Franchising & Distribution Law Blog


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$7.6M award for failure to give proper notice of franchise termination reversed
By Dawn Johnson, Leonard Vines on December 7, 2017 at 9:24 AM

White turnaround arrow on a brick wall, showing a reversal in a decision.Unlike some states’ franchise laws, the Missouri Franchise Act gives limited protection to franchisees. However, it does provide that if a franchisor fails to give 90 days’ notice of cancellation or termination, the franchisee may be awarded “damages sustained, to include loss of goodwill, costs of suit, and any equitable relief that the court deems proper.” A recent case provided much-needed clarification on how damages are measured if a franchisor fails to give a proper notice of termination.

In Sun Aviation v. L-3 Communications Avionics, No. SC 96280, 2017 WL 4930870 (Mo. Sup. Ct. Oct. 31, 2017), Sun Aviation, a distributor of L-3 Communications’ aircraft products, sued L-3 for, among other things, lost profits because of L-3’s failure to provide 90 days’ notice as required under the Missouri Franchise Act. In a non-jury case, the circuit court judge awarded Sun more than $7,600,000 in damages for 18 years of lost profits. After the appellate court affirmed, the Missouri Supreme Court reversed the judgment and held that the damages were limited to those sustained as a result of the failure to provide 90 days’ notice. The court sent the case back to the circuit court for a new trial on damages.

The Supreme Court noted that awarding profits in excess of those caused by the failure to provide the 90-day notice would give unintended breadth to the remedy. It reasoned that the limitation was justified because if a franchisor lawfully terminated a franchise by giving the proper notice, the franchise would not be entitled to any more than those sustained due to the franchisee’s reliance on the expectation that the relationship would continue for at least 90 more days, especially because the Missouri Franchise Act has no “good cause” requirement for termination.

The takeaways:

This case provides comfort and guidance to franchisors, particularly those who may fail to provide notice or who provide less than 90 days’ notice of termination of a franchise. However, it also highlights the importance of any franchisor, manufacturer, supplier or distributor carefully reviewing each state’s relationship laws before terminating or not renewing a franchise.

To avoid problems, franchisors should, of course, still provide 90 days’ notice as required by the statute and should recognize that the Missouri Franchise Act applies to many types of distributorships and dealerships, and not only traditional franchises. Furthermore, if the franchise agreement provides greater protection to the franchisee than the Missouri law, such as good cause prior to termination (which is not required under Missouri law), a franchisor must still comply with the terms of its contract.

Although not evident from the Supreme Court’s opinion, the ruling of the circuit judge is also instructive. According to the judge’s decision, prior to filing suit, Sun asked L-3 to buy back $250,000 of its unsold inventory, but L-3 refused to do so. We, of course, do not know all of the details of those negotiations, but one can only wonder if the lawsuit could have been avoided if L-3 had agreed to buy back the inventory in exchange for a full release. Even though L-3 may not have been legally required to buy back the inventory, in retrospect, it may have made a mistake by failing to do so.

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