The Franchise Memorandum

A federal court in Maryland recently entered an order requiring a former franchisee to comply with the post-term covenant against competition and awarding liquidated damages to the franchisor following the termination of the franchise agreement. The Cleaning Authority v. Hunsberger Enters., 2022 WL 2344169 (D. Md. June 29, 2022). Lathrop GPM represented franchisor The Cleaning Authority (TCA) in the case. Hunsberger Enterprises entered into a franchise agreement with TCA in 2018, and Stephen Hunsberger guaranteed the agreement. In 2019 and 2020, Hunsberger failed to make several royalty payments to TCA, and TCA terminated the agreement. Following termination, Hunsberger failed to pay the outstanding royalty amounts and the liquidated damages required under the agreement and continued to offer residential cleaning services from the location of the former franchised business. Although the business identified itself as “Affordable Services” on its new website, Hunsberger continued to make use of TCA’s marks on its premises and in communications with customers. TCA sued Hunsberger to recover the unpaid royalties and to enforce the post-termination obligations of the franchise agreement. Hunsberger Enterprises did not respond to the suit and the court entered default against it. Following discovery, TCA moved for default judgment against Hunsberger Enterprises and summary judgment against Stephen Hunsberger.

The court granted TCA’s motion in its entirety. The court found Hunsberger’s breaches to be clearly proven by the content of the business’s new website, customer checks the business deposited, and text messages to a customer, evidence that showed that the business continued to operate following termination and that customers identified the business as “The Cleaning Authority.” The court further held the liquidated damages provision of the franchise agreement—requiring payment of two years’ worth of royalties in the event of termination—to be reasonable compensation for the damages anticipated from Hunsberger’s breach. It also held the covenant against competition to be reasonable where it restricted competition within 20 miles of Hunsberger’s former territory or within 10 miles of another TCA franchise territory for a period of 2 years. Accordingly, the court entered judgment against Hunsberger, requiring payment of the unpaid royalties and liquidated damages, as well as compliance with the post-termination obligations of the franchise agreement, including the covenant against competition. Finally, the court’s order enforced the covenant against competition for two years beginning with the date of Hunsberger’s compliance.