Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—SDOhio: Termination of Campground Franchisees Met Contractual Requirements But Liquidated Damages Awards Denied, (Nov 2, 2012)

By William Zale, J.D.

The franchisor of Yogi-Bear campgrounds performed its notice obligations in terminating franchise agreements for three campgrounds, but the liquidated damages provisions constituted unenforceable penalties, the federal district court in Cincinnati has ruled (Leisure Systems, Inc. v. Roundup LLC, October 31, 2012, Barrett, M.). The case will proceed on triable issues as to actual damages on the franchisor’s breach of contract and trademark-related claims and on the franchisees’ counterclaims for defamation and deceptive trade practices.

The plaintiff, Leisure Systems, Inc. (LSI) is an exclusive licensee of the name, character, symbol, design, likeness and visual representation of the Yogi Bear and related trademarks and service marks in connection with the construction, operation, and franchising of all Yogi Bear-identified campgrounds. There did not appear to be any dispute that LSI performed each of its obligations under the franchise agreements—two of which were governed by Ohio law and one by Indiana law—up through the time that the franchisees defaulted on their respective obligations, according to the court.

Default and Termination

There was no dispute that the franchisees had actual notice that they were in default of their obligations pursuant to the default notices, the court found. There also was no dispute that they had not fully cured the defaults of which they were made aware in those default notices, either within the five-day cure period or otherwise.

Under the franchise agreements, there was a written notice requirement for default but not similar written notice requirement for termination. The right to terminate therefore arose under the agreements regardless of notice. Nevertheless, given the responsibilities and obligations of franchisees that arose upon termination, the termination would not be effective until they were aware that the franchises had been terminated by LSI. The court found the franchisees had, through counsel retained by them or through personal knowledge or receipt of notices, actual awareness of the terminations.

Liquidated Damages

The liquidated damages formula in the two franchise agreements governed by Ohio law provided added all sums due to the monthly average royalty and service fee paid or due by the franchisee for the three years immediately preceding termination and multiplied the sum by the number of months remaining on the agreement, with the total then converted to present value. The court held that these provisions were unenforceable penalties because they were unreasonable and would have resulted in an amount of damages disproportionate to the probable damages sustained by LSI. The court also declined to award liquidated damages under the third franchise agreement, which did not contain a liquidated damages provision.

Trademark

The franchisees’ entire defense to LSI’s trademark-based unfair competition claims rested on whether LSI properly terminated the franchisee agreements. The court held that the franchisee’s continued use of LSI’s marks after termination was sufficient to demonstrate a likelihood of confusion. The court granted summary judgment as to liability and said that the case would proceed on the issues of when liability arose and the amount of damages recoverable.

Defamation, Ohio Deceptive Trade Practices Act

With regard to a defamation counterclaim, and a related claim under the Ohio Deceptive Trade Practices Act, the court denied LSI summary judgment on the truth of a statement made by an LSI operational officer to a disgruntled customer of one of the campgrounds. The court also determined that the case would proceed on the issue of actual malice.

The case is No. 1:11-cv-384.

David Thomas Bules (Keating, Muething & Klekamp) for Leisure Systems, Inc. Jeffrey P. McSherry (Bricker & Eckler LLP) for Roundup LLC.

Cases: FranchisingDistribution StateUnfairTradePractices OhioNews