Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—SDNY: Krispy Kreme awarded over $1million in damages against franchisee, (Jun 20, 2013)

By Peter Reap, J.D., LL.M.

Despite a magistrate judge’s report and recommendation that franchisor Krispy Kreme Doughnut Corporation be awarded no contractual damages against a terminated franchisee and its principals, Krispy Kreme was awarded its sought-for amount of contractual damages of $1,125,091, together with post judgment interest, the federal district court in New York City has decided (Krispy Kreme Doughnut Corp. v. Satellite Donuts, LLC, June 19, 2013, Kaplan, L.). Additionally, the magistrate judge’s recommendation that the court issue an order to show cause with respect to possible sanctions against the franchisor was rejected.

At various times, the defendants owned and operated multiple Krispy Kreme franchises, including the Penn Station franchise, the Baldwin franchise, and a franchise in Milford, Connecticut. After termination for nonpayment of fees, the defendants failed to cease using Krispy Kreme’s trade secrets, system and marks and to comply with their post-termination obligations.

Krispy Kreme filed suit, seeking a total amount due of $1,125,091, comprised of amounts due from product purchases, fees, costs and attorney fees. Krispy Kreme contends that, as a result of the franchisee’s filing for bankruptcy, Krispy Kreme was forced to pursue its claims against all defendants in the context of the Satellite bankruptcy case. Further, it contends that it to assert and defend against claims in no less than four separate actions as a direct result of the defendants’ breaches of the franchise agreements.

Contractual damages. The magistrate judge recommended denial of any contractual damages on the grounds that: (a) the Penn Station and Baldwin franchise agreements contain North Carolina governing law clauses but the plaintiffs cited briefly to New York, not North Carolina, law, and thus failed to establish that they were entitled to any damages for breach of those agreements; and (b) they improperly sought damages for breach of the Milford franchise agreement, which was not mentioned in the complaint, and failed to establish damages for breach of the Milford lease, which was.

However, the magistrate judge pointed to no material difference between New York and North Carolina law on any issue pertinent to the case. The reference to New York rather than North Carolina law, even if technically mistaken, was not a basis for denying damages, the court held.

Sanctions. The magistrate judge was on sounder ground with respect to his concern that some of the damages sought at the inquest were for alleged breaches of the Milford franchise agreement, a category of damages not recoverable in light of Rule 54( c), given the failure of the complaint to allege breach of that agreement, according to the court. The conclusion, however, that plaintiffs sought any material amount of damages for breach of that franchise agreement turned out to be incorrect, although it was readily seen how the plaintiffs inadvertently led the magistrate judge to think otherwise, the court determined.

It is true that the spreadsheets submitted by Krispy Kreme for certain categories of damages attributed amounts to the Milford franchise. But, as the franchisor demonstrated in its objections and as was corroborated in the backup to the spreadsheet, virtually the entire amount included in respect of Milford was for advances by Krispy Kreme to pay real estate taxes and rent on the Milford store. This was specifically claimed in the complaint. Moreover, the few small items that were not recoverable for breach of the lease were recoverable as elements of damages under Section 27.1 of the Penn Station and Baldwin franchise agreements for the reasons set forth in the objections, the court ruled.

Thus, Krispy Kreme’s objections to the magistrate’s report and recommendation were sustained and the franchisor was awarded judgment against the defendants in the amount of $1,125,091.97 together with post-judgment interest.

The case is No. 10 Civ. 4272 (LAK).

Attorneys: Jonathan David Pressment (Haynes and Boone, LLP) for Krispy Kreme Doughnut Corp.

Companies: Krispy Kreme Doughnut Corporation.

Cases: FranchisingDistribution NewYorkNews