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Appeals Court Dismisses Franchisee Claims against Franchisor in Disclosing Confidential Settlement in FDD

AUSTIN, Texas - A U.S. appeals court issued a decision this month upholding the dismissal of claims brought by a franchisee who alleged she was entitled to liquidated damages in the amount of $20 million because the terms of her confidential settlement with franchisor Keller Williams Realty were published in the company's Franchise Disclosure Document.

Keller Williams had settled the 2013 lawsuit brought by former Indiana franchisee Jana Caudill, who later became a regional director for the company. The settlement was subject to a confidentiality provision that specifically covered the amount paid to the franchisee plaintiff. The confidentiality term of the settlement agreement also contained a liquidated damages provision stating that damages for breach of confidentiality would be difficult to quantify precisely, so any violation would entitle the other party to an award of $10,000.

Three months after the settlement in the case, Caudill v. Keller Williams Realty, Inc., Texas-based Keller Williams filed its required Franchise Disclosure Document, FDD, which eventually went to some 2,000 existing or potential franchisees and others, disclosing the information about the settled case and the amount that was paid to the franchisee.

In Caudill's subsequent lawsuit, she contended that Keller Williams in broadcasting the settlement terms in its FDD was a breach of confidentiality, and she sought $10,000 in liquidated damages per recipient of the FDD, for a total of $20 million. Applying Texas law, the district court dismissed the case because liquidated damages cannot be awarded unless the amount established in the provision is a "reasonable forecast of just compensation." The lower court believed any non-actual-damages amount would be punitive, and punitive damages are not allowed in contract cases. The Seventh Circuit agreed there was no evidence that $20,000,000 (or even $10,000 per violation) reasonably approximated the plaintiff's damages. In fact, the plaintiff had not tendered any evidence that she was damaged by any one of the 2,000 people having seen the FDD. The Seventh Circuit said that while actual damages may be conceivable for an inappropriate disclosure, there was nothing other than speculation on which to base an award in this case.

DLA Piper 2014 analysis of Caudill after lower court decision

The DLA Piper law firm presented the Caudill v. Keller Williams Realty, Inc. case in its March 2014 webinar as one of its Top 13 Franchise Cases for 2013, presenting to clients the question, "Can You Breach a Confidentiality Provision by Disclosing a Settlement in an FDD?

Attorney John Hughes explained that the Keller Williams confidentiality provision stated that the conditions of the settlement (including the settlement amount, the settlement itself, and the parties' allegations) will be held in strict confidence and could only be disclosed "to tax professionals to the extent needed for tax advice, to the parties insurance carriers, attorneys who represented the parties in the Lawsuit, underwriters and reinsurers, the mediator, and to governmental agencies or regulatory authorities as required by law, and then only to the extent necessary and required to be disclosed by law, by lawful subpoena, or otherwise."

Hughes listed the franchisee's claims: Keller Williams breached the confidentiality provision in the settlement agreement by disclosing the terms of the settlement in the FDD; Caudill derived business from referrals in the real estate industry from many of the recipients of the FDD; Caudill suffered damages, including the loss of professional opportunities, future income, embarrassment and reputational harm; and Caudill sought compensatory damages (liquidated damages) and injunctive relief.

Keller Williams had filed a motion to dismiss the claims. The franchisor argued that it did not breach the confidentiality provision because the settlement agreement did not prohibit disclosure to employees who act on or behalf of Keller Williams. The company also said it was required by law to disclose certain terms of the settlement, and it was not required to instruct recipients of the FDD to maintain the information's confidentiality.

The law firm states that the lower court denied the motion to dismiss because of fact existed: Purported unintentional drafting error in the settlement agreement; who received the FDD; in which states those recipients resided; and the applicable state franchise law.

DLA Piper gave practice pointers to its franchisor clients saying they should expressly provide in confidentiality provisions in settlement agreements that the terms of the settlement can be disclosed to anyone when required by law, including any applicable franchise disclosure regulations. It noted that this provision in Caudill carved out the disclosure "to governmental agencies or regulatory authorities as required by law, and then only to the extent necessary and required to be disclosed by law."

Seventh Circuit Ruling in Caudill v Keller Williams

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