The law firm of Ichter Thomas has racked up another franchisee win against controversial childcare franchisor Legacy Academy.
Are you familiar with the Legacy Academy franchise? Please share your opinion or insight – positive or negative – as a comment below.
(UnhappyFranchisee.Com) This time, the Ichter Thomas client was a successful Legacy Academy owner who de-branded and left the system after the Legacy Academy brand was publicly tarnished through scandals, franchise lawsuits and allegations of franchise fraud.
Legacy Academy sued the franchisee for future royalty fees and advertising fees through the end of the franchise agreement period, which they contended amounted to $836,833.51 (exclusive of attorneys’ fees).
In a two day bench trial, Ichter Thomas mobilized “every possible defense” and obtained a judgement that was less than 3% of what Legacy Academy was seeking.
Ichter Thomas attorney Dan Davis provided this overview:
One of the first items in any franchise agreement is the “term.” This is the duration of the franchise agreement.
Here’s an example:
This Agreement shall take effect as of the date of this Agreement (the “Effective Date”), and, unless previously terminated, its term shall extend for a period of twenty years from the Effective Date.
Not very complicated, right? But think about it: the term determines how long a person is agreeing to be a franchisee. Plenty of marriages do not even last ten years. Many franchisees apparently think that if things don’t work out, they’ll just get a divorce.
Now, a franchisee can simply “stop” being a franchisee during the term of the franchise agreement or can attempt to formally terminate the franchise relationship. Like a divorce, however, this can be a very expensive proposition. Believe it or not, some franchisors will take the position that a franchisee is obligated to pay royalty fees for the entire term even if it is not using the franchise system.
We recently encountered such a scenario. We represented “XYZ, Inc.” (a pseudonym), a former franchisee of Legacy Academy, Inc. (“Legacy”). Legacy sells “childhood education” (daycare) centers. In 2002, XYZ entered into a Legacy franchise agreement with a twenty year term. Under the terms of that franchise agreement, XYZ promised to pay Legacy six percent of its gross revenue as royalty and advertising fees to use Legacy’s trademarks and the franchise system. XYZ did so, and was fortunate enough to do well.
In 2010, however, the Superior Court of Gwinnett County confirmed an arbitration award finding Legacy had given “misleading financial information in the [Federal Trade Commission’s (“FTC”)-required Uniform Franchise Offering Circular (“UFOC”)] and outside the UFOC to [five (5) other franchisees] and [in doing so] violated the disclosure requirements of [16 C.F.R. § 436.1].” As a result, five (5) former Legacy franchisees were awarded more than $1 million in damages and had both their promissory notes (totaling about $1 million in principal obligations) and their franchise agreements rescinded.
In connection with this arbitration and thereafter, the size of the Legacy franchise system shrunk drastically, as did the goodwill associated with the brand name which XYZ was paying royalties for. In other words, the momentum that Legacy had enjoyed previously and that franchisees relied upon in joining the system ground to a halt. As a result, XYZ had no choice but to de-identify and leave the franchise system, and did so at the end of 2010. When Legacy sued XYZ (apparently for having the temerity to acknowledge unavoidable business realities), Legacy took the position that XYZ was obligated to pay royalty fees and advertising fees from 2011 through 2022, which they contended amounted to $836,833.51 (exclusive of attorneys’ fees).
Ichter Thomas defended XYZ on this claim in a two day bench trial. The result was a judgment for only $23,841.80, which included Legacy’s attorneys’ fees after almost three years of litigation. How is this possible? Because Ichter Thomas mobilized every possible defense available in the most forceful way possible, particularly with respect to the murky and often convoluted law of future lost profits.
Read more about the Legacy Academy franchise:
Disclosure: Cary Ichter and Ichter Thomas law firm are featured in the UnhappyFranchisee.Com Franchise Attorney Directory.
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