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The Franchise Memorandum

Tennessee Federal Court Allows Franchisor to Maintain Claim for Lost Future Royalties
Posted in Damages

After a franchisee abandoned his franchise and allowed his son to open a competing business in the same location, the franchisor filed suit in Moran Indus., Inc. v. Mr. Transmission of Chattanooga, Inc., 2010 U.S. Dist. LEXIS 71753 (E.D. Tenn. Jul. 15, 2010), claiming lost future royalties. The defendants filed a motion to dismiss, arguing  that the license agreement provided that the royalty payment obligation lasted only five years. The court rejected that argument, noting that an addendum the parties signed  seven years after the license agreement provided for a decreased royalty rate for certain work, which would be nonsensical if such payments ceased after five years. The court also rejected the defendants’ argument that a franchisor who terminates a franchise agreement, even where the franchisee is in breach, is not entitled to lost future royalties because the franchisee’s breach is not the proximate cause of the loss of those royalties. After a fairly extensive survey of the case law on this subject, including Postal Instant Press, Inc. v. Sealy and its progeny, the court ruled that the right to collect future royalties is very fact specific and could not be determined at this early stage in the litigation. Therefore, the motion to dismiss was denied.

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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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