FRANCHISEE AVOIDS GETTING HIT WITH A WHOPPER
by Philip A. Kramer, Esq.
Hinton, Inc., (“Hinton”), operated eighteen Burger King restaurants, all located in South Carolina. Burger King Corporation (“BKC”) and Hinton entered into eighteen separate Franchise Agreements and eight Lease agreements concerning these franchise restaurants. The leases were executed during the time span of March 1, 1993 through June 15, 2000. Hinton failed to pay royalties, advertising, investment spending, rent, property taxes, and other expenses due under the Franchise Agreements and Leases. Under the terms of the Franchise Agreements, Hinton agreed to make monthly payments in exchange for, among other things, a license to use the Burger King ¨ trademark and franchise system at their restaurants.
After providing notice of default on June 4, 2001 and the opportunity to cure such default, BKC terminated the relationship, terminated the franchised businesses and sued Hinton for damages. The lawsuit, Burger King Corporation v. Hinton was brought in Federal Court in Miami, Florida.
Hinton “justified” its failure to make payments as required under the Franchise Agreements and Leases with the defense that BKC prevented it from complying with its contractual obligations through three different actions and omissions.
Hinton said that BKC’s shortcomings were:
(1) BKC’s failure to provide Hinton with adequate support, services, and assistance; (2) BKC’s reduction of the number of field personnel in the South Carolina market, which impacted BKC’s ability to give services to Hinton’s restaurants; (3) BKC’s refusal to give marketing support; and (4) BKC’s utilization of substandard advertising.
In the court action, BKC sought to recover the amount owed for past due royalties, rents, property taxes, and advertising contributions, in addition to lost profits under the Agreements. BKC alleged that Hinton failed to make (1) advertising and royalty payments since February 2001; (2) rent payments on restaurants leased from BKC since March 2001; and (3) property tax payments due in December 2000.
The amount BKC sought under the Agreements was calculated to be $860,676.84. Additionally, BKC sought lost profits in an amount of $10,074,307.00 In total, BKC sought $10,934,983.00 ($860,676.84 in sums past due plus $10,074,307.00 in lost profits). Hinton had over ten million reasons to mount a defense!
The Court found that Hinton’s allegations that BKC failed to provide a package of support, including merchandising, marketing, and advertising research data and advice, were misplaced as such services were at the discretion of BKC. This was clearly indicated, the Court said, in plain language in the Franchise Agreements.
BKC asserted that it was entitled to recover the lost profits it would have earned under the remaining terms of the Franchise Agreements. Hinton disputed BKC’s entitlement to lost profits, arguing that (1) Hinton only failed to pay sums due to BKC and did not abandon its franchises; (2) BKC was not entitled to a windfall, as it could and would resell the franchises and earn rents and royalties from the new business; (3) an award of lost profits is barred, as the amount would be based on speculation.
The Court found that Florida law allowed BKC, as the non-breaching party, to choose between being placed in the position it would have been in had the contract been fully performed by seeking an award of lost profits or the position it would have been in prior to the breach, which would be accomplished through an award of reasonably foreseeable damages.
Hinton argued that the reasoning of a California case, Postal Instant Press, Inc. v. Sealy, was applicable. In Postal Instant Press, the Court did not allow an award of lost profits to a franchisor, as the franchisee only failed to make royalty and advertising payments, and this did not prevent the franchisor from receiving royalties on future revenues. The Court reasoned that what actually prevented the franchisor from receiving future revenues was its decision to terminate the franchise agreements.
The Court stated that Hinton’s reliance on the Postal Instant Press case was misplaced, as the Franchise Agreements contained a Florida choice of law provision. Under Florida law, a non-breaching party can receive lost profits. In order to recover, however, BKC was required to prove that (1) a breach of contract occurred; (2) BKC sustained a monetary loss as a proximate result of the breach; (3) the loss was or should have been within reasonable contemplation of the parties; and (4) the alleged loss was not remote, contingent, or conjectural, and that the damages were reasonably certain.
The Court found that BKC did not satisfy this standard. Accordingly, the Court refused to allow BKC to recover its lost future profits.
The Court found that BKC certainly established that Hinton committed a breach of the contract by failing to remit payments, but BKC was unable to demonstrate that its total requested award of lost profits resulted from Hinton’s breach.
The Court concluded that BKC was absolutely entitled to recover from Hinton its lost royalty and rent payments, but Hinton’s failure to pay these amounts did not proximately cause BKC’s future profits loss. BKC decided to terminate the Franchise Agreements due to Hinton’s breach, and it was this action that caused the loss of future profits.
©2002 Kramer & Kaslow PC