Liquidated damages (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).
Yes, was the answer of court in the case of Howard
Johnson International, Inc. v. Manomay, LLC.
The franchise agreement, in this case, had a liquidated damage
provision, which allowed the franchisor, Howard Johnson, to collect liquidated
damages in the event that the franchisee breached the franchise agreement. The franchisee breached the franchise
agreement by not paying. Howard Johnson
terminated the franchise agreement and demand payment of unpaid royalties and
The court awarded the Howard Johnson the payment of unpaid
royalties, attorney fees, and liquidated damages totaling $89,691.60.
[W]hen a liquidated damages clause for a commercial transaction is negotiated by parties with comparable bargaining power, the ultimate issue is whether the amount of liquidated damages is reasonable, either at the time of contract formation or the breach.
Ramada, 2018 WL 3105421, at *5
The court citing case precedent held that liquidated damages in commercial contracts negotiated by parties with comparable bargaining power are enforceable if the amount of liquidated damages is set at the time of contacting and the amount is a reasonable forecast of the harm resulting from breach.
Do you complete inspections and audits of your franchise locations? Are the inspections done as a matter of routine practice? Do you only complete audits and inspections if a problem is reported? If an inspection yields findings of subpar operating standards, what do you do with the results?
Following brand standards, reporting revenues, and paying royalties goes to the core of the franchise relationship. Failure to follow the franchisor’s brand standards can irreparably harms the goodwill of the franchisor and the franchise system.
Franchise audits and inspection can be way to ensure brand uniformity, quality, and compliance with operating standards. Read about:
How Are Compliance Audits are being Conducted
When Are Compliance Audits Done
Franchisee Perspective On Compliance Audits
What Courts Have To Say About Compliance Audits
See our article that appeared in Franchise Law Journal!
There are no hard and fast rules about how much capital or money a franchisor is required to have in the bank. If a franchisor has limited amounts of funds in the bank, a state may require the franchisor to include a risk factor on the state cover sheet of the franchise disclosure document [FDD]. For new franchisors or franchisors that have limited amount of funds, a state may require a franchisor to defer initial franchise fees, initial escrow fees, or secure a bond.
Based on a new policy, California is requiring Franchisors to have additional capital.
However, based on recent comment letters and conversations
with the examiners in California, California requires something new. Based on a new policy, California requires Franchisors
to have additional capital. The amount required
is still convoluted. However, when
registering in California, franchisor should plan on having an amount equal to
the initial franchise fee in the bank. Without
sufficient funds in the bank, the state of California may refuse the franchise
On May 19, 2019, the NASAA [North American Securities
Administrators Association] Membership issued instructions for the new Franchise
Disclosure Document [FDD] state cover page.
The state cover sheet is expanding.
It is now 3 pages, not just one. The
How to Use This Franchise Disclosure Document
What You Need to Know About Franchising
Special Risk(s) to Consider About This Franchise
The first page, How to Use This Franchise Disclosure Document, is a table with 8 questions in the first column and in the second column, a cross-reference in the franchise disclosure document. A narrative above tables states the mission of the table. The narrative reads:
Here are some questions you may be asking about buying a franchise and tips on how to find more information:
The question includes:
How much can I earn?
How much will I need to invest?
Does the franchisor have the financial ability
to provide support to my business?
Is the franchise system stable, growing, or
Will my business be the only [XYZ] business in
Does the franchisor have a troubled legal
What’s it like to be [an XYZ] franchisee?
What else should I know?
The next page, What You Need to Know About Franchising Generally,
is 7 general statements about franchising on the topics including:
Continuing responsibility to pay fees.
Business model can change.
Competition from franchisor.
When your franchise ends
The final page, special risk factors page, is kin to the risk factors required by the prior version of the state cover sheet.
Franchisors must comply with the new state cover page
requirements by January 1, 2020.
Dickey’s Barbecue Restaurants, Inc. ran a national promotion
using a pitch that infringed on the Boise Idaho BBQ 4 LIFE restaurant.
BBQ 4 LIFE demanded disgorgement
of Dickey’s Barbecue Restaurants, Inc.’s national profits[i].
