CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES 559
(1995).
The word “terminate” ordinarily means “put an end to.” Webster’s New International Dictionary 2605 (2d ed.1957); see also The
Random House Dictionary of the English Language 1465 (1967). The term “cancel” carries a similar meaning: to “annul or
destroy.” Webster’s,
supra,
at 389; see also Random House,
supra,
at 215 (“to make void; revoke; annul”). The object of the verb
FN5. The difference between a “termination” and a “cancellation” under the Uniform Commercial Code relates to how the
contracting party justifies its ending of the contractual relationship. A “termination” occurs when “either party pursuant to a
power created by agreement or law puts an end to the contract otherwise than for its breach.” U.C.C. § 2–106(3) (1972
ed.). By contrast, a “cancellation” occurs when “either party puts an end to the contract for breach by the other.” § 2–
Law § 59.05[8] (2009); 2 EEOC Compliance Manual § 612.9(a) (2008); cf.
Suders,
supra,
at 141-143, 148, 124 S.Ct. 2342;
Young
v. Southwestern Savings & Loan Assn.,
509 F.2d 140, 144 (C.A.5 1975);
Muller v. United States Steel Corp
., 509 F.2d 923, 929
(10th Cir.1975). Similarly, landlord-tenant law has long recognized the concept of constructive eviction. See Rapacz, Origin and
Evolution of Constructive Eviction in the United States, 1 DePaul L.Rev. 69 (1951). The general rule under that doctrine is that a
tenant must actually move out in order to claim constructive eviction. See
id
., at 75; Glendon, The Transformation of American
Landlord-Tenant Law, 23 Boston College L.Rev. 503, 513-514 (1982); 1 H. Tiffany, Real Property §§ 141, 143 (3d ed.1939). FN6
FN6. Before Congress enacted the PMPA, at least one court, it is true, had held that a tenant asserting constructive
eviction could obtain
declaratory
relief without abandoning the premises-although the court observed that the tenant still
would have to abandon the premises in order to obtain rescission. See
Charles E. Burt, Inc. v. Seven Grand Corp.,
340
Mass. 124, 129-130, 163 N.E.2d 4, 7-8 (1959). But as even the dealers concede, see Tr. of Oral Arg. 37-38, the clear
majority of authority required a tenant to leave the premises before claiming constructive eviction.
established body of law.
The Court of Appeals was of the view that analogizing to doctrines of constructive termination in other contexts was inappropriate
because “sunk costs, optimism, and the habit of years might lead franchisees to try to make the new arrangements work, even
when the terms have changed so materially as to make success impossible.” 524 F.3d, at 46. But surely these same factors
compel employees and tenants-no less than service-station franchisees-to try to make their changed arrangements work.
The dealers would have us interpret the PMPA in a manner that ignores the Act’s limited scope. On their view, and in the view of
the Court of Appeals, the PMPA prohibits, not just unlawful terminations and nonrenewals, but also certain serious breaches of
contract that do not cause an end to the franchise. See Brief for Respondents in No. 08-372, pp. 28-35 (hereinafter Respondents’
Brief); 524 F.3d, at 44-47. Reading the Act to prohibit simple breaches of contract, however, would be inconsistent with the Act’s
limited purpose and would further expand federal law into a domain traditionally reserved for the States. Without a clearer
FN7. Adopting such a broad reading of the PMPA also would have serious implications for run-of-the-mill franchise
disputes. The Act
requires
courts to award attorney’s fees and expert-witness fees in any case in which a plaintiff
recovers more than nominal damages. See 15 U.S.C. § 2805(d)(1)(C). The Act also permits punitive damages, §
2805(d)(1)(B), a remedy ordinarily not available in breach-of-contract actions, see
Barnes v. Gorman,
536 U.S. 181, 187-
188, 122 S.Ct. 2097, 153 L.Ed.2d 230 (2002). Accepting the dealers’ reading of the statute, therefore, would turn
everyday contract disputes into high-stakes affairs.
