April 2011

The Fourth Circuit on Thursday sided with a franchisor in its efforts to recover prospective damages under North Carolina law, including lost profits, from a franchisee which it had terminated.  Franchisors seeking such damages should find joy in Meineke Car Care Centers, Inc. v. RLB Holdings, LLCin which the Court said it was not necessary for the franchise agreement to speak to the possibility of the recovery of prospective damages.

The opinion also resolves what appears to be a burning issue for franchisors: whether they can recover lost profits if it is the franchisor which takes the step of terminating the franchisee as a result of the franchisee’s breach of the franchise agreement.  The Fourth Circuit discussed a variety of approaches to the recovery of damages in such circumstances, but found the answer in this case "in the relevant North Carolina law concerning damages recoverable following a breach of contract."

RLB claimed that its shops weren’t "commercially feasible" to operate, but the Court said that Meineke didn’t need to show that the shops could have been profitable, but only that they would have generated revenues upon which royalty payments would have been based. 

The Fourth Circuit also found acceptable Meineke’s method of calculation of its lost profits, which the franchisor based on the average weekly sales of the shops multiplied by the number of weeks in the three year period for which it sought relief times the average historical royalty rate paid to Meineke.  The district court had said this formula was speculative, but the appellate court disagreed.  It said that "using past profits as a basis for calculating future lost profits is a widely accepted methodology."

The franchise agreements didn’t mention the possibility of the recovery of lost profits, but the Fourth Circuit did not find that to be necessary.  It ruled that lost profit damages were "reasonably supposed to have been within the contemplation of the parties," and that an express written agreement was therefore not required.  The district court had entered summary judgment for the franchisee on this point, but the Fourth Circuit remanded the case for further proceedings.

The Court ended its opinion by discussing Meineke’s obligation to mitigate its damages.  The trial judge had held that Meineke’s failure to mitigate barred it from any recovery.  The Fourth Circuit held that if there had been a failure to mitigate it only served as a limitation of the damages that might be recovered, not a complete bar.  The Court accepted Meineke’s argument that its decision to limit its recovery to a three year period of lost profits rather than the longer remaining term of each of the franchise agreements could serve as the needed mitigation by Meineke.

The upshot of the Court’s decision is that it found issues of fact that should have prevented the trial court’s entry of summary judgment in favor of the franchisee.  Meineke still has to prove its damages.


 So much of discovery depends on agreement: for example, where and when will the officers of an out of state corporate defendant appear for their depositions.  And what about an out of country defendant?  Can you make their representatives appear in the United States for a deposition if you can’t persuade opposing counsel to do so?  There was no North Carolina state court authority on this point until yesterday, when Judge Jolly ordered in Cheatham v. Ribonomics, Inc., that the president and CEO of a Japanese company (MBL) which had invested in a North Carolina entity (Ribonomics) would be required to appear for a deposition in one of the 48 continental United States, the state to be  agreed upon by all counsel.

Before making that ruling, the Court denied Plaintiff’s request for a video deposition   He based that denial on "notions of international comity and foreign sovereignty" as protected by the Hague Convention.  Since the witness would have been on Japanese soil for a video deposition, Judge Jolly observed that Japan’s territorial sovereignty would be implicated.    The defendants said that Japanese law prohibits the taking of video depositions.

The same concerns for comity and sovereignty are not present when a foreign national’s deposition is taken in the U.S.  From there, it becomes a question whether the Court has jurisdiction over the defendant corporation.  Because of MBL’s controlling interest in Ribonomics, the Court found that MBL was subject to personal jurisdiction, and that it therefore could be "compelled under Rule 30(b)(6) to produce its officers, directors or managing agents in the United States to give deposition testimony."

Judge Jolly concluded his Order by directing counsel to agree on the "time, place, date and mechanics" of an in-person  deposition to take place "in any one of the States of the United States, other than Hawaii and Alaska."