Oct 9, 2016 - Franchise Articles by |

Franchise and Distribution Litigants Seeking Damages Awards are in For a Rocky Ride – We Can Help You

My article last month on franchise termination litigation set forth a somewhat detailed assessment of the law of damages in a franchise termination context, concluding in part that:

In franchise and antitrust distribution law there is no more exasperating, elusive and esoteric issue than damages. This analytical muddle threatens franchisors and franchisees alike. Further, the doctrinal failure regarding franchise damages is so robust that it has extensively infected damages theory, methodology, and calculation.

The Predictably Unpredictable Legal Morass of Franchise Termination Damages, Jeffrey M. Goldstein (August 2016)

Within a month of publication of that article another franchisee litigant in Florida federal court, seeking about $7 Million, was unable to successfully run the franchise litigation damages gauntlet. HRCC Ltd. v. Hard Rock Cafe International et al., CA 6:14-cv-02004, U.S. District Court for the Middle District of Florida (September 13, 2016). In Hard Rock, the franchisee’s damages claim was categorically rejected by a federal district court judge granting the franchisor’s motion for summary judgment on the eve of trial.

Background Facts of the Franchise Termination

Abstracting from the numerous esoteric legal-entity distinctions associated with the many related corporate entities in the Hard Rock case, it appears that the franchisee, HRCC, LTD. (“HRCC”), which operated a restaurant in Nassau, the Bahamas, fell behind in paying its required royalties in 2013 and was terminated in 2014. As expected, the franchisor sued for purported lost future royalties and the franchisee counterclaimed for alleged lost profits damages arising out of the franchisor’s alleged operational failures and misrepresentations. The franchisee’s myriad allegations pivoted off of the base assertion that that the franchisor had engaged in conduct that violated the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”). In its complaint, HRCC sought “recovery for all monies tendered by HRCC in connection with the opening and operation of its Hard Rock Café restaurant franchise.”

The Failure to Provide Any Damages Evidence Doomed the Terminated Franchisee

After discovery in the case had been completed, and as the parties were filing certain trial-related papers, the defendant franchisor filed a motion for summary judgment asking the court to dismiss, without trial, HRCC’s claims on various legal grounds. In ruling in favor of the franchisor on the pivotal FDUPTA claim, the court for all intents and purposes gutted the franchisee’s entire case. The beginning of the end for the franchisee was when the court pointedly expressed an obvious preliminary summary judgment standard: that a party opposing summary judgment must present more than mere statements of disputed facts – it must present actual evidence. That meant, in this case, that HRCC was required to present evidence of actual damages, which is “a required element under FDUTPA.” After scouring the record and coming up empty regarding evidence of actual damages, the court proclaimed that HRCC had done nothing more than explicitly assert the bald proposition that it was entitled to “an amount to be proven at trial.”

The court also appeared aggravated by HRCC’s failure to provide any detailed information regarding damages declaring that:

In its response to Defendants’ summary judgment motion, however, HRCC makes no attempt to clarify the issue of damages and instead focuses on the issue of whether the Defendants’ actions can be considered ‘unfair or deceptive.’ Indeed, in a single paragraph, HRCC responded to Defendants’ FDUTPA arguments without any mention of damages at all. Moreover a careful review of the record reveals that HRCC has avoided providing any meaningful evidence that would satisfy the measure of damages needed for a successful FDUTPA claim.

The court then hammered the definitive nail in HRCC’s coffin when it proclaimed that “For purposes of the FDUTPA, actual damages must be direct damages, not consequential damages in the form of lost profits.” In so ruling, the court held that even if HRCC had added more meat to the bones of its surficial references to lost profits this would not have been sufficient to pass legal muster, as these losses would not have been considered actual damages. As the court indicated: “Such references have no bearing on the issue of damages in this case, however, because they do not fall within the established measures for damages for a FDUTPA claim.”

Not All Damages are Equal – Lost Profits is not Actual Damages

Although the court acknowledged that the term “actual damages” was not explicitly defined in the FDUTPA, it also quickly emphasized that other courts unanimously have defined the term very narrowly, stating: “Generally, the measure of actual damages is the difference in the market value of the product or service in the condition in which it was delivered and its market value in the condition in which it should have been delivered according to the contract of the parties.” The court pronounced that “this was the only possible way to measure actual damages in a FDUTPA claim.”

Apparently sensing that something might be amiss regarding the lack of record evidence of actual damages, HRCC, in its opposition papers, dropped a footnote requesting that it be permitted to amend its complaint. The court, in response, also in a footnote, rejected this request. Slamming the door shut on the franchisee, the court stated: “In its response, HRCC appears to ask the Court to amend its complaint to conform to the record evidence in order to assert a new theory of liability. However, it is well-settled that “[a] party may not amend [its] complaint through argument in a brief opposing summary judgment.”

Interestingly, the franchisee in the Hard Rock case was skewered in almost the exact same fashion as was the losing franchisee in the case discussed in my last article, Legacy Academy, Inc., et al. v. Doles-Smith Enterprises, Inc., Court of Appeals of Georgia, ¶15, 781, (Jun. 9, 2016). As previously noted:

Reading between the lines of Court’s opinion, it appears that two strategic decisions made by the franchisees’ lawyers shattered the franchisee’s case for damages at trial. In this regard, the franchisee, as reported by the Court of Appeals: (1) withdrew before trial its claim for rescission that would have been based on the alleged FDD fraud; and (2) failed to introduce any evidence of direct damages at trial as measured by the difference between the value of what the franchisee received (e.g., the allegedly defective franchise) and its purchase price.

There are More Legacies and Hard Rocks to Come

The rocks and shoals on which many franchisee litigation ships continue to crash and burn originated out of the prolific esoteric and sometimes indefensible distinctions between actual damages, indirect damages, and consequential damages. Even though there is no uniformly accepted way to navigate around these dangerous, ambiguous and confusing distinctions, the franchisee in Hard Rock, by relying solely on the quintessential example of consequential damages – lost profits – sealed its fate from the moment it filed its initial pleading.

Moreover, given the tenor of the court’s decision, it is not certain that an alternative damages theory that closely charted the skeleton course outlined by the court would have sufficed in this context given the susceptibility of such damages to be characterized as conjectural. In other words, even if the Hard Rock franchisee had produced an alternative damages model based upon the difference between the net-profit projections for a generic Hard Rock franchise and what the franchisee actually earned during that time period, it may be that the court would have rejected it as too speculative. Dicta from the Legacy case suggested just such a possibility: “awarding damages on that basis would have essentially converted what was a projection of potential cash flow into a guarantee of future cash flow.”

My view on the subject remains the same as it did when I published last month’s article; accordingly, I will finish with the conclusion previously expressed there: “Given that the politics associated with franchise and distribution damages measures is inextricably linked to the dogmas underlying franchise and distribution termination laws, franchise and distribution litigants seeking damages awards are in for a rocky ride for the foreseeable future.”

By: Jeffrey M. Goldstein

(202) 293-3947

goldlawgroup.com

jgoldstein@goldlawgroup.com

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