The Franchise Memorandum

The United States Court of Appeals for the Seventh Circuit last week issued a decision upholding the dismissal of claims challenging the publication of a settlement in a franchise disclosure document. Caudill v. Keller Williams Realty, Inc., No. 15-3313 (7th Cir. July 6, 2016). Franchisor Keller Williams had settled a case brought by a former franchisee who later had become a regional director of the franchisor. The settlement, like many, was subject to a confidentiality provision that specifically covered the amount paid to the plaintiff in the settlement. Importantly, the confidentiality term of the settlement agreement also contained a liquidated damages provision stating that damages for breach of confidentiality would be difficult to quantify precisely, so any violation would entitle the other party to an award of $10,000. Three months after the settlement, Keller Williams issued its FDD, which eventually went to some 2,000 existing or potential franchisees and others, disclosing the information about the settled case and the amount paid.

In her subsequent lawsuit, the plaintiff contended that the widespread dissemination of the settlement terms through the FDD was a breach of confidentiality, and she sought $10,000 in liquidated damages per recipient, for a total of $20,000,000. Applying Texas law, the district court dismissed the case because liquidated damages cannot be awarded unless the amount established in the provision is a “reasonable forecast of just compensation.” The lower court believed any non-actual-damages amount would be punitive, and punitive damages are not allowed in contract cases. The Seventh Circuit agreed there was no evidence that $20,000,000 (or even $10,000 per violation) reasonably approximated the plaintiff’s damages. In fact, the plaintiff had not tendered any evidence that she was damaged by any one of the 2,000 people having seen the FDD. The Seventh Circuit said that while actual damages many be conceivable for an inappropriate disclosure, there was nothing other than speculation on which to base an award in this case.