The Franchise Memorandum

In the latest rejection of the doctrine first announced by the California Court of Appeals in PIP v. Sealy, the Texas Court of Appeals has awarded a franchisor its lost future profits suffered as a result of a franchisee’s breach of contract. In Progressive Child Care Systems, Inc. v. Kids ‘R’ Kids International, Inc., 2008 WL 4831339 (Tex. Ct. App. Nov. 6, 2008), a franchisee breached its franchise agreements, leading the franchisor to terminate them. The franchisor then brought suit to recover past due fees as well as fees owed for the remainder of the agreements’ terms.

Relying on PIP v. Sealy, the franchisee argued that a franchisor could not recover its lost future profits when the franchisor, rather than the franchisee, terminated the franchise agreements. The court rejected that argument and awarded lost future profits.  Applying Georgia law, the court concluded that the franchisor, as a matter of traditional contract law, was entitled to be placed in the same position it would have enjoyed had the franchisee complied with the terms of the franchise agreements. In this case, had the franchisee performed for the remainder of the term, the franchisor would have continued to receive payments.