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The Franchise Memorandum

Distributor Limited to Lost Profit Damages Incurred During 90-Day Notice Period

The Supreme Court of Missouri recently reversed an award of lost profits as damages for an improper notice of termination of a distributorship under the Missouri Franchise Act. Sun Aviation, Inc. v. L-3 Commc’ns Avionics, 2017 WL 4930870 (Mo. Oct. 31, 2017). Sun Aviation, a former distributor of L-3’s aircraft instrument products, sued L-3 on the grounds that L-3 had failed to provide 90 days’ written notice of termination as required by the Missouri Franchise Act when it terminated Sun’s distributorship. The trial court found L-3 liable and awarded Sun eighteen years of lost profits as damages.

L-3 appealed, arguing that Sun’s damages should have been limited to the lost profits sustained during only the ninety-day notice period, and not a subsequent eighteen year period. The court agreed. The court initially overruled a finding of liability under Missouri’s power equipment distributor laws, which require good cause for termination and repurchase of inventory, finding that L-3’s products were not covered by those statutes. Next, the court observed that the plain language of the Franchise Act connotes a causal connection between the particular statutory violation and the injury. The court then reasoned that damages are intended to compensate a plaintiff whose expectations have been frustrated by failure to give the requisite notice. The court held that damages must be limited to those sustained due to reliance on the expectation that the relationship would continue for at least a ninety-day period after notice of termination, and the costs of filing suit. The court further reasoned that its decision was supported by the fact that under the Franchise Act, a franchise may be lawfully terminated so long as the requisite notice is given. Accordingly, the court held that Sun’s damages were limited to those sustained as a result of the failure to provide ninety days’ notice, and nothing more.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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