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The Franchise Memorandum

Franchisees' Default for Failure to Comply with Discovery Overturned
Posted in Damages

The Sixth Circuit in Krowtoh II LLC v. Excelsius Int’l Ltd., No. 08-5492 (6th Cir. May 19, 2009), overturned a district court’s opinion that had defaulted franchisees for their failure to find counsel, timely appear at a court hearing, and comply with discovery. The district court had awarded the franchisor damages in the amount of $781,226.00, but that judgment to the franchisor failed to withstand appeal. 

This case began when the franchisees terminated the relationship after two years of operation. The franchisor sued for breach of contract, misappropriation of trade secrets, unfair competition, and conversion. In overturning the district court’s default judgment, the Sixth Circuit noted that the franchisor-plaintiff had suffered no prejudice, and the franchisees’ delay in responding to discovery did not constitute prejudice under Sixth Circuit case law. Moreover, the Sixth Circuit found that the defendant’s failure to comply with a court order and discovery were excusable, as the individual responsible for overseeing litigation for the defendant was unfamiliar with the U.S. legal system, since he was from Germany. The appeals court also noted that the franchisor was at fault as well because, for a period of time, the franchisor failed to prosecute its case. For these reasons, the Sixth Circuit overturned the district court’s decision defaulting the franchisees, and the case was remanded to the lower court. 

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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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