Legacy Acad., Inc. v. JLK, Inc.

Decision Date20 November 2014
Docket NumberNo. A14A1100.,A14A1100.
Citation765 S.E.2d 472,330 Ga.App. 397
CourtGeorgia Court of Appeals

Gregory, Doyle, Calhoun & Rogers, Charles L. Bachman Jr., Stuart Lee Sims, Marietta, for Appellant.

Ichter Thomas, Cary Ichter, William Daniel Davis, for Appellee.


RAY, Judge.

Legacy Academy, a franchisor of childcare centers, sued one of its franchisees, JLK, Inc., alleging breach of contract. The trial court granted summary judgment to Legacy,1 reserving for trial its decision on the amount of damages due, if any. After a bench trial, the lower court entered a final judgment in favor of Legacy for $9,729 in royalty fees for the months of November and December 2010, in addition to pre-and post-judgment interest and attorney fees. Legacy appeals from the final judgment, arguing that the amount awarded is insufficient and that the trial court erred in finding that Legacy could not recover damages after December 2010, or any advertising fees either before or after that date. Legacy also claims the trial court erred in determining that it failed to provide sufficient proof quantifying its damages and in finding that OCGA § 51–12–13 does not apply as a basis to discount future royalty fees. We reverse the trial court's findings as to advertising fees. Further, while we find that lost future royalties may properly be an item of damages, we affirm the court's determination as to the insufficiency of proof of future royalty fee damages. We remand the case for further proceedings not inconsistent with this opinion.

[W]hile we apply a de novo standard of review to any questions of law decided by the trial court, factual findings made after a bench trial shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of witnesses. Indeed, because the clearly-erroneous test in effect employs the same standard as the any evidence rule, appellate courts will not disturb fact findings of a trial court if there is any evidence to sustain them.
(Punctuation and footnotes omitted.) God's Hope Builders, Inc. v. Mount Zion Baptist Church of Oxford, Ga., Inc., 321 Ga.App. 435, 439, 741 S.E.2d 185 (2013). Accord Alday v. Decatur Consolidated Water Svcs., Inc., 289 Ga.App. 902, 903(1), 658 S.E.2d 476 (2008) (“Regardless of whether evidence supports an opposite finding, we construe the evidence in favor of the trial court's finding and affirm if there is any evidence to support it”) (footnote omitted).

On July 22, 2002, JLK and Legacy entered into a franchise agreement that Legacy drafted. In pertinent part, the contract provided that JLK pay Legacy five percent of its gross monthly revenue as royalty fees and, under certain circumstances, one percent of its gross monthly revenue as advertising fees. The franchise agreement was to last for 20 years. Approximately 8 ½ years into the term, on December 13, 2010, JLK sent a letter to Legacy stating that JLK intended to “terminate all of their relationship with Legacy effective January 1, 2011[,] and would remove all indicia of Legacy affiliation by that date. After the date of the letter, Legacy never communicated with, sent correspondence to, or otherwise provided assistance to JLK. JLK continued to use Legacy's name and trademarks until December 31, 2010, and after that date, continued its daycare operations at the same location under the name Old Peachtree Academy. JLK last paid its royalty and advertising fees due under the contract in October 2010, approximately two months prior to sending the letter. Legacy sued in December 2010, seeking accrued royalty and advertising fees through that time as well as future, unaccrued royalty and advertising fees through the contract's full term, July 2022. The trial court awarded only royalty fees for November and December 2010, the time period when JLK still used Legacy's name and marks; it awarded no royalties pertaining to what would have been the remainder of the contract term. It also awarded no advertising fees.

1. Legacy first argues that the trial court erred in concluding that it could not recover future royalty fees. The trial court determined that the contract “did not vest the right of unilateral termination in JLK[,] but that Legacy could not recover future royalty fees between January 2011 and July 2022 because it “admitted the termination of the contract upon filing of the complaint on December 29, 2010.” The trial court reasoned that because the royalty fee was defined by the contract as consideration for JLK's use of Legacy's name and trademarks, and that there was no requirement in the contract that JLK actually exercise its right to use the Legacy Academy System and its licensed marks, then the consideration was eliminated when Legacy terminated the contract. We disagree.

On appeal, JLK argues that although its breach for failure to pay past due royalty fees caused Legacy's loss of those fees, its breach did not cause Legacy's loss of future fees. Rather, JLK argues that Legacy's decision to terminate the contract “proximately caused” its own loss of future fees because when Legacy terminated the contract, it “deprived” itself of entitlement to fees because the termination meant JLK could no longer use Legacy's trademarks. This argument ignores the language of JLK's letter, which states that JLK will voluntarily stop using those marks, and the fact that JLK voluntarily ceased using the marks.

