The Franchise Memorandum

The United States District Court for the Eastern District of Missouri recently issued an important decision for franchisors seeking to recover damages caused by a franchisee’s abandonment of the franchise. In Hardee’s Food Systems, Inc. v. Hallbeck, 2011 U.S. Dist. LEXIS 107038 (E.D. Mo. Sept. 21, 2011), Hardee’s sued the Hallbecks when they abandoned their franchised restaurant before the expiration of their franchise agreement. (Gray Plant Mooty represents the franchisor in this case.) Hardee’s sought to recover damages caused by that abandonment, including the royalties and advertising fees that the Hallbecks would have paid for the remaining term of the agreement. The Hallbecks moved for summary judgment, contending that Hardee’s could not recover prospective fees because it had terminated the franchise agreement following their abandonment and the agreement did not expressly provide for the recovery of post-termination fees. 

The court denied the franchisees’ motion, finding that Missouri law recognizes the right to recover lost future profits upon a breach of contract. Citing the Fourth Circuit’s recent decision in Meineke Car Care Ctrs., Inc. v. RLB Holdings, LLC, the court found that Missouri courts likely would take the same approach and that a franchisor can, in an appropriate case, recover lost future profits from a franchisee that abandons the franchise before expiration. The court held that the claim by Hardee’s need not cite an express contractual provision allowing recovery of future fees, and that Hardee’s had presented sufficient evidence to raise a fact question as to the amount of its damages.

Notably, the court also rejected the franchisees’ contention that lost future profits could not be awarded under the rationale of the California decision in Postal Instant Press v. Sealy. The Sealy court held that a franchisor could not recover lost future profits because the franchisor had made the decision to terminate the franchisee’s agreement. The Missouri court found that decision inapplicable to the case before it because the Hallbecks had abandoned their restaurant. The court also distinguished its own prior decision in Medicine Shoppe Int’l, Inc. v. TLC Pharmacy, which had denied a claim for lost future royalties in similar circumstances.