Contract analysis

I. Introduction and Purpose This memorandum analyzes the enforceability of the liquidated-damages provision set forth in Section 15.3 of the Franchise License Agreements ("FLAs") between our client, Verimark Hospitality Group Inc. ("Verimark"), and the defendants, Coastal Palms Franchise Holdings LLC and its affiliated entities (collectively, "Coastal Palms"). This memorandum has been prepared at the direction of Pri

Section 15.3 of each FLA provides that, upon termination for cause by Verimark, the franchisee shall pay, as liquidated damages, an amount equal to three times (3×) the trailing-twelve-month royalties for the terminated property. The royalty is calculated at 5% of Gross Room Revenue ("GRR"), and the provision directs that the calculation shall be based on the greater of the franchisee's reported GRR or GRR as determi

II. Factual Background Relevant to the Liquidated-Damages Analysis A. The Franchise License Agreements Coastal Palms executed 22 individual Franchise License Agreements with Verimark over a span of approximately twelve years. The first FLA was dated June 15, 2007, and covered a single Verimark Suites property located in Naples, Florida. The most recent FLA was dated September 3, 2019. Each FLA is a standalone agreeme

Section 15.3 of each FLA contains the liquidated-damages provision that is the subject of this memorandum. The provision reads in full as follows:

Section 15.3 — Liquidated Damages. Upon termination of this Agreement for cause by Franchisor pursuant to Section 14, Franchisee shall pay to Franchisor, as liquidated damages and not as a penalty, an amount equal to three times (3×) the Royalty Fees payable under Section 4.1 for the twelve (12) month period immediately preceding the effective date of termination (the "Trailing Twelve-Month Royalties"), calculated ba

Section 14.1 (Notice and Cure). Upon the occurrence of a material breach by the franchisee, Verimark must provide written notice specifying the nature of the breach. The franchisee then has 30 calendar days from receipt of the notice to cure the breach to Verimark's reasonable satisfaction.

Section 14.2(c) (Incurable Breach). Notwithstanding the 30-day cure period, Section 14.2(c) provides that "[s]ystematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure" and triggers Verimark's right to terminate the FLA immediately upon notice, without affording any cure period. This provision is directly applicable to the Suncoast revenue-diversion scheme, which cons

Section 8.2 (Audit Rights). The FLAs grant Verimark the right to audit the franchisee's books and records at any time. Section 8.2 further provides that if an audit reveals that the franchisee has underpaid franchise fees by more than 2% of reported GRR, the franchisee bears all costs of the audit. The preliminary audit conducted by Thornbury & Associates CPAs LLP found that Coastal Palms' underreporting averaged app

III. Florida's Legal Framework for Liquidated Damages A. General Principles Under Florida Common Law Florida law has long recognized the enforceability of liquidated-damages provisions as an exercise of the parties' freedom of contract. The Florida Supreme Court and the District Courts of Appeal have repeatedly held that contracting parties may agree in advance on the amount of damages to be paid in the event of a br

Section 672.718(1) provides that damages for breach of a contract may be liquidated in the agreement "but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy." Section 672.718(2) further provides that "[a] term fixing unreasonably large liquidated

IV. The Two-Prong Reasonableness Test A. Prong One: Difficulty of Ascertaining Actual Damages at the Time of Contracting The first prong of Florida's two-prong test asks whether the damages contemplated by the breach were uncertain in nature or difficult to ascertain at the time the contract was formed. This inquiry is inherently prospective: it evaluates the parties' knowledge and the state of affairs as they existe

V. Analysis of the Penalty Doctrine A. Distinguishing Liquidated Damages from Penalties Under Florida law, the distinction between an enforceable liquidated-damages provision and an unenforceable penalty turns on the function and proportionality of the stipulated amount. A liquidated-damages provision is enforceable where three conditions are met: (1) the damages contemplated by the breach are uncertain or difficult

1. Sophistication of the parties. Both Verimark and Coastal Palms are sophisticated commercial entities with extensive experience in the hospitality industry. Verimark is a publicly traded company, and Coastal Palms operates a 22-property hotel portfolio. Both parties were represented by experienced counsel during the negotiation and execution of the FLAs. The transaction was conducted at arm's length, with no allega

2. Express contractual recitals. The FLAs contain explicit recitals acknowledging that actual damages from early termination are "difficult to ascertain with certainty," that the § 15.3 formula represents a "reasonable estimate" of such damages, and that the amount is "agreed upon at arm's length and after consultation with their respective advisors." These recitals are not conclusive but carry significant evidentiar

3. Conservative formula relative to remaining contract terms. The 3× royalty multiplier captures only 3 years of lost royalties against remaining contract terms of 5 to 16 years. In every case, the liquidated-damages amount is a fraction of the total lost royalty stream, let alone the total lost franchise fees (which also include marketing-fund contributions and technology fees).

4. Limited scope of the formula. The formula captures only the royalty component (5% of GRR). It does not include any multiplier for lost marketing-fund contributions (2.5% of GRR) or lost technology fees ($12.50 per available room per month). If the formula were intended to approximate total lost franchise fees, it would need to include these additional components, which would roughly double the stipulated amount.

5. Self-correcting GRR mechanism. The provision calculates liquidated damages using the "greater of" reported GRR or audited GRR. This mechanism ensures that a franchisee cannot minimize its liquidated-damages exposure through the very conduct (underreporting GRR) that constitutes the material breach. This is both commercially rational and directly relevant to the present case, where the breach consists of systematic

6. Industry-standard provision. The 3× trailing-royalty formula is consistent with prevailing practices in the hospitality franchise industry, where multipliers of 2× to 5× are common. The formula does not deviate from industry norms and therefore cannot reasonably be characterized as an outlier designed to penalize rather than compensate. C. Factors the Defendant Will Likely Raise Notwithstanding the strong case for

VI. Application to the Court's February 9, 2024 Partial Summary Judgment Order On February 9, 2024, the Court entered a partial summary judgment order granting Verimark's motion on Counts I (Breach of Contract — Royalties) and II (Breach of Contract — Marketing Fund Contributions). The Court found that Coastal Palms' exclusion of Suncoast-collected revenues from GRR constituted a material breach of Sections 4.1 and 4

VII. Interaction with Other Damages Components A. Stacking of Damages Verimark's total claimed damages of approximately $150 million comprise three distinct components, each addressing a different category of harm: The direct underpayments represent franchise fees (royalties, marketing-fund contributions, and technology fees) that accrued during the 2013–2021 period and were never paid due to the underreporting of GR

VIII. Strategic Recommendations A. Summary Judgment Considerations I recommend that the engagement team consider pursuing partial summary judgment on the enforceability of § 15.3 as a legal matter. The argument would be that the two-prong reasonableness test is satisfied as a matter of law based on undisputed facts: the parties are sophisticated commercial entities; the FLAs were negotiated at arm's length with the b