FRANCHISOR 101: STILL UNDECIDED AFTER ALL THESE YEARS
In 1996, a California state court held that a franchisor could not recover future royalties because it was the party that terminated the franchise agreement, so the loss of future royalties was caused by the franchisor's termination of the Franchise Agreement, rather than by the franchisee's breach.
In 2003, a federal court concluded that under California law, a franchisor may be entitled to recover future royalties if the franchisee, rather than the franchisor, terminated the franchise agreement. Also, in 2003, a federal court held that under Michigan law, a franchisor was entitled to recover future royalties, while a state court held that under Michigan law, a franchisor was not entitled to recover lost future royalties.
In 2010, a federal court held that under Missouri law, a franchisor could not recover future royalties unless the franchisor and franchisee contemplated recovery of these damages when the franchise agreement was formed, while a federal court applying Tennessee law found that a franchisor might recover future lost royalties where a franchisee had abandoned the franchise.
These cases reveal that the issue of future royalties is still uncertain. To avoid any doubt on the intention of the parties, however, every franchise agreement should acknowledge the franchisor's right to recover future royalties and provide that the franchisee's obligation to pay these royalties survives the termination of the agreement.