Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Information about settlement in franchise disclosure documents might breach confidentiality agreement, (Nov 1, 2013)

By John W. Arden, J.D., LL.M.

Franchisor Keller Williams Realty, Inc. might have breached the confidentiality provision of a settlement agreement with a franchisee by including information about the agreement in a Franchise Disclosure Document sent to existing franchisees, regional owners, regional directors, and prospective franchisees, according to the federal district court in Chicago (Caudill v. Keller Williams Realty, Inc., October 31, 2013, Kocoras, C.). The court found that the franchisee’s complaint contained sufficient facts to allege a plausible breach of contract.

Jana Caudill was the owner and operator of Leaders, LLC, a real estate agency, serving Northwest Indiana and Southern Chicago suburbs, under a franchise agreement with Keller Williams. After Caudill filed a lawsuit against the franchisor in February 2011, Keller Williams terminated the franchise. The parties participated in a private mediation, reaching a confidential settlement agreement and mutual general release in December 2012.

The settlement agreement contained a confidentiality provision, stating that the settlement agreement itself and the allegations of the parties “will be held strictly in confidence, and will not be disseminated or disclosed by the parties, their attorneys, their employees, or anyone acting on their behalf,” except to tax professionals as necessary, attorneys who represented the parties in the lawsuit, underwriters and reinsurers, the mediator, and governmental agencies or regulatory authorities as required by law. The parties were to be liable for liquidated damages of $10,000 for each breach of the confidentiality agreement.

In reliance on the settlement agreement, Caudill dismissed the initial lawsuit against Keller Williams.

Beginning on or about March 29, 2013, the franchisor distributed a Franchise Disclosure Document containing information about the settlement agreement to existing franchisees, regional owners, regional directors, and prospective franchisees. The information in the disclosure document included (1) the case name, (2) a summary of the claims, (3) the history of the litigation, (4) the settlement amount, and (5) a statement that the settlement was entered into “without a finding or admission of liability” on the part of Keller Williams.

In July 2013, Caudill and Leaders filed a complaint alleging that Keller Williams breached the confidentiality provision of the settlement agreement, causing damages, including loss of professional opportunities, future income, embarrassment, and harm to reputation. Their action sought compensatory damages, including liquidated damages; injunctive relief prohibiting future disclosures; and attorney fees and costs of suit.

Keller Williams moved to dismiss the complaint, claiming that the settlement agreement did not prohibit disclosures to employees who act on behalf of the franchisor, that the disclosures were required by law, and that the franchisor was not required to instruct recipients of the disclosure documents to maintain the information’s confidentiality.

Issues of fact. The court found that, at this preliminary stage of the litigation, that the complaint contained sufficient facts to indicate that a breach of contract was plausible. “Keller Williams’ arguments for why dismissal is proper contain various questions of fact which this Court presently declines to explore,” the court explained. These issues of fact included (1) a purported unintentional drafting error in the settlement agreement, (2) who exactly received disclosure documents, (3) in what states did those recipients reside, and (4) the applicable state franchise laws. These issues of fact precluded dismissal, the court concluded.

Damages. Keller Williams argued that Caudill and Leaders did not sufficiently allege pecuniary damages as a result of the breach and that the liquidated damages provision was unenforceable as a penalty.

Construing the allegations in a light most favorable to the plaintiffs, the court accepted as true that Caudill and Leaders did lose professional opportunities due to the breach. The court agreed with the franchisor that Texas law, which governed the franchise relationship, would not recognize damages for alleged loss of business reputation or embarrassment. Nevertheless, the plaintiffs successfully pleaded enough facts to establish actual loss of professional opportunities and future income.

Whether the liquidated damages provision was invalid as an unenforceable penalty was a question of law that required the resolution of factual issues before determination, according to the court. The “difficulty of estimation” and “reasonable forecast” questions must be determined from evidence of the circumstances that existed at the time the parties executed the settlement agreement.

To determine the reasonableness of the liquidated damages provision would require the court to make determinations that it was not yet prepared to make.

The case is No. 13 C 4693.

Attorneys: Ruth Irene Major (Law Offices of Ruth I. Major, PC) for Jana Caudill and Leaders LLC. Jeannice Devon Williams (Schiff Hardin LLP) for Keller Williams Realty, Inc.

Companies: Leaders, LLC; Keller Williams Realty, Inc.

Cases: FranchisingDistribution IllinoisNews