Minnesota Federal Court Holds Franchisor May Recover Actual Lost-Profit Damages under Minnesota Law

At a Glance

• The US District Court for the District of Minnesota concluded that a franchisor may recover actual damages caused by premature termination of a franchise agreement, including lost profits from anticipated fees.

• Failure to disclose a franchise agreement provision in the franchise disclosure document did not amount to a false, fraudulent, or deceptive practice under Minnesota law where the provision did not create any new contractual obligations, but instead correctly stated that the franchisor could recover actual damages but not liquidated damages or a termination penalty under Minnesota law.

Actual lost-profit damages for early termination do not constitute liquidated damages or termination penalties.

When a long-term franchise agreement is terminated early, the franchisor's lost future royalties and fees can be substantial. Some franchise agreements address this risk through liquidated damages or termination penalty provisions. But under Minnesota law, it is "unfair and inequitable," in violation of the Minnesota Franchise Act, to require a franchisee to consent to liquidated damages or termination penalties. The US District Court for the District of Minnesota recently addressed whether a franchisor may still recover actual damages arising from an early termination of a long-term franchise agreement — it concluded a franchisor can.

In Ramada Worldwide Inc. v. TCBH, Inc., No. 24-CV-0955 (D. Minn. Sept. 29, 2026), Ramada entered into a 15-year franchise agreement with a franchisee for the operation of a hotel in Minnesota. The franchise agreement required the franchisee to pay recurring fees, including royalties and system assessment fees. The franchise agreement provided that "liquidated damages and termination penalties are prohibited under Minnesota law," but that, in the event of premature termination, the franchisee would "remain liable to us for any and all damages, losses, costs, and expenses incurred by us which would have otherwise been payable for and during the remainder of the unexpired Term" (the Liability Provision).

Ramada terminated the franchise agreement after about a year and a half into the 15-year term due to the franchisee's uncured defaults. Ramada thereafter sought $1.25 million in actual damages for premature termination, among other forms of relief.

The franchisee counterclaimed, alleging that Ramada's attempt to recover $1.25 million for premature termination was either liquidated damages or a termination penalty in violation of Minnesota law. The case proceeded to cross-motions for summary judgment.

The court acknowledged (and the parties did not dispute) that Minnesota Administrative Rule 2860.4400(J) barred recovery of liquidated damages or a termination penalty. But the court held that Minnesota law does not prohibit a franchisor from seeking actual damages, including lost profits, as a consequence of the franchisee's breach of the franchise agreement. According to Ramada, and as accepted by the court, Ramada's $1.25 million damages claim was a "place holder for an as-yet undetermined amount for thirteen years of lost income," not liquidated damages or a termination penalty. The court also rejected an argument that Ramada's internal references to the amount as "liquidated damages" were dispositive of the nature of the damages.

Failure to disclose the Liability Provision in the franchise disclosure document did not violate the Minnesota Franchise Act.

The franchisee also argued that Ramada violated the Minnesota Franchise Act by adding the Liability Provision without disclosing it to the franchisee in the franchise disclosure document (FDD).

Even assuming Minnesota Administrative Rule 2860.4500 (which defines false, fraudulent, or deceptive practices under the relevant provision of the Minnesota Franchise Act) allows franchisees to sue franchisors for false, fraudulent, or deceptive practices, the court held that Ramada's failure to disclose the Liability Provision in the FDD was not false, fraudulent or deceptive. According to the court, the Liability Provision did not create any new obligation; rather, it merely stated that Ramada could recover actual damages, which would have been true under the franchise agreement even if the Liability Provision had not been added. Thus, because the Liability Provision did not create any new contractual obligations and because Ramada would have been able to recover actual damages with or without the inclusion of the Liability Provision in the franchise agreement, the addition of that provision was not false, fraudulent, or deceptive.

Lack of evidence of different treatment of similarly situated franchisees defeats a discrimination claim.

Finally, the franchisee asserted that Ramada violated Minnesota law by discriminating against it when it sought to recover projected gross revenues for more than 13 years. In contrast, Ramada sought to recover only the actual average monthly recurring fees for a maximum of 36 months from other terminated franchisees.

The court rejected this argument, pointing to the fact that franchise agreements in other states are not subject to Minnesota's liquidated damages prohibition. Under Minnesota Administrative Rule 2860.4400, differential treatment based on geographic differences is not unfair or illegal discrimination. Without evidence that Ramada treated franchisees within the same geographic location differently, any differential treatment the franchisee pointed to resulted from differences in state law, not unfair discrimination.

What does this means for franchisors?

• Franchisors may seek recovery of actual lost profits under Minnesota law without violating Minnesota's prohibition on liquidated damages or termination penalties.
• Franchisors should review and appropriately disclose state-specific provisions or addenda to franchise agreements; but language that accurately summarizes rights and obligations under the law may not amount to a false, fraudulent, or deceptive practice under Minnesota law if not disclosed.