Recovering Lost Profits for Franchisee’s Abandonment

The U.S. District Court for the Eastern District of Missouri has recently ruled that, under Missouri law, a restaurant franchisor may recover lost profits resulting from a franchisee’s abandonment of its restaurant prior to the expiration of the franchise term. Although the court did not rule on whether the franchisor would in fact have realized future profits in this particular case, the court did hold that a factfinder could have reasonably determined that, absent the early closure by the franchisee, some revenue would have been realized from the continued operation of the restaurant.

In reaching its decision, the court relied on the case of Meineke Car Care Ctrs., Inc. v. RLB Holdings, LLC, where the Fourth Circuit held that a non-breaching party was entitled to recover damages that were the proximate consequence of a contract breach regardless of whether the contract contained explicit provisions as to future and liquidated damages.

Hardee’s Food Systems, Inc. v. Hallbeck, No. 4:2009-cv-00664 (E.D. Mo. Sept. 21, 2011).

State Income Taxation of Out-of-State Franchisors

The U.S. Supreme Court denied review of a decision by the Iowa Supreme Court holding that physical presence within the state was not a constitutional prerequisite to the state’s imposition of income tax on a franchisor. The Iowa court had held that the dormant Commerce Clause of the U.S. Constitution did not require a franchisor to maintain a physical presence within the state in order for the state to impose an income tax on revenue arising from the use of the franchisor’s intangibles by franchisees located within the state.

State courts are currently split on whether the physical presence requirement of the Constitution applies to state income and franchise taxes. While the courts of three states have held that a taxing state could not impose income or franchise taxes on out-of-state businesses that did not maintain a physical presence in the taxing state, 13 other states have reached the opposite conclusion. It is unclear whether Iowa’s decision will lead to policy changes in other states, but until the U.S. Supreme Court rules on the issue, we expect continued uncertainty and discord on this subject.

KFC Corp. v. Iowa Dept. of Revenue, Dkt. No. 10-1340, petition denied October 3, 2011.

Franchisee’s Rights to Renew

A federal district court in New Jersey granted summary judgment to a franchisee, holding that the franchisor must renew its franchise agreements even where those agreements contained no express right of renewal. Under the New Jersey Franchise Practices Act (NJFPA), it is unlawful for a franchisor to terminate, cancel or fail to renew a franchise agreement unless the franchisee has failed to substantially comply with requirements imposed by the franchise. The district court held that this provision of the NJFPA applies regardless of whether the franchise agreement at issue contains an express right of renewal.

The district court’s decision relied heavily on the opinion in Dunkin’ Donuts of America, Inc. v. Middletown Donut Corp. There, the New Jersey Supreme Court stated that “once a franchise relationship begins [under the NJFPA], all that a franchisee must do is comply substantially with the terms of the agreement, in return for which he receives the benefit of an ‘infinite’ franchise-he cannot be terminated or refused renewal.”

BP Products N.A., Inc. v. Hillside Service, Inc., No. 2:09-cv-04210 (D. N.J. Sept. 14, 2011).