Progressive Child Care Systems, Inc., Karry L. Dunn, and Heather Dunn v. Kids 'R' Kids International, Inc. and Patrick D. Vinson

Citation: Not availableDocket: 02-07-00127-CV

Court: Court of Appeals of Texas; November 5, 2008; Texas; State Appellate Court

Original Court Document: View Document

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Appellants Progressive Child Care Systems, Inc., along with Karry L. Dunn and Heather Dunn, appeal a jury verdict favoring Appellees Kids >R= Kids International, Inc. and Patrick D. Vinson, which awarded Kids >R= Kids both past-due and future royalty payments stemming from two franchise agreements. Progressive raises three main issues: insufficient evidence supporting the awarded amounts of past and future royalties, insufficient evidence linking Progressive's actions to the damages claimed, and the assertion that the damage amounts are excessive. 

The factual background reveals that Progressive entered into two franchise agreements with Kids >R= Kids for child-care facilities in Plano and Flower Mound, Texas, each requiring a 5% royalty payment on gross revenues. Progressive ceased royalty payments in March 2002 and subsequently operated under a different name. Kids >R= Kids filed suit on October 3, 2003, alleging breach of contract and other claims, while Progressive counterclaimed with fraud and related allegations. 

At trial, forensic accountant Gregory Schuelke provided testimony, analyzing extensive documentation and calculating past-due royalties of $316,662 for the Plano center and $247,461 for the Flower Mound center. He also projected future royalties, totaling $873,879 for Plano and $767,771 for Flower Mound. The jury found in favor of Kids >R= Kids on all claims, leading to a total judgment of $1,385,008.72 against Progressive, which is now under appeal.

Georgia law applies to the case due to the franchise agreements explicitly stating they shall be governed by Georgia law. A trial court's choice of law determination is a matter of law reviewed de novo, and contractual choice of law is generally upheld if there is a reasonable relationship to the chosen state and no conflicting public policy. Both parties requested judicial notice of Georgia law, which includes relevant case law on breach of contract and damages; additionally, Kids 'R' Kids is a Georgia corporation, establishing a reasonable relationship to Georgia.

Progressive contests the sufficiency of evidence linking its actions to the damages awarded for unpaid future royalty payments, arguing that the franchise agreement was terminated by the franchisor's president, Vinson, thereby absolving it of liability. Progressive cites trial court findings and Vinson's testimony indicating the termination of the franchise agreement. It references case law asserting that a franchisor cannot recover damages for unpaid royalties post-termination, notably the California case Postal Instant Press, Inc. v. Sealy, which concluded that damages from future profits were caused by the franchisor's termination rather than the franchisee's breach. The Sealy court deemed such future profits awards as potentially unreasonable or oppressive.

The Sealy court expressed concern that awarding future profits to franchisors could pressure franchisees into compliance due to the threat of termination and profit loss. However, it did not rule out the possibility of future profit damages in cases where a franchisee terminated the agreement, nor did it prohibit awarding future royalties if franchisee misconduct caused the damages, provided such awards are reasonable. In contrast, the American Speedy case involved a franchisor who successfully obtained an award for future royalties after terminating a franchise agreement due to the franchisee's non-payment. The appellate court upheld this award, emphasizing the franchisor's right to damages reflective of the agreement's full term. This case differs from Sealy and American Speedy, as the franchisee, Progressive, not only failed to pay royalties but also independently exited the franchise, operating under a different label. The jury determined that Kids 'R' Kids, the franchisor, complied with the franchise agreement, distinguishing it from previous cases where the franchisor initiated termination. The court must also consider how Georgia would address this unique situation. The Maaco Enterprises case provides a relevant precedent, where lost future royalties were granted despite the franchisor's termination due to the franchisee's failure to perform. The Cintron court based its decision on contract law rather than proximate cause, allowing recovery of lost profits under Pennsylvania law, which could influence the decision in the current case.

The court will apply traditional contract law principles, noting that Georgia's approach to contract damages aligns with Pennsylvania's. Under Georgia law, damages from a breach must be directly traceable to the breach, arise in the usual course of events, and be within the parties' contemplation as a probable outcome. The aim is to place the injured party in the position they would have occupied without the breach. Lost profits are recoverable if proven with reasonable certainty and were contemplated by the parties when forming the contract. In this case, the jury determined that Progressive materially breached the franchise agreements by failing to pay required royalties, which entitled Kids >R= Kids to seek recovery for both past-due and future royalties due to the premature termination of the agreement. Progressive challenged the sufficiency of evidence supporting the royalty claims, arguing that its operation under a different name negated its franchise status and thus halted its obligation to pay royalties. However, Kids >R= Kids maintained that Progressive's name change was only one of several breaches, asserting that the refusal to pay royalties constituted an earlier default. The court affirmed that, under Georgia law, if any evidence supports the jury's verdict, it stands, and the jury is the sole arbiter of evidence weight and credibility. Thus, the court agreed with Kids >R= Kids that sufficient evidence existed to uphold the jury's findings on damages.

Kids >R= Kids claimed that Progressive breached their franchise agreement by not making royalty payments, which Progressive admitted it stopped paying after spring 2002. The jury determined that Progressive did not materially comply with the agreement, leading to a judgment in favor of Kids >R= Kids. The court found sufficient evidence to support this verdict and identified no reversible errors by Progressive, overruling its first issue.

Regarding damages, Progressive contested the amount awarded as excessive. Under Georgia law, a jury's damage award is generally upheld unless it is clearly excessive or inadequate, indicating bias or gross mistakes. The trial court's approval of the verdict carries a presumption of correctness. The jury's decision on lost profits was based on testimony from a forensic accountant, who calculated prospective losses of $66,000 per year for the Flower Mound facility and $73,000 per year for the Plano facility, using various business records. The jury awarded $753,561.94 for the Plano facility and $631,346.78 for the Flower Mound facility, totaling $1,384,008.72. The court concluded that the jury's award was not excessively high, and Progressive failed to provide compelling evidence to challenge the trial court's judgment, thus overruling Progressive's third issue.

All issues raised by Progressive have been overruled, leading to the affirmation of the trial court's judgment. The Dunns, as owners of Progressive Child Care Systems, Inc. and personal guarantors for contracts with Kids >R= Kids, are collectively referred to as Progressive. Vinson, the founder and president of Kids >R= Kids, is involved in the case. Evidence presented by Shuelke included all business records related to the franchises' incomes, as testified by Karry Dunn. The trial court noted that while the agreements were referred to as "terminated" and "breached," there remained a factual issue regarding the timing of the contract's termination for the jury's consideration. Kids >R= Kids highlighted a non-compete clause in the franchise agreement, which prohibits operating competing child-care facilities within a two-mile radius. They contend that the establishment of a facility under the name "Learning Legacy Center" breaches this agreement and argue that the primary material breach was Progressive's failure to pay royalties as stipulated in the franchise agreements.