A California appellate court affirmed a trial court’s denial of more than $4 million in damages for “reverse royalties” arising from a franchisee’s purchase of a boba franchise with an exclusive 10-mile territory.
The franchisee purchased an existing It’s Boba Time franchise. The purchase agreement included an exclusive territory provision, prohibiting the opening of another It’s Boba Time within 10-miles of the franchise. After the sale, additional It’s Boba Time stores were opened within the franchisee’s exclusive territory. The franchisee filed suit against franchisor Boba Time, Inc. for violating the purchase agreement’s exclusive territory provision.
In a bench trial, the trial court found in favor of the franchisee and awarded the franchisee lost profits. The trial court denied the franchisee’s request for “reverse royalties,” finding the franchisee’s evidence was insufficient to establish the reverse royalties he claimed he would have received had Boba Time honored the franchisee’s exclusive territory rights. The trial court found the franchisee had not established the ability to operate additional franchises or that such operations would be profitable because the expert testimony in support of the franchisee’s reverse royalties theory was too speculative and unsupported. The franchisee appealed.
The appellate court affirmed the trial court’s denial of reverse royalty damages. The appellate court rejected the franchisee’s arguments that (1) the purchase agreement did not require that he be able to open other franchises, and (2) the trial court erred by failing to award any damages for lost value of the exclusive territory. The franchisee contended the evidence supported his expert’s reverse royalty valuation and Boba Time did not dispute that valuation since Boba Time presented no alternate valuation.
Though the franchisee established rights to an exclusive territory, the appellate court agreed with the trial court that the reverse royalty valuation was too speculative. The appellate court distinguished between established and unestablished businesses when determining whether to award lost anticipated profits. Lost anticipated profits for an unestablished business are not recoverable as too speculative. Here, the franchisee failed to demonstrate with reasonable certainty the gross sales and viability of current and future It’s Boba Time stores not currently owned or operated by the franchisee. Thus, the franchisee failed to present sufficient evidence that he could have capitalized on his exclusive territory rights by opening additional stores.
When a franchisee seeks to prove lost future profits caused by the franchisor’s breach, franchise counsel and the damages expert must consider a number of factors about the franchisee’s existing and intended businesses to establish that lost profits damages are available, and that the calculation of lost profits is reasonably certain.
Suh v. Un Mi Pak 2024 Cal.App.Unpub. LEXIS 1192 (Feb. 26, 2024)
