Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Mich.: Little Caesars franchisees owe liquidated damages and attorney fees, (Aug 25, 2023)

By Justin Marcus Smith, J.D.

Although the Michigan franchise statute did not define “good cause” for termination, the court held that the circumstances here amounted to good cause.

There was no doubt that a franchisee entity and its two keyperson obligors breached their franchise agreements with plaintiff franchisor Little Caesar Pizza Enterprises, Inc. (LCE) in multiple ways, determined the federal district court in Detroit, Michigan. Michigan law did not define “good cause” for termination, but the court held the circumstances supported it here, ruling in favor of the franchisor in its breach of contract claim. LCE satisfactorily established a liquidated damages provision in the two franchise agreements and reasonable calculations of liquidated damages, by way of affidavit, consistent with the parties’ intent. Michigan law also made attorney fee and litigation cost provisions enforceable where the franchisees triggered judicial action by contesting the franchise terminations. The opinion did not describe the circumstances of that contest, but it appeared to have occurred before LCE filed the instant action. The court granted summary judgment to LCE only on LCE’s claim for breach of contract, as LCE requested, leaving various unfair competition claims to be decided later (Little Caesar Enterprises, Inc. v. S&S Pizza Enterprises, Inc., August 24, 2023, Parker, L.).

Background. Franchisor-plaintiffs Little Caesar Pizza Enterprises, Inc. and LC Trademarks, Inc. (collectively, LCE) sued franchisee-defendants S&S Pizza Enterprises, Inc. (S&S) and co-obligors Sheryl Claeys and Suzanne L. Matthews (collectively, S&S) for: 1) breach of contract; 2) trademark infringement; 3) unfair competition; and, 4) trade dress infringement. LCE moved for partial summary judgment on the count for breach of contract.

The assembled record reflected, in the court’s estimation, that S&S formerly operated two LCE locations under two separate franchise agreements: the Marysville franchise and the Harrison Township franchise. The agreements had 10-year initial terms. Claeys and Matthews agreed to be personally bound to the obligations under the agreements. The obligations included, among other things, bookkeeping, preparation of weekly reports, and payment of royalties and advertising fees based on gross sales. LCE had a right to terminate the agreements for default. Certain defaults were not curable or involved liquidated damages payable to LCE. Post-termination obligations included, among other things, cessation of trademark use and a non-compete for 2 years within the designated market area.

The record further reflected that LCE sent S&S three default notices between July 2017 and September 2019 and a fourth notice in April 2021 about alleged failures to submit the required financial statements. These notices all involved a thirty-day notice to cure. In June 2021, LCE sent S&S a termination notice for failure to cure the April 2021 notice of default.

According to LCE, S&S stopped operating the Marysville franchise in March 2021 without LCE approval. LCE then sent S&S a fifth, supplemental termination notice in July 2021 stating that S&S were in default for failure to provide quarterly financials, abandonment of the Marysville franchise location, and other details. This supplemental termination notice also stated that LCE would sue if S&S contested the termination.

LCE also supplied evidence of other royalty and advertising fee defaults and more notices in connection with the Harrison Township franchise. Last, in May 2022, LCE became aware that the landlord for the Marysville franchise location had terminated the lease agreement there in early 2020 and initiated eviction proceedings. This caused LCE to send a seventh default or termination notice. S&S closed the Harrison Township franchise location as of June 2022.

Breach. The court granted summary judgment to LCE because the record showed S&S “committed a plethora of breaches under the clear and unambiguous terms of the contracts.” The court also found that the defendants not only “took no action” to cure, they “continued to commit breaches” after receiving notice of them, including failure to pay royalties and advertising fees. Although the Michigan Franchise Investment Law, Mich. Comp. Laws § 445.1527(c), did not define “good cause” for termination, the court found that the number and flagrant nature of the franchise agreement breaches amounted to good cause for termination.

Damages. The court found that a reasonable juror would have concluded that the affidavit of LCE’s compliance officer, setting forth his calculations of liquidated damages, reasonably ascertained LCE’s damages. The court noted that Michigan courts generally enforce liquidated damages provisions as long as the plaintiff has not disregarded the principle of compensation the parties intended.

The court noted further than Michigan courts also generally enforce reasonable provisions for attorneys’ fees. Section 23.9 of the instant franchise agreements required them. The court found the attorneys’ fees provision to be facially valid and enforceable in connection with the financial burden of the litigation proceedings incurred by LCE.

The Case is No. 2:21-cv-11776-LVP-KGA.

Attorneys: Justin L. Sallis (Lathrop GPM LLP) for Little Caesar Enterprises, Inc. and LC Trademarks, Inc. Keith C. Jablonski (O'Reilly Rancilio PC) for S&S Pizza Enterprises, Inc., Sheryl Claeys and Suzanne L. Matthews.

Companies: Little Caesar Enterprises, Inc.; LC Trademarks, Inc.; S&S Pizza Enterprises, Inc.

MainStory: TopStory FranchisingDistribution MichiganNews