Although not directly addressed by the trial court, JLK somewhat obliquely raises the specter of a split among courts of various jurisdictions as to whether and under what analysis a franchisor may recover future royalties. Georgia has yet to address this issue head-on. While there appears to be general agreement that a franchisor may recover lost future royalties when a franchisee terminates the relationship, the divide occurs where, as here, the franchisor terminates the relationship.2 See Douglas R. Hafer and Logan W. Simmons, “Lost Future Royalties: Lessons from Recent Decisions,” 31 Franchise Law Journal 150, Winter 2012. See generally Kiddie Academy Domestic Franchising LLC v. Faith Enterprises DC, LLC, 2010 WL 673112, at *5 (II) (B)(3)(b) (D.Md.2010). Courts considering the issue have used two different analyses: the proximate cause rationale that JLK urges and which has been applied, for example, in Postal Instant Press, Inc. v. Sealy, 43 Cal.App.4th 1704, 1709–1713(II), 51 Cal.Rptr.2d 365 (1996) ; or a traditional contract analysis, as applied in American Speedy Printing Centers, Inc. v. AM Marketing, Inc., 69 Fed.Appx. 692, 698 (B) (6th Cir.2003) and as also applied by a Texas appellate court using Georgia law in Progressive Child Care Systems, Inc. v. Kids ‘R’ Kids Intl., Inc., 2008 WL 4831339, *3–4 (IV) (Tex.Ct.App. Nov. 6, 2008).

The Sealy court held that a franchisee's “mere failure” to pay royalties was not a “proximate” or “natural and direct” cause of the franchisor's loss of future royalties, reasoning that the franchisor's own decision to terminate was the cause of its loss.3 Sealy, supra at 1711, 1713 (II), 51 Cal.Rptr.2d 365. Although not part of an express ruling, the Sealy court also remarked on the difficulties in accurately projecting future profits. Id. at 1714 (III), n. 5, 51 Cal.Rptr.2d 365.

As recognized in Progressive Child Care Systems, supra at *4 (IV), however, Georgia law provides a mechanism for quantifying future profits under general contract principles, and this is how we will proceed. As a threshold matter, our courts recognize that the policy behind a damages award is to place the injured party in the position it would have been in had the contract been fully performed. Turner Broadcasting System, Inc. v. McDavid, 303 Ga.App. 593, 612(4), 693 S.E.2d 873 (2010). Even though anticipated profits may be too speculative to be recovered, in the context of an established business that has definite, certain and reasonable data for ascertaining profits, our courts have determined that such profits may be recovered, even if they cannot be shown with mathematical certainty, where the claimant can show with specificity the probable gain as well as the expenses. KAR Printing, Inc. v. Pierce, 276 Ga.App. 511, 511–512, 623 S.E.2d 704 (2005). “Damages recoverable for a breach of contract are such as arise naturally and according to the usual course of things from such breach and such as the parties contemplated, when the contract was made, as the probable result of its breach.”OCGA § 13–6–2.

In the instant action, the following contract terms are relevant to our analysis:

Paragraph 2.2:

Franchisee shall operate its Legacy Academy Center under the assumed name of LEGACY ACADEMY CENTER[.] (Emphasis supplied.)

Paragraph 4.2:

Beginning upon commencement of operations of Franchisee's Legacy Academy Center, Franchisee shall pay to Franchisor a non-refundable monthly royalty fee equal to [five]4 percent (5%) of the Franchisee's Gross Monthly Revenue (as hereinafter defined) (“Royalty Fee”). This Royalty Fee shall be consideration for Franchisor entering into this Agreement and for Franchisee's right to use the Legacy Academy System and the Licensed Marks.

Paragraph 5.4:

Franchisee further agrees and covenants to operate the Legacy Academy Center and advertise, market and promote its Legacy Academy Center only under the Licensed Marks; to adopt and use the Licensed Marks solely in the manner prescribed by Franchisor[.] (Emphasis supplied.)

Paragraph 8.3:

Franchisee agrees to use the Premises solely for the operation of a Legacy Academy Center in the manner and pursuant to the standards prescribed herein. (Emphasis supplied.)

Paragraph 14.1:

Franchisor may terminate this Agreement prior to the expiration of its term upon the occurrence of any one or more events of default described below (“Event of Default”). Upon the occurrence of any Event of Default which remains uncured ... Franchisor may, at its

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