A Michigan district court held a franchisee breached its obligations under its franchise agreements and upheld the liquidated damages clause in the agreements.
Little Caesar Enterprises, Inc. (LCE) entered into franchise agreements for two franchise locations with franchisee, S&S. Pursuant to the franchise agreements, S&S was required to prepare and preserve accurate books and records for at least four years, provide weekly reports of gross sales and quarterly financial statements, and timely pay royalties and advertising fees, among other requirements.
S&S failed to submit required financial statements in 2017 and 2019. After repeated default notices, LCE terminated the franchise agreements. S&S also ceased operation and abandoned one of the locations without approval from LCE after which LCE sent S&S a supplemental notice of default and termination. LCE filed suit for breach of contract, trademark and trade dress infringement, among other claims, seeking liquidated damages and attorneys’ fees for the breaches.
LCE moved for summary judgment on its breach of contract claim. Although breach of contract is a highly factual question, it may be resolved by summary judgment if a plaintiff is able to show that there are no disputed issues as to the validity of the contract, the contractual terms are clear, and there are sufficient factual allegations to demonstrate breach of those terms. The court noted there was no dispute the franchise agreements were valid and their terms were clear and unambiguous. The court also found S&S continued to breach the agreements after the lawsuit was filed.
The court then analyzed whether the liquidated damages provision was enforceable. Generally, liquidated damages are appropriate where the damages would be uncertain or difficult to ascertain at the time of entering into the contract. In support of its liquidated damages provision, LCE submitted an affidavit relating to the calculation of the liquidated damages clause. The court found there was a reasonable basis from which to calculate the damages. Similar to its analysis on liquidated damages, the court held that attorneys’ fees were reasonably calculated.
Provisions for liquidated damages and attorneys’ fees in franchise agreements are likely to be upheld if franchisors can demonstrate reasonable basis for the calculation of damages and show that the calculation is not a penalty, but a reasonable estimate of the franchisor’s losses upon termination. Franchisors should consult with franchise counsel to assess whether a liquidated damages clause is likely to be found enforceable prior to invoking the provision upon termination of the franchise agreement.
Little Caesars Enterprises, Inc. v. S&S Pizza Enterprises, Inc., No. 2:21-cv-11776-LVP (E.D. Mich. Aug. 24, 2023)
