Minnesota Ruling Lets Ramada Chase Lost Royalties After Early Exit

About 19 months into a 15-year hotel franchise, the owner of a Ramada in Eagan, Minn., fell behind on fees and the brand pulled the flag. The fallout tests a rule Minnesota franchisees have long counted on: the state's ban on exit penalties.

The answer, from a federal judge on Sept. 29, is that the ban has limits. In Ramada Worldwide Inc. v. TCBH, Inc., the U.S. District Court for the District of Minnesota held that a franchisor may still sue for the actual damages an early exit causes, including the royalties and fees it would have collected over the rest of the term, according to a client alert from law firm Faegre Drinker published Oct. 13.

The facts are not in dispute. TCBH signed a 15-year agreement for the 187-room hotel on Dec. 31, 2021, according to a case summary by Franchise Intelligence. Ramada sent a default notice in January 2023 over $111,900.73 in unpaid recurring fees and terminated the agreement on Aug. 3, 2023. It then demanded $1,250,743.15, which it described as a "place holder for an as-yet undetermined amount for thirteen years of lost income." At a hearing, TCBH and its majority owner conceded they had breached the agreement.

Their defense rested on Minnesota Administrative Rule 2860.4400(J), which makes it "unfair and inequitable" to require a franchisee to agree to liquidated damages (a preset sum owed on breach) or a termination penalty. TCBH argued the $1.25 million was exactly that. Ramada's own files had even called it liquidated damages.

The court was not persuaded. The rule bars preset sums, it held, not damages a franchisor can actually prove, and an internal label does not change what a claim is. It followed an earlier hotel franchise case, Days Inn Worldwide v. SBSB.

Two other arguments failed. TCBH said a clause preserving its liability after termination was missing from its disclosure document; the court found the clause created no new obligation, so leaving it out was not deceptive. TCBH also noted that Ramada sought only up to 36 months of average fees from terminated franchisees in other states. The court said "any differential treatment of Defendants resulted from differences in state law, not unfair discrimination."

That carries an irony. In this case at least, a rule written to protect Minnesota franchisees exposed this one to a bigger claim than Ramada pursued elsewhere, because the capped formula it uses in other states is the kind of preset sum Minnesota forbids.

Nothing is final on the big number. Ramada still has to prove its lost profits at trial, and attorney fees will go to a jury too. The only fixed award so far is $602,021.93 on a development incentive note, owed jointly by TCBH and the owner who personally guaranteed it.

Termination fights have run through this fall, including Wendy's battle with Meritage over 314 terminated restaurants. This one now comes down to a jury question: what 13 more years of a 187-room hotel's royalties were actually worth.