Franchisor 101: Court Delivers Pizza Franchisor Liquidated Damages

Lewitt Hackman

The Sixth Circuit Court of Appeals recently affirmed a $2.6 million award of liquidated damages in favor of a pizza franchisor and a summary judgment order enforcing termination of franchise agreements due to nonpayment and other franchisee defaults.

The franchisees ran Little Caesars franchises in multiple states. The franchisees stopped making timely royalty payments and violated other franchise agreement provisions. Little Caesars sent the franchisees default notices for not paying on time, refusing to produce financial records, and not paying for supplies. The franchisees failed to cure the defaults. Little Caesars terminated the franchises and demanded the franchisees comply with post-termination obligations, including closing the franchises and paying liquidated damages.

The termination notices explained that if the franchisees continued operating the restaurants during any litigation, Little Caesars would accept payments from them without waiver of its rights, including the right to enforce termination of the franchise agreements. The termination notices said Little Caesars reserved all its post-termination rights until it received a court order.

Little Caesars sued to enforce the terminations. Throughout litigation, the franchisees continued to operate the restaurants. Ultimately, the court granted summary judgment for Little Caesars, enforced the termination and awarded Little Caesars $2.6 million in liquidated damages.

The Sixth Circuit affirmed the district court’s decision. On appeal, the franchisees argued that Little Caesars waived its right to terminate the franchise agreements by letting the franchisees continue to operate after sending notices of termination. The Sixth Circuit affirmed the district court’s holding that there was no evidence of a waiver. Instead, the district court held that Little Caesars’ termination notices contemplated continued dealings between the parties during the course of litigation.

Before terminating a franchise agreement, a franchisor should work closely with franchise counsel to craft a clear notice of termination that preserves the franchisor’s remedies if the dispute winds up in litigation. Having these issues in mind can reduce the risk of arguments by disgruntled former franchisees of improper notice or, like in this case, claiming waiver of the right to terminate.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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