The Anatomy of Lost-Profits Claims

Because both the franchisor and the franchisee enter into the relationship with the expectation of profit, a termination frustrates both sides' expectations and the economic rationale for entering the relationship in the first place. Lost-profit damages are now available in a variety of civil contexts-tort actions (both personal and business), breach of contract actions, antitrust suits, and claims for trademark and patent infringement.10 Nonetheless, courts continue to face the often difficult questions of how to assess whether the parties contemplated lost-profit damages, whether a party actually suffered them, and if so, how to measure those lost profits.11 The remainder of this article will focus on the following common issues confronting franchise litigants when determining if lost profits damages are available, and if so, in what amount: (1) how a franchisee can prove lost profits, including the types and amounts of evidence necessary, and how a franchisor can challenge the factual basis of a claim for lost profits; (2) how new franchised businesses can prove lost profits without an available history of past profits; (3) the role of experts; and (4) whether a franchisor can contractually disclaim lost profit damages. Co., for example, the court stated that, in terms of proving causation for lost profit damages, Washington law does not mandate a "direct result" test or require that certain of defendants' acts of bad faith caused a certain specific amount of monetary damages.21 Such an approach, the court concluded, would not comport with the long-held view that a defendant should not profit from the difficulty in proving exact damages, particularly if his breach contributes to that difficulty.22 The court held that, to survive summary judgment, the insured must simply establish a genuine issue of material fact concerning whether the insurer's conduct was one of the causes of its lost profits.23 A common causation issue that arises in the franchise context is whether a franchisor can claim future lost royalties after it has terminated a franchisee for failing to timely pay royalties. In 1996, the California Court of Appeal first confronted this issue in Postal Instant Press, Inc. v. Sealy.24 In Sealy, franchisor Postal Instant Press, Inc. (PIP) entered into a twenty-year franchise agreement with the Sealys whereby PIP would provide its trademark and certain services to the Sealys in exchange for royalty and advertising fees.25 When the Sealys failed to