The Franchise Memorandum

A federal court in Michigan recently entered a default judgement against a former Little Caesars franchisee and its principals, which included contractual liquidated damages in the amount of $474,144.14, as well as all attorneys’ fees and costs requested. Little Caesar Enterprises, Inc., v. Reyes 1, Inc., 2020 WL 2395206 (E.D. Mich. May 11, 2020). After Reyes repeatedly failed to operate its restaurants in accordance with Little Caesar’s standards, Little Caesar terminated its franchise agreements and filed a lawsuit, which quickly resulted in a settlement agreement between the parties. The settlement agreement required Reyes to, among other things, sell or deidentify its franchises and pay Little Caesar a specified settlement amount. Reyes promptly breached the settlement agreement, causing Little Caesar to replead its claims, including a claim for breach of the settlement agreement.

After Reyes failed to respond to the lawsuit, the court readily found in favor of Little Caesar, entered a default judgment, and focused its analysis on the award of damages — more specifically — the validity of the liquidated damages provision contained in the franchise agreements and the reasonableness of the attorneys’ fees and costs requested. The liquidated damages provision contained in the franchise agreements calculated damages based on the franchisee’s average monthly royalty and advertising fees (over the 12-month period immediately preceding termination), multiplied by the lesser of 36 months or the number of months remaining in the term of the franchise agreement. The court found the provision enforceable because the parties had contractually agreed to the uncertainty of damages resulting from termination and the amount provided for under the provision was reasonable with relation to the possible injury suffered. The court also found that the attorneys’ fees sought were reasonable, taking into account that Little Caesar’s counsel “brought significant experience and expertise in th[e] matter” and “the results achieved in th[e] matter [were] significant in order to enforce the basic tenants of the parties’ Franchise Agreement.” The court awarded all attorneys’ fees and costs requested. Little Caesar was represented by Lathrop GPM in this matter.