Finally, important practical considerations inform our decision. Adopting the dealers’ reading of the PMPA would require us to
articulate a standard for identifying those breaches of contract that should be treated as effectively ending a franchise, even though
the franchisee in fact continues to use the franchisor’s trademark, purchase the franchisor’s fuel, and occupy the service-station
premises.FN8 We think any such standard would be indeterminate and unworkable. How is a court to determine whether a breach is
serious enough effectively to end a franchise when the franchisee is still willing and able to continue its operations? And how is a
franchisor to know in advance which breaches a court will later determine to have been so serious? The dealers have not provided
FN8. The First Circuit, for example, approved of a test that asks whether the breach resulted in “such a material change
that it effectively ended the lease, even though the plaintiffs continued to operate [their franchises].” 524 F.3d, at 46
(internal quotation marks omitted). That standard, it seems to us, does little more than restate the relevant question. While
we do not decide whether the PMPA contemplates claims for constructive termination, we observe that the Court of
Appeals’ unwillingness or inability to establish a more concrete standard underscores the difficulties and inherent
awarded them almost $1.3 million in damages. See App. 376-379. Thus, the dealers’ own experience demonstrates that
franchisees do not need a PMPA remedy to have meaningful protection from abusive franchisor conduct.
[4] The dealers also charge that this interpretation of the PMPA cannot be correct because it renders other provisions of the Act
meaningless. Respondents’ Brief 21-22, 24-25. While we agree that we normally should construe statutes “in a manner that gives
effect to all of their provisions,” we believe our interpretation is faithful to this “well-established principl[e] of statutory interpretation.”
FN9. The Government reads the Act to permit a dealer to seek preliminary injunctive relief if a franchisor announces its
“intent to engage in conduct that would leave the franchisee no reasonable alternative but to abandon” one (or more) of
the franchise elements. Brief for United States as
Amicus Curiae
21. Because we do not decide whether the PMPA
permits constructive termination claims at all, see n. 4,
supra,
we need not address this argument.
FN10. After Motiva withdrew the rent subsidy, seven of the dealers continued operating their franchises for the full terms
185-186, 268-269 (Sid Prashad);
id
., at 190, 312-313 (J & M Avramidis, Inc.);
id
., at 179-182, 322-323 (RAM Corp., Inc.);
id
., at 148-153, 324-325 (John A. Sullivan). These dealers necessarily cannot establish that the elimination of the subsidy
“terminate [d]” their franchises “prior to the conclusion of the term” stated in their franchise agreements. 15 U.S.C. §
2802(a)(1). Whether they ceased operations
after
their franchise agreements expired, moreover, is irrelevant. Indeed, in
FN11. As is true with respect to the dealers’ constructive termination claims, it is not necessary for us to decide in these
cases whether the Act at all recognizes claims for “constructive nonrenewal.” We therefore do not express a view on that
question.
