A California federal court denied a franchisee’s motion to dismiss a franchisor’s counterclaims related to the loss of future royalties after terminating two separate franchise agreements in Ohio.
Qdoba Restaurant Corporation and Qdoba Franchisor LLC (collectively, “Qdoba”), franchisors of Mexican food restaurants, entered into a franchise agreement with Fiesta Ventures Dayton (“FVD”). The parties also signed a development agreement to open a franchised business in Bevercreek, Ohio, under a new entity owned by FVD named Fiesta Ventures Bevercreek (“FVB”).
The FVB restaurant failed to open after numerous extensions. The parties subsequently entered into a Workout Agreement, which provided a new opening deadline and included a cross-default provision that held FVD liable for the defaults of FVB. When FVB failed to open, Qdoba issued a notice of default and terminated the franchise agreements with FVD and FVB.
The franchisee filed suit alleging Qdoba breached both franchise agreements and that the terminations constituted unfair business practices under California Law. Qdoba filed six counterclaims, two of which sought lost future royalties for termination of the franchise agreements and breach of the Workout Agreement. The franchisee moved to dismiss the two counterclaims, which the court denied.
The franchisee alleged that Qdoba’s loss of future royalties is unavailable as a matter of law when a franchisor exercises its contractual right to terminate a franchise agreement. The court disagreed and held that although lost future royalty damages are not generally recoverable after a partial breach, a “total breach exception” still exists, which the court found applicable here.
The court found that the total breach exception applied because the franchisee, not Qdoba, was the proximate cause of the termination. The court noted that a total breach occurs after the franchisor makes repeated requests for the franchisee’s performance over a prolonged time period, and franchisor reasonably believed that franchisee’s performance is unlikely. In this case, the court found Qdoba provided numerous extensions and opportunities to correct the defaults under the franchise agreements and the Workout Agreement, and the franchisee’s conduct clearly justified Qdoba’s belief that performance was unlikely.
The court also rejected the franchisee’s public policy arguments under the California Franchise Relations Act (“CFRA”) and California Franchise Investment Law (“CFIL”). The court found that the text of the CFRA, and its precedent did not apply to out-of-state franchise locations in Ohio, and that the CFIL policy was inapplicable because the statute primarily governs the offer and sale of franchises. Therefore, the court held Qdoba could proceed with counterclaims for loss of future royalties.
Before terminating a franchise agreement, franchisors should consult franchise counsel to assess the nature of the franchisee’s breach and whether certain remedies of the franchisor are impacted by the termination. This case demonstrates that a franchisor may recover lost future royalties as damages when the franchisee’s conduct rises to the level of a total breach.
Fiesta Ventures of Bevercreek, LLC v. Qdoba Rest. Corp., No. 24-cv-02218 JLS (BLM) (S.D. Cal. Aug. 21, 2025)
