A federal district court in Michigan granted franchisor Little Caesar Enterprises, Inc. (LCEI) a default judgment against its former franchisee for violating the terms of the franchise agreement.

The franchisee entered into a franchise agreement with LCEI to operate a Little Caesars restaurant. The franchisee was to provide weekly reports of gross sales, pay continuing royalty and advertising fees and certain other fees. The agreement also provided that LCEI could terminate the contract if the franchisee failed to make any required payments or ceased operating the franchise for three or more consecutive days. The franchisee agreed that, upon termination, not to hold itself out as a franchisee of LCEI or use its trademarks, to return confidential materials and information, and to pay LCEI liquidated damages.

The franchisee went out of business and stopped reporting sales. LCEI sent the franchisee a notice of default and termination of the franchise agreement and filed suit. The franchisee was served with the complaint but failed to respond. LCEI filed a motion for default judgment.

The court determined the franchisee violated the terms of the franchise agreement, which constituted good cause for termination. The court entered judgment in favor of LCEI for unpaid royalties and advertising expenses, unpaid amounts to suppliers, and awarded LCEI $164,576.26 in liquidated damages. The court noted that liquidated-damages provisions are enforceable under Michigan law and that liquidated damages are appropriate where damages from contractual breach are uncertain and difficult to ascertain. The parties acknowledged in the franchise agreement that damages from a breach of the agreement would be difficult to ascertain.

Liquidated damages provisions are common in franchise agreements. Franchisees should review their franchise agreements with franchise counsel prior to signing so they understand the implications of any liquidated-damages provisions and the potential monetary impact of such provisions upon early termination of the franchise agreement, especially if the franchisee’s owners are subject to a personal guarantee.

Little Caesar Enters. v. Walters Invs., Inc., 2023 U.S. Dist. LEXIS 11877 (E.D. Mich. Jan. 24, 2023)