[5] The plain text of the statute leaves no room for a franchisee to claim that a franchisor has unlawfully declined to renew a
franchise relationship-constructively or otherwise-when the franchisee has in fact accepted a new franchise agreement. As relevant
The dealers point out that several of them signed their renewal agreements “under protest,” and they argue that they thereby
explicitly preserved their ability to assert a claim for unlawful nonrenewal under the PMPA. That argument misunderstands the
legal significance of signing a renewal agreement. Signing a renewal agreement does not constitute a waiver of a franchisee’s
legal rights-something that signing “under protest” can sometimes help avoid. See,
e.g.,
U.C.C. § 1–207, 1 U.L.A. 318. Instead,
signing a renewal agreement negates the very possibility of a violation of the PMPA. When a franchisee signs a renewal
FN12. The availability of preliminary injunctive relief under the Act also explains why the dealers are wrong to suggest that
our holding will force franchisees “to choose between accepting an unlawful and coercive contract in order to stay in
business [or] rejecting it and going out of business in order to preserve a cause of action.” Respondents’ Brief 51 (internal
quotation marks omitted). A franchisee presented with “unlawful and coercive” terms can simply reject those terms and, if
the franchisor pursues nonrenewal, seek a preliminary injunction under the Act once the franchisee receives notice of
nonrenewal. Instead, a franchisee could simply sign the new franchise agreement and decide later whether to sue under the
PMPA. Franchisees would then have the option of either continuing to operate under the new agreement or, if the terms of the
agreement later proved unfavorable, bringing suit under the PMPA alleging that the newly imposed terms are unlawful. And
because the PMPA has a 1-year statute of limitations, see § 2805(a), franchisees would retain that option for the entire first year of
a new franchise agreement. Accepting the dealers’ argument, therefore, would cast a cloud of uncertainty over all renewal
861. We thus decline to adopt an interpretation that would expand the Act in such a fashion.FN13
FN13. It also is worth noting that, although the concept of “constructive nonrenewal” does not arise frequently in other
areas of the law, the little authority on this concept supports our conclusion that a plaintiff who signs a new agreement
cannot maintain a claim for constructive nonrenewal. See
American Cas. Co. of Reading, Pa. v. Baker,
22 F.3d 880, 892-
894 (C.A.9 1994) (insured who accepts a successor insurance policy cannot maintain a claim for constructive nonrenewal
of the previous policy);
American Cas. Co. of Reading, Pa. v. Continisio,
17 F.3d 62, 65-66 (C.A.3 1994) (same);
Adams
v. Greenwood,
10 F.3d 568, 572 (C.A.8 1993) (same).
* * *
We hold that a franchisee who is offered and signs a renewed franchise agreement cannot maintain a claim for unlawful
nonrenewal under the PMPA. We therefore affirm the judgment of the Court of Appeals with respect to the dealers’ nonrenewal
claims.
IV
The judgment of the Court of Appeals is reversed in part and affirmed in part. The cases are remanded for further proceedings
consistent with this opinion.
It is so ordered.
Supplemental Case Printout for:
Insight Into Ethics
564 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
D.Colo.,2009.
Rocky Mountain Chocolate Factory, Inc. v. SDMS, Inc.
Slip Copy, 2009 WL 579516 (D.Colo.)
United States District Court,
D. Colorado.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., Plaintiff,
v.
SDMS, INC., Thomas P. Anderson and Kenneth Pecus, Defendants.
Civil Action No. 06-cv-01212-PAB-BNB.
March 4, 2009.
PHILIP A. BRIMMER, District Judge.
The Court presided over a trial to court in this matter from February 23-25, 2009. Pursuant to Rule 52(a)(1) of the Federal Rules of
Civil Procedure, the Court makes the following findings of fact, by a preponderance of the evidence, and the following conclusions
of law:
I. FINDINGS OF FACT
Rocky Mountain Chocolate Factory (“RMCF”) is a Colorado corporation with its principal place of business in Durango, Colorado.
RMCF grants the right to others, pursuant to written franchise agreements, to develop and operate Rocky Mountain Chocolate
Factory stores using RMCF’s trademarks and proprietary methods of doing business.
SDMS, Inc. (“SDMS”) is a California corporation with its principal place of business in San Diego, California. Thomas P. Anderson
(“Anderson”) is an adult who resides in California. Kenneth Pecus (“Pecus”) is an adult who resides in California.
as Exhibit B. “Item 19” of the UFOC, dated June 16, 2003, disclosed the gross sales figures for the top seventy-five percent (75%)
of RMCF’s then-existing franchised store locations. Note 5 to the “Explanatory Notes” for item 19 of the UFOC states: “We do not
have access to nor knowledge of the expenses or costs incurred by each of the 169 franchised Stores. The above Gross Retail
Sales figures may not necessarily be predictive of any given Store’s profitability.”
The UFOC advised franchisee prospects that their due diligence should include contacting former and current RMCF franchisees
including those located in La Jolla, Ontario Mills, and San Francisco. Only the La Jolla store was located in a similar retail
CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES 565
environment as the Gaslamp district of San Diego, California. Anderson asked representatives from these stores for their financial
information, including their operating costs and expenses. On each occasion, the franchisees declined to provide their financial
information to Anderson.
