In Fiesta Ventures Bevercreek, Ltd. Liab. Co. v. Qdoba Rest. Corp., No. 24-CV-2218 JLS (BLM), 2025 U.S. Dist. LEXIS 162943 (S.D. Cal. Aug. 21, 2025), the dispute arose from a series of franchise agreements and subsequent defaults between Fiesta Ventures entities (FVD and FVB) and Qdoba, the franchisor. The relationship began in 2012, with Fiesta Ventures operating Qdoba restaurants under franchise agreements. By 2019, only one location remained under operation. In July 2019, the parties entered into a development agreement for a new restaurant in Bevercreek, Ohio, which led to a new franchise agreement in April 2023. However, the Bevercreek location failed to open on time due to leasing issues, prompting Qdoba to issue a notice of default in February 2024.
Rather than immediately terminating the franchise agreement, the parties entered into a Workout Agreement, which required the Bevercreek restaurant to open by May 31, 2024, and included a provision making affiliates of FVB (including FVD and the individual owners) liable for any future default. Qdoba extended the opening deadline three more times, but after the landlord terminated the lease, Qdoba terminated FVB’s franchise agreement. FVB attempted to cure the default, but Qdoba did not reconsider its decision. Subsequently, Qdoba also terminated FVD’s franchise agreement, relying on the Workout Agreement’s affiliate liability provision.
Fiesta Ventures sued Qdoba, alleging breach of contract and unfair business practices under California law. Qdoba counterclaimed, seeking declaratory judgments regarding the terminations, lost future royalties for both agreements, attorneys’ fees, and enforcement of personal guarantees. Fiesta Ventures moved to dismiss the counterclaims for lost future royalties, arguing that California law, specifically Postal Instant Press, Inc. v. Sealy, precluded such damages when a franchisor elects to terminate a franchise agreement, and that awarding such damages would violate California public policy as reflected in the California Franchise Relations Act (CFRA) and California Franchise Investment Law (CFIL).
The court analyzed the motion under the standard for motions to dismiss, accepting all well-pleaded facts as true and drawing reasonable inferences in favor of Qdoba. The court acknowledged that Sealy generally holds that a franchisor who terminates a franchise agreement cannot recover lost future royalties, as the franchisor’s own act of termination, not the franchisee’s breach, is the proximate cause of lost future royalties. However, Sealy also recognizes an exception: if the franchisee’s breach is “total”—meaning performance is unlikely or impossible—then the breach itself, not the franchisor’s termination, is the proximate cause of lost future royalties, and such damages may be recoverable.
The court found that Qdoba plausibly alleged a total breach by Fiesta Ventures, as the franchisee failed to open the restaurant after multiple opportunities and extensions, justifying Qdoba’s belief that performance was unlikely. The court drew on Coughlin v. Blair, 41 Cal. 2d 587 to clarify the distinction between partial and total breach, noting that when a party’s conduct makes future performance unlikely, the non-breaching party is justified in treating the breach as total and seeking all damages, including prospective ones, in a single action.
The court also addressed the public policy arguments. It found that the CFRA did not apply because the franchisees were not domiciled or operated in California, and the CFIL was inapposite because it primarily governs the sale of franchises, not the termination or damages for breach. Therefore, the court rejected the argument that awarding lost future royalties would violate California public policy.
Ultimately, the court denied Fiesta Ventures’s motion to dismiss, holding that Qdoba’s claims for lost future royalties were plausible under the total breach exception recognized in Sealy and consistent with California contract law principles, which seek to place the injured party in the position it would have occupied had the contract been fully performed.
The court’s reasoning arguably reflects a policy goal of ensuring that franchisors are not left without an adequate remedy when a franchisee’s conduct amounts to a total breach, making future performance impossible or highly unlikely. By allowing claims for lost future royalties in such circumstances, the court arguably aimed to prevent franchisees from escaping liability for the full consequences of their nonperformance and to avoid forcing franchisors to engage in repeated litigation for each missed royalty payment. Franchisors would argue that this approach aligns with the general contract law principle of awarding damages that give the injured party the benefit of the bargain.
For franchisees and dealers, this decision should be viewed as unfavorable, as it opens the door for franchisors to seek substantial damages in the form of lost future royalties when a court finds a total breach. The prior rule – focusing on proximate cause – seemed to navigate the equitable forest more efficiently. This decision places significant pressure on franchisees to perform or risk exposure to large damage awards, especially where agreements contain cross-default or affiliate liability provisions. However, the decision also clarifies that such damages are not automatic; they are only available where the breach is total and future performance is unlikely, providing some protection against overreaching claims by franchisors in cases of minor or curable defaults.
