United States: Should You Tolerate Hold-Over Franchisees?

In Donut Holdings, Inc. v. William Risberg, — N.W.2d —, 294 Neb. 861 (Neb. Sept. 30, 20160), the Nebraska Supreme Court affirmed a trial court's decision that a franchisor was not entitled to recover lost royalties or fees from a hold-over franchisee for the time period after the franchisor notified the franchisee that the franchise agreement had expired. In this case, neither the franchisor or franchisee took action to renew the franchise agreement when it expired in 2004 and the parties continued to operate, including the payment of royalties and advertising fees, as if the franchise agreement were in effect until 2009. In 2009, the franchisee ceased paying the franchisor and, in response, the franchisor sent a letter stating "the agreement had expired in 2004, and that [the franchisee] should review the provisions of the franchise agreement relating to its obligations upon the expiration of the franchise." The franchisee apparently continued to operate without payments to the franchisor until 2012.

The franchisor sued the franchisee for breach of contract and claimed damages in compensation of lost royalties and advertising fees from 2009 through 2012. This was brought as a breach of contract claim. The franchisor apparently did not bring any tort or statutory claims such as unjust enrichment or unfair competition. The trial court denied the franchisor's breach of contract claim and the Supreme Court agreed, holding that while the parties had an implied in fact contract from 2004 to 2009, the franchisor's 2009 letter terminated that implied contract. The franchisor did argue that they a should be allowed to recover royalties and fees as the franchisee continued to use franchisor's recipes and trademarks after 2009, but the court rejected that argument since the franchisor had not plead unjust enrichment.

In summary, this case is a strong reminder that franchisors may lack contractual protection in the situation of a hold-over franchise and should endeavor to prevent this situation from happening by renewing their franchise agreement in accordance with their terms. However, should they find themselves with a hold-over franchisee, they should consider also seeking tort or statutory remedies when enforcing their rights against a hold-over franchisee.

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