Page 12 - Calculating Lost Profits

Although this practice aid discusses legal concepts and requirements in connection with performing lost
profits analyses, it is not intended to provide legal advice. Legal standards and requirements vary based
on facts and circumstances, causes of action, the legal jurisdiction, and the continuously evolving body
of legal precedent. Practitioners providing services in connection with measuring lost profits are advised
to discuss legal concepts and requirements specific to their engagements with counsel.

After introducing legal concepts affecting lost profits measurements, this publication addresses method-
ologies for measuring lost profits and common approaches for estimating elements of a lost profits cal-
culation. Throughout this practice aid, key considerations when performing lost profits analyses are
highlighted, and practical approaches to common issues are discussed. To illustrate the practical applica-
tion of the concepts introduced herein, reference is made throughout to a hypothetical business dispute
between a restaurant franchisor and its franchisee. This case study is an important complement to the
conceptual guidance provided herein.

Case Study Background Information

In 2009, Franchisee LLC (Franchisee) entered into a franchise agreement with Franchisor Corp. (Fran-
chisor), a franchisor of fast casual dining establishments under the "American Kitchen" trade name,
whereby the Franchisee obtained the exclusive right to develop and operate American Kitchen restau-
rants in the Baltimore-Washington, DC metropolitan area (the Franchise Zone). Pursuant to the fran-
chise agreement, Franchisee agreed to pay Franchisor a franchise fee for use of the American Kitchen
trade name, trademarks, and for certain services provided by Franchisor. Franchisee additionally agreed
to pay Franchisor certain fees based on a percentage of store revenues. Franchisor agreed to provide
Franchisee with its franchisee operating manual and promotional materials as well as access to training,
development, and operations advisory services. Franchisor also agreed to include the Franchise Zone in
its national ad campaigns. Although Franchisee was responsible for the actual development and opera-
tion of each restaurant in the Franchise Zone, Franchisor maintained some control over the development
and operations of restaurants developed by Franchisee, including the location, restaurant layout, signage,
products, supply chain sources, and product pricing, per the franchise agreement. The franchise agree-
ment had a 10-year term and was renewable for additional 5-year terms thereafter, at the election of
Franchisor, subject to achievement of certain key financial and quality performance metrics by Franchi-
see.

In 2010, Franchisee opened and began operating eight American Kitchen eatery locations in the Fran-
chise Zone. In 2011, and again in 2013, Franchisee opened one additional American Kitchen eatery lo-
cation in the Franchise Zone. From 2013–2016, Franchisee operated 10 American Kitchen eateries.

In late 2016, Franchisee submitted a development plan to Franchisor to build and operate its 11th loca-
tion, on a prominent college campus, as part of a new mixed-use development to be built in 2017. Fran-
chisor rejected the development plan, citing concerns regarding the planned location and restaurant lay-
out, and Franchisor’s perception that it deviated from the American Kitchen brand’s targeted consumers.

In 2017, Franchisee filed a lawsuit against Franchisor, asserting breach of contract. In particular, Fran-
chisee asserted that Franchisor lacked contractual authority to reject the development plan. Franchisee
asserted damages from the inability to open the new American Kitchen location in 2017.

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