Disgorgement is defined by Black’s Law Dictionary as “the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.”
Dickey’s Barbecue Restaurants, Inc. pushed back. BBQ 4 LIFE only has restaurants in Boise, Idaho. Why should Dickey’s Barbecue Restaurants, Inc. be disgorged of national profits and pay BBQ 4 LIFE all of its profits earned nationally.
The court said they should.
Dickey’s Barbecue Restaurants, Inc.
willfully infringed on BBQ 4 LIFE’s
trademark. Dickey’s Barbecue
Restaurants, Inc., need a disincentive.
Besides, the BBQ 4 LIFE infringement
increased sales nationally; therefore, national sales should be disgorged.
After all, Dickey’s has willfully infringed plaintiffs’ trademark and used it nation-wide for a reason – to increase sales throughout its operations, not just in areas where it competes with plaintiffs. Such an award would, according to Maier, remove the motive for infringements, deter future infringements, and protect the intangible value associated with trade-marks.
BBQ Id. citing Maier, 390 F.2d at 122.
The takeaway, infringement is expensive. Infringe of even a small local brand can result in national disgorgement of profits.
4 Life, LLC, et al. v. Dickey’s Barbecue Restaurants, Inc., Business Franchise
Guide – Explanations, Laws, cases, rulings, new developments Issued Apr 23,
2019 Case No. 1:18-cv-140-BLW
The liability for the wrongful termination of a franchise
agreement can be considerable, lost profit for the remainder of the franchise
term and perhaps other damages.
Here is the facts Franchisor requests licensee to remodel
the franchise location to conform to current standards. Licensee does not. Franchisor sends franchisee a default notice
for failing to update the location. Licensee
still does not update. Franchisor sends the
licensee a notice of termination, files a complaint in court staying the
termination. Licensee de-brands and continues
to operate under a new name.
Can the Franchisor be held liable for wrongful
The case is Buffalo Wild Wings, Inc., v. BW-3 of Akron, Inc., et al.[i] No, said the court. Since the Licensee closed the business, de-branded, and opened under a different name, the Licensee abandoned the business. The Franchisor never terminated the license. The Franchisor is not liable for wrongful termination.
Interesting case, but would the come be different if the
franchisor had not stayed the termination?
Within the franchise world, there has been a lot of buzz about joint employment. Being held accountable as an employer creates exposure to wage, discrimination, and other employee claims.
The legal determination of who is an employer can be swishy. The US Department of Labor has put out for comment new regulations that would clear the issue up, to some extent. Under the purposed regulations set forth a 4 prong test. Under the test an employer:
hires or fires the employee;
supervises and controls the employee’s work
schedules or conditions of employment;
determines the employee’s rate and method of
maintains the employee’s employment records.
As part of the purposed regulations, the US Department of Labor posted hypotheticals under the test. Can you determinate if an employer relationship is present?
(National Restaurant Franchise)
An individual works
30 hours per week as a cook at one restaurant establishment, and 15 hours per
week as a cook at a different restaurant establishment affiliated with the same
nationwide franchise. These establishments are locally owned and managed by
different franchisees that do not coordinate in any way with respect to the
employee. Are they joint employers of the cook? [i]
(2) Example (Same Owner, Multiple Restaurants)
An individual works
30 hours per week as a cook at one restaurant establishment, and 15 hours per
week as a cook at a different restaurant establishment owned by the same
person. Each week, the restaurants coordinate and set the cook’s schedule of
hours at each location, and the cook works interchangeably at both restaurants.
