August 21, 2025|Franchise Frontlines
August 21, 2025 | United States District Court, Southern District of California | Slip Copy
Executive Summary
In a slip opinion, Judge Janis L. Sammartino of the Southern District of California denied Fiesta Ventures’ motion to dismiss counterclaims brought by Qdoba Franchisor, LLC. Fiesta Ventures argued that California precedent under Postal Instant Press, Inc. v. Sealy barred recovery of lost future royalties when a franchisor terminates a franchise agreement. Qdoba countered that Sealy was both distinguishable and outdated, and that Fiesta Ventures’ conduct constituted a total breach under California law. The court accepted Sealy for purposes of analysis but emphasized two key paths for franchisors: (1) lost profits remain recoverable under traditional contract law principles because “[w]here the object of the contract is profits, lost profits are contemplated as damages”; and (2) even under Sealy, a total breach permits lost profits.
Relevant Background
Fiesta Ventures’ relationship with Qdoba began in 2012, when its owners, Shalinder Kular and Kanwaldeep Sidhu, acquired the right to operate three existing restaurants. Over time, that footprint contracted, and by 2019, Fiesta Ventures was operating only a single location in Dayton, Ohio.
In 2019, Fiesta Ventures and Qdoba entered into a development agreement for a new restaurant in Beavercreek, Ohio. After multiple extensions and modifications, a new entity—Fiesta Ventures Bevercreek, LLC—signed a franchise agreement with Qdoba in April 2023 to open and operate the Beavercreek location. When the restaurant failed to open on time due to leasing issues, Qdoba issued a notice of default in February 2024. Instead of immediately terminating, the parties entered into a Workout Agreement requiring Beavercreek to be open by May 31, 2024, and holding affiliates—including the Dayton franchise entity—liable for any future default.
Despite Qdoba granting three additional extensions, the Beavercreek lease was ultimately terminated by the landlord. Qdoba then terminated both the Beavercreek franchise agreement and the Dayton franchise agreement under the affiliate-liability provision of the Workout Agreement. Fiesta Ventures and its affiliates sued, claiming Qdoba’s terminations breached the agreements and violated California law. Qdoba counterclaimed for declaratory relief, enforcement of guarantees, and lost future royalties on both the Beavercreek and Dayton agreements. Fiesta Ventures moved to dismiss the royalty claims, citing Sealy.
Decision
The court rejected Fiesta Ventures’ categorical reading of Sealy. While Sealy held that lost royalties are not available where a franchisor voluntarily terminates an agreement after a partial breach, it also recognized an exception for total breach. Judge Sammartino noted that Sealy itself conceded it was not holding that “franchisors can never collect lost future royalties,” only that entitlement depends “on the nature of the breach and whether the breach itself prevents the franchisor from earning those future royalties.”
The court explained the practical problem with Sealy: “if the franchisor had not terminated the franchise agreement it might have been required to sue again and again” for missed payments. This, the court reasoned, was contrary to California contract law, which awards damages to place the injured party in the position it would have been in had the contract been performed. “[W]here the purpose of the contract is profits, lost profits are contemplated as damages.”
Because Sealy did not define “total breach,” the court turned to Coughlin v. Blair, 262 P.2d 305 (Cal. 1953). Coughlin held that repeated failures to perform can justify treating the default as a total breach, entitling the plaintiff to all damages, past and prospective. Much like Coughlin, Qdoba gave Fiesta Ventures multiple chances to cure but was met with continued nonperformance. The court therefore held it was plausible that Fiesta Ventures’ conduct amounted to a total breach, entitling Qdoba to seek lost profits.
Finally, the court dismissed Fiesta Ventures’ public policy defense under the CFRA and CFIL. The CFRA applies only when a franchise is domiciled or operated in California, and “courts will not apply [laws] to the parties falling outside of those limitations, even if the parties stipulate that the law should apply.” Because Fiesta Ventures’ restaurants were in Ohio, the CFRA had no application.
Looking Forward
Although issued as a slip copy, this opinion offers a well-reasoned analysis that may prove persuasive in future franchise disputes. The court made clear that Sealy does not categorically foreclose recovery of lost profits. Instead, when franchisee conduct reaches the level of total breach, as defined in Coughlin, a franchisor may plausibly recover lost royalties as damages. This approach helps avoid the impractical result of forcing franchisors to file repeated lawsuits while a franchisee continues to default, and it places the remedy back within traditional contract law principles.
The decision also underscores the limited reach of statutory franchise protections. By holding that the California Franchise Relations Act does not extend to out-of-state restaurants, even when parties select California law, the court reminded franchisors and franchisees alike that geography matters. The ruling highlights that statutory frameworks cannot be invoked beyond their territorial boundaries, leaving the parties to the terms of their contracts and general contract law remedies.
Finally, the opinion reflects a broader judicial trend of questioning Sealy’s departure from general contract law. Courts have increasingly noted that when the very purpose of a contract is to generate profits, it makes little sense to bar recovery of those profits simply because the franchisor exercised a termination right. This case contributes to that conversation, suggesting that future courts may continue to scrutinize Sealy’s reasoning and move toward a more contract-based framework for awarding damages in franchise disputes.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
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