1. I have not received any information, either oral or written, regarding the sales, revenues, earnings, income or profits of
2. I have not received any assurances, promises or predictions of how well my ROCKY MOUNTAIN CHOCOLATE FACTORY
Store will perform financially from any officer, employee, agent or sales representative of RMCF.
5. I am not relying on any promises of RMCF which are not contained in the ROCKY MOUNTAIN CHOCOLATE FACTORY
Franchise Agreement.
10. I acknowledge that the success of my ROCKY MOUNTAIN CHOCOLATE FACTORY Store depends in large part upon my
ability as an independent business person and my active participation, or the active participation of my General Manager, in the
15.1
Franchisee Reports.
…
15.6
Failure to Comply with Reporting Requirements.
If the Franchisee fails to prepare and submit any statement or report as required under this Article 15, then the Franchisor
11.1. Monthly Royalty. The Franchisee agrees to pay to the Franchisor a monthly royalty (“Royalty”) equal to 5% of its Gross
Retail Sales generated from or through its ROCKY MOUNTAIN CHOCOLATE FACTORY Store …
12.3. Marketing and Promotion Fee. The Franchisee shall pay to the Franchisor, in addition to Royalties, a fee of 1% of the total
amount of the Franchisee’s Gross Retail Sales (“Marketing and Promotion Fee”) …
18.3. Franchisor’s Remedies.
a. Failure to Pay…. Additionally, in the event this Agreement is terminated by the Franchisor prior to its expiration as set forth in
22.8. Attorneys’ Fees. In the event of any dispute between the parties to this Agreement, including any dispute involving an
officer, director, employee or managing agent of a party to this Agreement, in addition to all other remedies, the non-prevailing
party will pay the prevailing party all costs and expenses, including reasonable attorneys’ fees, incurred by the prevailing party in
any legal action, arbitration or other proceeding as a result of such dispute.
B.
Breach of Franchise Agreement
Defendants operated their RMCF Store between February 11, 2004 and September 1, 2007. After Anderson and Pecus’ execution
of the Franchise Agreement, Anderson became the primary person within SDMS, Inc. responsible for the day-to-day operations of
their RMCF store. The defendants’ store lost money almost every month that it was in operation.
Defendants did not comply with certain operational covenants of the Franchise Agreement during the first 26 months of operations:
a. In the summer of 2004, defendants duplicated a pecan log by making it in the store even though it is required to be bought
from the RMCF factory;
b. In the summer of 2004, defendants modified RMCF’s recipe for fudge (a RMCF signature item) they were selling at their
RMCF store by adding cream, which RMCF disapproved of; and
c. In March or April 2006, defendants sold non-approved product by making a line of molded chocolates that are not consistent
with the type of chocolate offered at RMCF stores.
On May 11, 2006, defendants informed RMCF via email and certified mail that due to financial reasons (the economic conditions at
that location, the cost structure of the RMCF products, and the size of the store) defendants were unable to continue being a
RMCF store. Subsequent emails from Anderson to RMCF on that day indicated that defendants intended to remove the RMCF
signage and to begin operating a competing chocolate store called “The Gaslamp Chocolatier” beginning June 1, 2006. A letter
from Anderson to defendants’ landlord, SD Malkin Properties, indicated that defendants did not know how RMCF would respond to
this notice.
premiums were based on the Ibbotson Risk Premia Over Time Report for 2006. Ibbotson reported the equity risk premium at 7.1 %
and the micro-cap risk premium at 3 .95%. RMCF’s Beta value on March 15, 2007 was 1.01. The cost of equity, given these inputs,
was calculated at: 4.53 + (7.1 %*1.01) + 3.95% = 15.65%. WACC weights the cost of debt and cost of equity in calculating the cost
of capital. Because RMCF was free of long term debt, at the time of analysis, the cost of equity is also the WACC.
