Can A Franchisor Collect Future Royalties When A Franchise Agreement is Terminated? Maybe – Maybe Not.

In the seminal case of Postal Instant Press, Inc. v. Sealy (“PIP”), 43 Cal.App.4th 1704, 51 Cal.Rptr.2d 365 (1996), the court determined that the franchisor was not entitled to future royalties because it found that the franchisee’s breach of the franchise agreement was not the proximate cause of the franchisor’s loss of such royalties. Id. at 1706, 51 Cal.Rptr.2d 365. In PIP the franchisees became delinquent on their royalty and advertising fee payments. Id. at 1707, 51 Cal.Rptr.2d 365. The franchisor viewed the failure to make the payments timely as a material breach and terminated the franchise agreement, requesting the franchisees to cease operating their printing store. Id. The franchisor then filed suit for breach of contract against the franchisees seeking both past and future royalty payments. Id. at 1707-08, 51 Cal.Rptr.2d 365.

In supporting its decision to deny the franchisor future royalty fees for lack of proximate cause, the PIP court noted:

Nothing in the franchisee’s failure to pay past royalties in any sense prevented the franchisor from earning and receiving its future royalty payments. No, it was the franchisor’s own decision to terminate the franchise agreement that deprived it of its entitlement to those future royalty payments. At worst, if the franchisor had not terminated the franchise agreement it might have been required to sue again or perhaps again and again to compel the franchisee to pay those future royalties in a timely fashion as those royalties accrued. PIP,43 Cal.App.4th at 1710-11.

The court continued by emphasizing that the franchisor had chosen to terminate the agreement, thus depriving itself of future royalties. Id. at 1713.

Courts from other jurisdictions have followed the Sealy reasoning. See, e.g., Burger King Corp. v. Hinton, Inc., 203 F.Supp.2d 1357, 1366 (S.D.Fla.2002) (finding that franchisor’s decision to terminate the franchise agreement due to franchisee’s breach in failing to pay fees was the proximate cause of loss of future profits); Kissinger, Inc. v. Singh, 304 F.Supp.2d 944, 950-51 (W.D.Mich.2003) (applying reasoning of Sealy in denying franchisor’s motion for summary judgment regarding future lost royalties); I Can’t Believe It’s Yogurt v. Gunn, No. Civ.A. 94-OK-2109-TL, 1997 WL 599391, at *23-24 (D.Col. Apr. 15, 1997) (same).

Additionally, in Meineke Car Care Centers, Inc. v. RLB Holdings, LLC, No. 3:08cv240-RJC, 2009 WL 2461953 (W.D.N.C. Aug. 10, 2009), the court held that where the franchisor terminated the franchise agreements, making it impossible for the franchisee to generate future royalties, the franchisee was not liable for future royalties.

In July 2003, the U.S. District Court for the Southern District of California held that PIP did not preclude a claim for lost future royalties as a matter of California law if the franchisee terminates the agreement, or if the franchisor terminates the agreement but the franchisee’s conduct proximately causes the damages, and the award is neither excessive, oppressive nor disproportionate. It’s Just Lunch Franchise LLC v. BFLA Enterprises, LLC, No. 03-CV-0561, 2003 WL 21735005 (S.D.Cal. July 21, 2003) (“IJL”).

Whether a Franchisor can collect future royalties will depend on: (a) what the franchise agreement specifically states; (b) what the Franchise Disclosure Document (FDD) discloses; (c) whether the franchisor or the franchisee terminated the agreement; and, (d) which state’s law is found to govern the franchise agreement. If your Franchisor is attempting to collect future royalties, you should consult a seasoned franchisee attorney to discuss the facts specific to your case.