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Damages from Defaulting Franchisees: More Options Than You Think

By Jon S. Swierzewski
September 13, 2003

When the relationship between a franchisor and a franchisee breaks down, one might think the standard measure of damages is just the lost franchise fees. However, just as a simple failure to perform is not the only type of wrong suffered by franchisors, unpaid fees are not the only types of damages available. This article examines a number of cases in which the franchisor's claims ' and claimed damages ' were outside the ordinary.

A franchisor invests blood, sweat, and tears ' and usually a lot of money ' in creating, developing, and marketing its business. Portions of that business are expressed in one or more forms of protectable intellectual property, such as patented products, machinery or processes, trademarks or trade names, copyrights, or trade dress. Most times, when a dispute arises between a franchisor and a franchisee, the franchisor has claims under the statutes or case law protecting such intellectual property.

For example, when a franchisee wrongfully uses the franchisor's trademarks, often after the end of the franchise relationship, it can be liable for damages measured in several different ways. In Hair Associates v. National Hair Replacement Services, Inc. et al., 987 F.Supp. 569, (W. D. Mich. 1997), the franchisor asserted such a claim against a terminated franchisee. The court cited the relevant provisions of the Lanham Act, 15 U.S.C. ' 1125(a), that entitle the registrant of a mark to recover: 1) defendant's profits; 2) damages sustained by the plaintiff; and 3) the costs of the action. The court also has discretion to enter judgment for any sum above the amount found as actual damages, not exceeding three times that amount. The court wrestled with alternative methods of computing the defendant's profits, but ultimately settled on a sum.

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