Under the terms of the Franchise Agreement, RMCF received royalty and marketing fee payments, paid monthly and adjusted
resulting figure to the projected royalty and marketing fees from October through December 2006 results in a total projected royalty
and marketing fee amount of $108,617.
Under the Franchise Agreement, defendants were required to purchase RMCF Factory Candy from RMCF. As discussed below,
the projected “Factory Margin” represents the amount of profit that RMCF would have made on sales of Factory Candy to RMCF
had the Franchise Agreement not been terminated. The last month in which defendants purchased RMCF product from RMCF was
of 2013.
Applying the 15.65% discount rate to the Factory Margin amounts that RMCF would have received after October 2006, and adding
the resulting figure to the Factory Margin amounts from May through December 2006, results in a total projected Factory Margin
1332. Venue is proper in the United States District Court for the District of Colorado under 28 U.S.C. § 1391(b)(2).
In assessing the credibility of each witness who testified at trial, the Court has considered all facts and circumstances shown by the
(4) resulting damages to the plaintiff.”
Western Distributing Co. v. Diodosio,
841 P.2d 1053, 1058 (Colo.1992).
568 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
On August 25, 2003, RMCF, Anderson, Pecus, and SDMS, Inc. entered into the Franchise Agreement for a RMCF franchise
1. Breach
Defendants’ three instances of noncompliance with the Franchise Agreement (involving the pecan log, the fudge recipe, and the
molded candy) between the summer of 2004 and the spring of 2006 do not constitute material breaches of the Franchise
Agreement, and RMCF did not treat them as such.
2. Damages
“Generally, in a breach of contract action, a plaintiff may recover the amount of damages necessary to place him in the same
position he would have occupied had the breach not occurred.”
Smith v. Farmers Ins. Exchange,
9 P.3d 335, 337 (Colo.2000).
According to RMCF’s business records and its calculations, the outstanding royalty balance owed by defendants for the time
period from May 2006 until their termination as RMCF franchisees is $15,945. Based upon an interest rate of 18% contained in
at 98. The court explicitly declined to hold that “future royalties raise special concerns requiring departure from the general rule for
future damages.”
Id.
The rule of certainty requires that, in addition to proving the fact of future damages, the plaintiff must “submit
substantial evidence, which together with reasonable inferences to be drawn therefrom provides a reasonable basis for
computation of the damage.”
Pomeranz,
843 P.2d at 1383.
Inherent in the requirement that future damage awards be subject to a reasonable basis for calculation is the principle that where
the term of the Franchise Agreement. The Colorado Court of Appeals in the
Technics
case referred to future royalties as a form of
lost profits.
Technics, LLC v. Acoustic Marketing Research Inc.,
179 P.3d 123, 126 (Colo.App.2007) (“[W]hen damages are sought
for future lost profits, here lost royalties, ….”),
aff’d,
198 P.3d 96 (Colo.2008). Because RMCF’s future damages claims are in the
nature of lost profits, RMCF was required to present evidence from which this Court could determine its net future profits.
A number of courts have addressed the calculation of a franchisor’s claim for future royalties following breach of a franchise
franchise system. However, RMCF presented no evidence at trial showing the relationship between such franchise costs and
RMCF’s business relationship with defendants’ franchise.
Without any evidence regarding these operational expenses, the Court is left to speculate as to the amount of RMCF’s net future
lost profits, in the form of future royalties or otherwise. Because RMCF adduced no evidence of its operating expenses attributable
to doing business with defendants, the Court concludes that RMCF failed to carry its burden at trial to submit substantial evidence
fees.” RMCF is the prevailing party within the meaning of Section 22.8 and is therefore entitled to have defendants pay its non–
taxable costs and reasonable attorney’s fees incurred because of this case.