The restaurants decided together to pay the cook the same hourly rate. Are they
joint employers of the cook? [ii]
(3) Example (Janitorial Services)
An office park
company hires a janitorial services company to clean the office park building
after-hours. According to a contractual agreement with the office park and the
janitorial company, the office park agrees to pay the janitorial company a
fixed fee for these services and reserves the right to supervise the janitorial
employees in their performance of those cleaning services. However, office park
personnel do not set the janitorial employees’ pay rates or individual
schedules and do not in fact supervise the workers’ performance of their work
in any way. Is the office park a joint employer of the janitorial employees? [iii]
(5) Example (Hotel Industry Franchise)
Franchisor A is a
global organization representing a hospitality brand with several thousand
hotels under franchise agreements. Franchisee B owns one of these hotels and is
a licensee of A’s brand. In addition, A provides B with a sample employment
application, a sample employee handbook, and other forms and documents for use
in operating the franchise. The licensing agreement is an industry-standard
document explaining that B is solely responsible for all day-to-day operations,
including hiring and firing of employees, setting the rate and method of pay,
maintaining records, and supervising and controlling conditions of employment.
Is A a joint employer of B’s employees? [iv]
[i]Application [the answer]: Under these
facts, the restaurant establishments are not joint employers of the cook
because they are not associated in any meaningful way with respect to the
cook’s employment. The similarity of the cook’s work at each restaurant, and
the fact that both restaurants are part of the same nationwide franchise, are
not relevant to the joint employer analysis, because those facts have no
bearing on the question whether the restaurants are acting directly or
indirectly in each other’s interest in relation to the cook.
[ii]Application [the answer]: Under these
facts, the restaurant establishments are joint employers of the cook because
they share common ownership, coordinate the cook’s schedule of hours at the
restaurants, and jointly decide the cook’s terms and conditions of employment,
such as the pay rate. Because the restaurants are sufficiently associated with
respect to the cook’s employment, they must aggregate the cook’s hours worked
across the two restaurants for purposes of complying with the act.
[iii]Application [the answer]: Under these
facts, the office park is not a joint employer of the janitorial employees
because it does not hire or fire the employees, determine their rate or method
of payment, or exercise control over their conditions of employment. The office
park’s reserved contractual right to control the employee’s conditions of
employment does not demonstrate that it is a joint employer.
[iv]Application : Under these facts, A is not a joint employer of B’s employees. A does not exercise direct or indirect control over B’s employees. Providing samples, forms, and documents does not amount to direct or indirect control over B’s employees that would establish joint liability.
When signing the franchise agreement, prospective franchisees usually form a business entity to own and operate the franchise. But, who can sign the franchise agreement on behalf of the franchise business entity?
The recent case of Extremely Clean Cleaning Services, LLC,
Alisia Burks v. CAAT, Inc.[i]
ponders this question. In this case, co-plaintiff Alisia Burk (“Ms. Burk”),
a prospective franchise formed the business entity Extremely Clean Cleaning
Services, LLC to be the franchisee business entity. Defendant CAAT, Inc. was
the franchisor. Burk’s mother Kearl Ash
(“Ms. Ash”) signed the franchise agreement on behalf of business entity
Extremely Clean Cleaning Services, LLC; however, Ms. Ash, Ms. Burk’s mother did
not have any ownership interest in the franchise.
Immediately post the signing of the franchise agreement, Ms. Burk registered a complaint about her mother Ms. Ash signing the franchise agreement saying Ms. Ash did not have authority to the sign the franchise agreement on the franchisee’s behalf. Irrespective of the complaint about the signing, Ms. Burk opened and operated the franchise. After three years of business, Ms. Burk abandons the franchise asserting that the franchise agreement was not properly signed.
Ratification means the adoption of that which was done for and in the name of another without authority. It is in the nature of a cure for [lack of] authorization. When ratification takes place, the act stands as an authorized one, and makes the whole act, transaction, or contract well from the beginning. Ratification is a question of fact, and ordinarily may be inferred from the conduct of the parties. The acts, words, silence, dealings, and knowledge of the principal, as well as many other facts and circumstances, may be shown as evidence tending to warrant the inference or finding of the ultimate fact of ratification. Knowingly accepting benefits of unauthorized employment amounts to a ratification of such contract of employment and is in the nature of estoppel to deny the authority to make such contract. Ratification by a corporation may be shown by conduct, without any formal action of its board of directors.
Was there a binding franchise agreement, even though Ms. Ash
did not have authority to sign the franchise agreement on the franchisee’s
behalf. Does the subsequent three years
operation of the franchise business ratify or translate to affirmation and enforceability
of the franchise agreement?
