Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ga. App.: Childcare franchisor entitled to lost future royalty fees, advertising fees, (Nov 25, 2014)

By Jody Coultas, J.D.

A trial court erred in failing to award childcare center franchisor Legacy Academy advertising fees and future royalty fees in a breach of contract dispute with franchisee JLK, Inc., a Georgia appellate court has held (Legacy Academy v. JLK, Inc., November 20, 2014, Ray, W.).

About eight years into a 20-year franchise agreement, JLK notified Legacy of its intent to terminate the relationship on January 1, 2011. JLK continued to use Legacy’s name and trademarks until December 31, 2010, and last paid its royalty and advertising fees due under the contract in October 2010, approximately two months prior to sending the letter. Legacy sued JLK, seeking accrued royalty and advertising fees through that time as well as future, unaccrued royalty and advertising fees through the contract’s full term.

A trial court granted summary judgment to Legacy, and entered a final judgment in favor of Legacy for royalty fees, pre-judgment and post-judgment interest, and attorney fees. The court did not award royalties pertaining to what would have been the remainder of the contract term or advertising fees.

Legacy should have been able to recover lost future royalty fees, according to the court. The trial court held that Legacy could not recover the royalty fees because it terminated the contract. Courts generally agree that a franchisor may recover lost future royalties when a franchisee terminates the relationship, but are divided where, as here, the franchisor terminates the relationship. The contract required JLK to operate as a Legacy Academy with concomitant use of Legacy’s trademarks, to operate its premises only as a Legacy Academy Center, and provided that if JLK defaulted, Legacy may terminate the agreement and seek actual and consequential damages.

The trial court did not err in holding that Legacy presented insufficient evidence of future damages from lost royalty fees, according to the court. Legacy’s damages were based on lost net profits, not gross revenue. To allow the court to quantify lost profits, Legacy needed to provide figures establishing the business’s projected revenue as well as its projected expenses. Legacy only presented evidence as to lost gross revenue and did not present sufficient evidence of expenses and avoided costs such that lost profits from royalties could be calculated with sufficient specificity.

Legacy was entitled to receive the benefit of the bargain it made as to the advertising fees, according to the court. The trial court found that Legacy could not recover advertising fees because it derived no profit from them. The contract required Legacy “to expend all, or any portion, of the Fund, in any year, for advertising, marketing or promotional programs or activities[.]” The advertising fee was not an immediate profit to Legacy, but rather an overall enhancement of the Legacy brand per se. The calculation of damages should be flexible, so as to reasonably compensate the injured party and place that party in the position he or she would have been in if the contract had been performed. Therefore, the trial court erred in not awarding advertising fees for the contract term.

The case is No. A14A1100.

Attorneys: Charles L. Bachman, Jr. (Gregory, Doyle, Calhoun & Rogers, LLC) for JLK, Inc. Cary Ichter (Ichter Thomas, LLC) for Legacy Academy, Inc.

Companies: Legacy Academy; JLK, Inc.

Cases: FranchisingDistribution GeorgiaNews