See Dennis I. Spencer Contractor, Inc. v. City of
Aurora,
884 P.2d 326, 332 (Colo.1994);
Bedard v. Martin,
100 P.3d 584, 593 (Colo.App.2004).
B. Defendants’ Counterclaims
On November 30, 2007 [Doc. No. 177], the Court issued a written order on RMCF’s Motion for Summary Judgment, in which it
1. Common Law Fraud
Defendants bring their counterclaims for fraud in the inducement (Fourth Counterclaim) and fraud (Sixth Counterclaim) under the
common law of Colorado. Under Colorado law, to prevail on their fraud claims, defendants have to prove that: “(1) a fraudulent
misrepresentation of material fact was made by [RMCF]; (2) [defendants] relied on the misrepresentations; (3) [defendants] have
the right to rely on, or were justified in relying on, the misrepresentation; and (4) the reliance resulted in damages.
M.D.C./Wood,
defendants contended at trial that their receipt of the franchise agreement attached to the UFOC gave them knowledge only that
RMCF would have a right to defendants’ financial statements, as opposed to knowledge that RMCF had a right to access such
information as to each of the 169 franchisees. Although defendants understood, due to changes in RMCF’s royalty structure, that
not all RMCF franchisees signed the same franchise agreement, the Court finds that defendants also understood that the franchise
agreement attached to the UFOC was a form agreement provided to any prospective franchisee. It was not reasonable to assume
FRANCHISEES.
Item 19 further provides:
WE DO NOT FURNISH OR MAKE, OR AUTHORIZE OUR SALES PERSONNEL TO FURNISH OR MAKE, ANY ORAL OR
WRITTEN INFORMATION CONCERNING THE ACTUAL, AVERAGE, PROJECTED, FORECASTED OR POTENTIAL SALE,
COSTS, INCOME OR PROFITS OF A FRANCHISE OR PROSPECTS OR CHANCES OF SUCCESS THAT ANY
2. California Statutory Claims
Defendants seek damages and rescission of the Franchise Agreement pursuant to California statutory law, alleging that RMCF
CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES 571
violated Cal. Corp.Code §§ 31300 and 31200 (First Counterclaim) and §§ 31301 and 31201 (Second Counterclaim). Sections
31300 and 31200 of the California Franchise Investment Law (“CFIL”) prohibit a franchisor from willfully making an “untrue
provision of this division that provides an exemption from the provisions of Chapter 2 (commencing with Section 31110) of Part 2
or any portions of Part 2, shall be liable to the franchisee or subfranchisor, who may sue for damages caused thereby, and if the
violation is willful, the franchisee may also sue for rescission, unless, in the case of violation of Section 31200 or 31202, the
defendant proves that the plaintiff knew the facts concerning the untruth or omission, or that the defendant exercised reasonable
care and did not know, or, if he or she had exercised reasonable care, would not have known, of the untruth or omission.
The same rationale underlying the Court’s conclusion that defendants failed to establish their reasonable reliance on the statement
contained in Note 5 to Item 19 of the UFOC necessarily causes defendants’ California statutory claims to fail.
With respect to the affirmative defenses preserved by defendants in the Revised Final Pretrial Order [Docket No. 205 at 14], the
Court finds that defendants did not carry their burden on these defenses at trial. Defendants abandoned their affirmative defense of
failure of consideration by failing to adduce evidence that RMCF’s business model had no value. Moreover, evidence presented by
1. Judgment shall enter in the favor of plaintiff Rocky Mountain Chocolate Factory, Inc. and against defendants SDMS, Inc.,
Thomas P. Anderson, and Kenneth Pecus as to plaintiff’s Third Claim for breach of contract.
2. Judgment shall enter against defendants SDMS, Inc., Thomas P. Anderson, and Kenneth Pecus and in favor of plaintiff Rocky
Mountain Chocolate Factory, Inc. on defendants’ First, Second, Fourth, and Sixth Counterclaims.
3. Plaintiff Rocky Mountain Chocolate Factory, Inc. is awarded actual damages in the amount of $33,109.
572 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
5. Plaintiff Rocky Mountain Chocolate Factory, Inc. is awarded its costs.
See
D.C.COLO.LCivR 54.1 and Fed.R.Civ.P. 54(d)(1).