The Franchise Memorandum

The Georgia Court of Appeals has ruled that a trial court erred in denying a motion for directed verdict on a claim for unpaid advertising fees. Legacy Acad., Inc. v. PACU Enters., Inc., 2019 WL 1146664 (Ga. Ct. App. Mar. 13, 2019). PACU had been a Legacy Academy franchisee since 2002. In addition to royalties, PACU’s franchise agreement required it to pay advertising fees of one percent of PACU’s gross monthly revenue. In December 2010, PACU abandoned its franchised daycare and stopped paying fees. Legacy filed suit, seeking past and future royalties and advertising fees. The case went to trial. At the close of evidence, Legacy moved for a directed verdict, but the trial court denied the motion and submitted the case to the jury. The jury awarded $275,000 in royalties and attorneys’ fees, but no advertising fees. Legacy appealed on its advertising fees claim.

On appeal, Legacy argued that the trial court should have granted its motion for directed verdict on the advertising fees claim. While PACU did not file an appellate brief, at the trial court level it defended against the advertising fees claims by alleging that Legacy had failed to mitigate damages, because Legacy could have “replenish[ed] the lost revenue stream by installing a new franchisee in what was formerly protected territory.” The court of appeals disagreed with PACU’s argument. Under Georgia law, mitigation of damages is not a defense to a claim based on an “absolute promise to pay.” Because PACU’s obligation to pay advertising fees was fixed and absolute, its mitigation defense did not apply. The court of appeals therefore reversed the denial of Legacy’s motion for directed verdict, and directed the trial court to add advertising fees to the verdict.