The court remanded the case for the more factual determinations. It is possible that irrespective of the
improper signing of the franchise agreement, the franchisee’s act of operating the
franchise business resulted in a binding franchise agreement. The inverse may also be true.
[i] Business Franchise Guide – Explanations, Laws, cases, rulings, new developments, Extremely Clean Cleaning Services, LLC, Alisia Burks, Plaintiffs v. CAAT, Inc., an Ohio Corporation, Anago Cleaning Systems, Inc., a Florida Corporation, Anago Franchising, Inc., a Florida Corporation, Albertson Family Janitorial Holdings, Inc., an Ohio Corporation, Curt Albertson, an individual, Corey Albertson, an individual, Teresa Albertson, an individual, David R. Povlitz, Defendants., U.S. District Court, S.D. Indiana, ¶16,372, (Feb. 25, 2019)
A prospective franchisee raises a concern regarding a specific provision in the franchise agreement. Can the franchisee modify the franchise agreement base on the prospective franchisee’s concern? e
The franchise agreement is an exhibit included in the franchise disclosure document (FDD). The franchisor must offer prospective franchisees the franchise agreement as it appears in the FDD. The franchisor may not offer franchise agreements different than it appears in the FDD. However, a prospective franchisee requests a change to the franchise agreement, the franchisor may agree to the requested change. This is referred to as franchise agreement negotiated changes.
The prospective franchisee is a great candidate. The prospective franchisee would be a great franchisee. Can the franchise agreement be modified to entice the prospective franchisee?
There are several best practices to follow:
offer the franchise agreement as it appears in the Franchise Disclosure Document
the prospective franchisees to put a requested change in writing (it can an
changes to the franchise agreement should be made in an addendum. The franchise
agreement should not be changed.
If the franchisor agrees to waive the initial franchise fee or
other fees charged by the Franchisor, a notation of fee non-uniformity must be
made in the FDD.
And for franchisees sold to California residents or business
operating in California, a negotiated form must be filed.
The enforceability of a non-competition covenant is based on state law. Generally, and perhaps uniformly, non-competitions are disfavored under the law. Hence they are very narrowly construed.
Restrictive covenants on employment may not be used to bar individuals from entire fields of work simply to limit the employer’s competition.
e.g., RLM Commc’ns, Inc. v. Tuschen, 831 F.3d 190, 196–97 (4th Cir. 2016)
A case out of Maryland involving Senior Helpers provides a real-life example[i]. Franchisee signs a Senior Helpers franchise agreement barring the use of Senior Helpers confidential information and engaging in a competitive business post the termination of the franchise agreement. Competitive business under the franchise agreement is defined as Any home health care or in-home care agency or business that offers or provides non-medical care, companionship services, personal assistant services.
Franchisee sales its Senior Helpers
franchise to another franchisee and
starts a business offering dementia care training and consultation to
senior care facilities and family members of individuals with dementia.
[A} a non-compete provision restricting a former employee from working directly with similar businesses was overbroad and thereby unenforceable because the restriction was not tethered to actual work the employee had performed for the employer)
Seneca One Finance, Inc. v. Bloshuk, 214 F. Supp. 3d 457, 461-62 (D. Md. 2016)
Senior Helpers sues for the breach of the non-competition. In promoting its
services and preparing treatment plans,
Senior Helpers includes information and education about dementia. Hence, dementia
care training and consultation to senior care facilities and family members of
individuals with dementia is a violation
of the non-competition.
The court rejected this deduction. Senior Helpers franchises offer companionship services and assistance. Senior Helpers offers dementia education free to promote its services, and incorporated dementia education into their treatment plans without charging. Senior Helpers does not charge for dementia education. Senior Helpers cannot bar others from selling and competing based on a service they do not charge.
[i] SH Franchising, LLC d/b/a, Senior Helpers v. Newlands Homecare, LLC, et at. Civil Action No. CCB-18-2104 Business Franchise Guide – Explanations, Laws, cases,
rulings, new developments ¶16,353