Postal Instant Press Inc v. Sealy

In Postal Instant Press, Inc. v. Sealy (1996) 43 Cal.App.4th 1704, a franchisor and a franchisee entered into a 20-year franchise agreement, in which the franchisees agreed to pay monthly royalty and advertising fees. The franchise agreement defined failure to pay a monthly royalty or advertising fee as a "material breach." When the franchisees failed to make timely royalty and advertising fee payments, the franchisor declared a material breach, terminated the franchisees, and sued them for breach of contract, seeking $ 73,000 in unpaid royalties, and future royalties and payments for the remaining unfulfilled term of the franchise agreement of at least $ 495,699. The franchisor obtained a judgment of $ 432,510.35, which award of damages included $ 301,334 in "estimated future profits" for the nearly eight years remaining in the franchise agreement. (Id. at pp. 1706-1709.) Sealy reversed the part of the judgment awarding expectancy damages as estimated future lost profits, for two reasons. First, the nonbreaching franchisor was entitled to recover only those damages proximately caused by the specific breach; the franchisee's breach--its failure to make timely past royalty payments and advertising fees owed to the franchisor--was not a natural and direct cause of the franchisor's failure to receive future royalty payments and advertising fees. Therefore the franchisor was not entitled to these damages. (Id. at pp. 1709-1710, 1713.) Second, Sealy held that the "lost future profits" damages award would violate the prohibition of "unreasonable, unconscionable or grossly oppressive" damages. (Sealy, supra, 43 Cal.App.4th at pp. 1713-1714.) Recovery of past unpaid royalties, attorney fees and costs, and the right to install a new franchisee in what had been the defendant franchisee's exclusive territory provided the franchisor with a full measure of reasonable damages. Additional damages for "lost future royalties" provided the franchisor with disproportionate compensation which was unreasonable, unconscionable, and a grossly oppressive imposition on its franchisee. (Id. at pp. 1715, 1717.) It was in this context that the Sealy opinion stated that although franchise agreements were commercial contracts, they exhibited many attributes of consumer contracts. (Id. at p. 1715.) These attributes included the inequality of economic resources between franchisees and franchisors, a "gross bargaining disparity" reflected in franchise agreements being offered on a take-it-or-leave-it basis and in those agreements often allowing the franchisor to terminate the agreement or refuse to renew it for virtually any reason. (Id. at p. 1716.) Sealy concluded that the "lost future profits" award to the franchisor expanded "the already enormous bargaining gap between this franchisor and this franchisee," that such an award would be excessive, unconscionable, and oppressive under Civil Code section 3359, and would provide the franchisor with disproportionate compensation. (Sealy, at p. 1717.) "To sanction such an award in this case would so unbalance the relationship between franchisors and franchisees as to threaten to convert every franchise agreement allowing such damages into an unconscionable and oppressive contract." (Id. at p. 1718.)