Einbinder & Dunn, LLP recently successfully defended franchisees at trial against a franchisor’s claim for lost profit damages from the franchisees’ alleged violation of the non-competition and non-solicitation provisions of the parties’ franchise agreement. Although the court found against the franchisees on the breach, the franchisor’s attorneys failed to demonstrate that the breach resulted in any real damages to the franchisor.
After trial, the court found that the franchisees had in fact breached the non-competition and non-solicitation provisions of the parties’ franchisee agreement by opening a business that was substantially similar to their franchised business, one that served the same customers, shortly after terminating their franchise agreement with the franchisor. The court noted that the proper measure of damages for a breach of a covenant not to compete is the lost profits caused by the breach. However, the court held that the franchisor was not entitled to recover its alleged lost profit damages because it failed to prove to a reasonable degree of certainty that the franchisees’ breach of the non-competition and non-solicitation provisions of the franchise agreement were the direct and proximate cause of the franchisor’s alleged damages.
Specifically, because the franchisor had since gone out of business and had no remaining franchisees, the franchisor had not shown nor could it have shown that it would have continued to service the franchisees’ former customers upon their termination of the franchise. To that end, the court found that the franchisor would have suffered the same loss of revenue from the franchisees’ departure if they had merely terminated their franchise properly and had not violated the non-competition and non-solicitation provisions, because the franchisor did not have any means to maintain service to the franchisees’ customers. Moreover, the franchisor had no base in the franchisees’ region except for the franchisees’ business. It did not have any contact or relationship with the franchisees’ customers, had no employees in that area, and had no competing business in that area. Further, the court found that it was entirely speculative that the franchisor could have serviced the customers in the franchisees’ area, or that it intended to or was in the process of opening up a franchise in that area after the franchisees’ breach.
Accordingly, the franchisor was found not to have met its burden of proof that the franchisees’ breach was a proximate cause of its damages, and the franchisor was not entitled to recover lost profit damages from the defendants’ breach of the non-competition and non-solicitation provisions of the franchise agreement. Based upon this decision, it can be argued in any similar set of circumstances that the breach itself of a covenant not to compete does not entitle the franchisor to any redress, it must be proven that damages flow from that activity.