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The Fourth Circuit this month sided with a franchisor in its efforts to recover prospective damages under North Carolina law, including lost profits, from a franchisee which it had terminated. Franchisors seeking such damages should find joy in Meineke Car Care Centers, Inc. v. RLB Holdings, LLC, in which the Court said it was not necessary for the franchise agreement to speak to the possibility of the recovery of prospective damages.
The opinion also resolves what appears to be a burning issue for franchisors: whether they can recover lost profits if it is the franchisor which takes the step of terminating the franchisee as a result of the franchisee's breach of the franchise agreement. The Fourth Circuit discussed a variety of approaches to the recovery of damages in such circumstances, but found the answer in this case "in the relevant North Carolina law concerning damages recoverable following a breach of contract."
RLB claimed that its shops weren't "commercially feasible" to operate, but the Court said that Meineke didn't need to show that the shops could have been profitable, but only that they would have generated revenues upon which royalty payments would have been based.
The Fourth Circuit also found acceptable Meineke's method of calculation of its lost profits, which the franchisor based on the average weekly sales of the shops multiplied by the number of weeks in the three year period for which it sought relief times the average historical royalty rate paid to Meineke. The district court had said this formula was speculative, but the appellate court disagreed. It said that "using past profits as a basis for calculating future lost profits is a widely accepted methodology."
The franchise agreements didn't mention the possibility of the recovery of lost profits, but the Fourth Circuit did not find that to be necessary. It ruled that lost profit damages were "reasonably supposed to have been within the contemplation of the parties," and that an express written agreement was therefore not required. The district court had entered summary judgment for the franchisee on this point, but the Fourth Circuit remanded the case for further proceedings.
The Court ended its opinion by discussing Meineke's obligation to mitigate its damages. The trial judge had held that Meineke's failure to mitigate barred it from any recovery. The Fourth Circuit held that if there had been a failure to mitigate it only served as a limitation of the damages that might be recovered, not a complete bar. The Court accepted Meineke's argument that its decision to limit its recovery to a three year period of lost profits rather than the longer remaining term of each of the franchise agreements could serve as the needed mitigation by Meineke.
The upshot of the Court's decision is that it found issues of fact that should have prevented the trial court's entry of summary judgment in favor of the franchisee. Meineke still has to prove its damages.
Based in Greensboro, North Carolina, Mack Sperling is partner with law firm Brooks Pierce McLendon Humphrey & Leonard LLP. He focuses on business litigation in complicated disputes. Mack is a Fellow of the American College of Trial Lawyers, and he writes a widely read blog about business litigation in North Carolina, the North Carolina Business Litigation Report.