Franchisor Barred From Obtaining Lost Future Franchise Fees in Termination

Medicine Shoppe International, Inc. v. TLC Pharmacy, Inc. (July 2010)

Under Missouri law, a pharmacy franchisor was not entitled to recover future franchise fees from a franchisee after an early termination of the parties' agreement. The court therefore denied the franchisor's request for future fees in the amount of $748,000. The issue of whether a licensee could recover future license fees from a franchisee following termination had not yet been decided by Missouri courts. Accordingly, the court applied the general requirements for lost profits in general relating to a breach of contract stating that lost profits were recoverable provided the loss was the natural and proximate result of the breach, was ascertainable with reasonable certainty, was not speculative or conjectural, and was within the contemplation of the parties when the contract was made. In this case, the court observed that nowhere in the parties' agreement was it evident that either party contemplated the payment of future license fees in the event of termination. Indeed, the contract stated that in the event of termination, the franchisee would be responsible only for past due amounts. Further, the agreement did not expressly provide that the licensee's obligation to pay franchise fees survived termination. Thus, the franchisor failed to support its assertion that it was entitled to future license fees and none would be awarded.

Even Though Third Party Owned Competing Business Franchisee Nevertheless Terminated

Bonus of America, Inc. v. Angel Falls Services, LLC (July 2010)

A cleaning business franchisee was likely to irreparably harm the goodwill of its franchisor if its continued operation of a competing cleaning business was not enjoined. Despite denials by the competing business that there was no connection between it and the franchisee, substantial evidence showed that the franchisee played a role in the day-to-day operations of the competing business and that the competing business was using the intellectual property of the franchisor. For example, the competing business used images and other features from the franchisor's materials in its own proposals. Although the evidence revealed that the competing business was owned by a third party, it also showed that the franchisee played an active role in the competing business. The franchisee could not avoid the terms of the non-compete covenant by doing through the owner of the competing business what he agreed not to do himself.

Claims For Violations of Covenant-Not-To-Compete Not Subject to Arbitration

Jewelry Repair Enterprises, Inc. v. Dilshad Ajani (May 2010)

Pursuant to the franchise agreement, jewelry franchisees agreed "not [to] be actively engaged in any jewelry sales or jewelry repair business other than the Franchised Business without the written consent of the Franchisor." The franchisor learned that the franchisees were operating two jewelry repair enterprises that were in direct competition with its franchise.  The franchisor sent a letter notifying the franchisees that their conduct constituted a breach of the agreement.  The franchisees responded stating that they had resigned as managers of the competing businesses, and that they had divested their interests in the competing businesses.  The franchisor alleged that the competing stores were still under the franchisees' control, and requested that the court shut down the competing businesses and terminate the franchise agreement. The franchisees moved to dismiss the court action claiming that they were entitled to go to arbitration for all disputes. The trial court agreed, only to have its decision overturned. The reviewing court thought the issue very clear even though the franchise agreement stated that if the franchisor terminates the agreement and the termination is disputed by the franchisees, "the parties shall submit said dispute for binding arbitration...." However, noted the court, the franchise agreement excepted from the arbitration provision "claims related to noncompetition covenants [or] .... the obligations of the Franchisee upon termination or expiration of this Franchise Agreement." Accordingly, the court of appeals ordered that the trial proceed in court, not in arbitration.