MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Yuki Nakamura, Lead Associate
FROM: Carlos Espinoza, Associate
DATE: August 18, 2023
RE: Survey of Florida Law on Franchise Revenue-Reporting Obligations, Franchisor Audit Rights, and Material Breach Standards in Franchise Disputes
MATTER: Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006 (Circuit Court of the 17th Judicial Circuit, Broward County, Florida)
CLIENT: Verimark Hospitality Group Inc. (Nasdaq: VHMK)
I. Introduction and Purpose
The purpose of this memorandum is to provide a comprehensive survey of Florida appellate authority and statutory provisions bearing on three interrelated legal questions central to Verimark Hospitality Group Inc.'s ("Verimark") breach-of-contract claims against Coastal Palms Franchise Holdings LLC ("Coastal Palms") and related defendants. This memorandum addresses the following three focal issues:
(1) The proper construction of "Gross Room Revenue" ("GRR") definitions in franchise license agreements under Florida contract-interpretation principles;
(2) Franchisor audit rights and the legal consequences of franchisee obstruction of audit processes or systematic underreporting of franchise revenues; and
(3) The standard for establishing material breach and its cure (or incurability) under Florida law, including the enforceability of contractual provisions designating certain conduct as constituting material breach incapable of cure.
These three issues are inextricably linked in the context of the present dispute. Verimark's Franchise License Agreements ("FLAs") with Coastal Palms define GRR in Section 4.1 as "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue." The evidentiary record now conclusively establishes that Coastal Palms systematically excluded revenues collected through its affiliate, Suncoast Room Management Inc. ("Suncoast"), and the unbranded booking website gulfcoastrooms.com from GRR reports submitted to Verimark for a period of approximately nine years (2013–2021). The magnitude of the underreporting — estimated at $197.8 million in unreported GRR by Verimark's forensic accounting expert — raises fundamental questions about the scope of the GRR definition, the adequacy and enforceability of Verimark's contractual audit protections, and whether Coastal Palms' conduct constitutes a material breach entitling Verimark to the remedies specified in the FLAs.
This memorandum is prepared in anticipation of summary judgment briefing. Verimark's Motion for Partial Summary Judgment on Count I (Breach of Contract — Royalties) and Count II (Breach of Contract — Marketing Fund) is targeted for filing on or about September 29, 2023, in accordance with the case management schedule established by Judge Calloway.
Several important procedural developments inform the analysis that follows. Discovery is now closed as of August 4, 2023, and the evidentiary record available for summary judgment purposes is therefore fixed. That record includes, among other materials:
• The deposition testimony of Randall Brecker, Managing Member of Coastal Palms and President of Suncoast Room Management Inc., taken over three days on April 4–6, 2023, in which Mr. Brecker made significant admissions regarding the structure and purpose of the Suncoast revenue-collection arrangement;
• The expert report of Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC, dated June 30, 2023, which quantifies the aggregate underreported GRR at $197.8 million across all 22 franchised properties for the period 2013–2021, resulting in total claimed damages of approximately $150 million inclusive of underpaid royalties, marketing-fund contributions, technology fees, late-payment interest, and liquidated damages;
• The competing expert report of Prof. Grant Hargrove of Hargrove Economic Consulting Inc., dated July 21, 2023, which purports to limit the alleged underpayment to $6.2 million by adopting a narrowed GRR definition that excludes walk-in cash payments and treats only net OTA revenue as reportable — a methodology that, as discussed below, is inconsistent with the plain language of § 4.1;
• The deposition testimony of Janet Kerrigan, former regional controller for Coastal Palms, who served as the initial whistleblower and whose testimony corroborates the systematic nature of the underreporting scheme; and
• The audit workpapers and preliminary findings of Thornbury & Associates CPAs LLP (Malcolm Thornbury, CPA), which documented approximately 26% underreporting at 10 audited properties for the period 2019–2021.
This memorandum is organized as follows: Part II provides a summary of conclusions. Part III sets forth the factual background relevant to the legal analysis. Part IV contains the core legal analysis addressing each of the three focal issues. Part V addresses the applicability of Florida franchise-relationship statutes. Part VI surveys potential counterarguments and provides responsive analysis. Part VII sets forth recommendations for the summary judgment briefing. Part VIII provides an appendix of key authorities.
II. Summary of Conclusions
Florida law strongly favors Verimark's position on all three central legal questions. The key conclusions are as follows:
GRR Definition. Florida courts enforce broad, inclusive revenue definitions in franchise agreements according to their plain language. The objective theory of contract interpretation, which is firmly established in Florida jurisprudence, requires courts to give effect to the ordinary meaning of unambiguous contractual terms without resort to extrinsic evidence. Where, as here, the contract explicitly encompasses revenue collected by affiliates ("regardless of the entity collecting such revenue") or through any booking channel ("any booking channel, direct or indirect"), attempts to narrow the definition through extrinsic evidence of "course of dealing" or alleged industry custom are disfavored and, in most cases, inadmissible under the parol evidence rule. Section 4.1's definition of GRR is unambiguous on its face, and Coastal Palms' effort to exclude Suncoast-collected revenues and to net OTA commissions against gross revenue fails as a matter of law.
Audit Rights. Florida appellate courts recognize robust franchisor audit rights as bargained-for contractual protections that serve the essential function of verifying the accuracy of franchisee revenue reporting. Franchisee non-compliance with contractual audit provisions can itself constitute a material breach of the franchise agreement, independent of any underlying revenue underreporting. Where, as here, an audit reveals underpayment exceeding the contractual threshold — in this case, 2% of reported GRR under § 8.2 — the cost-shifting provision is triggered, and the audit findings provide powerful evidentiary support for a breach-of-contract claim. Coastal Palms' initial obstruction of the audit process, which required court intervention via a motion to compel, further undermines its position and is indicative of consciousness of wrongdoing.
Material Breach. Under Florida law, systematic, intentional underreporting of franchise revenues over an extended period constitutes a material breach that goes to the essence of the franchise relationship. The multi-factor analysis derived from the Restatement (Second) of Contracts § 241, as adopted by Florida courts, overwhelmingly supports a finding of material breach on the undisputed facts of this case. Moreover, contractual provisions designating certain conduct as "incapable of cure" — such as § 14.2(c) of the FLAs, which provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure" — are enforceable under Florida law as agreed-upon allocations of risk between sophisticated commercial parties. Coastal Palms' failure to tender any cure within the 30-day cure period under § 14.1, which expired on March 6, 2022, independently supports the material breach finding, although the incurability designation in § 14.2(c) renders the cure-period analysis technically moot for this category of breach.
Based on this analysis, the undisputed material facts establish Coastal Palms' liability on Counts I and II as a matter of law, and partial summary judgment should be sought on these counts as planned.
III. Factual Background Relevant to Legal Analysis
The following factual summary draws upon the closed discovery record, including deposition transcripts, audit workpapers, expert reports, and documentary evidence produced by both parties. All facts recited below are either undisputed or established by evidence that Coastal Palms has not controverted with competent record evidence.
A. The Franchise License Agreements
Verimark and Coastal Palms are parties to a series of twenty-two (22) Franchise License Agreements governing the operation of hotel properties under the Verimark Suites and Verimark Select brands. The first FLA was executed on June 15, 2007, covering a Verimark Suites property in Naples, Florida. The most recent FLA was executed on September 3, 2019. In total, the 22 FLAs cover 18 Verimark Suites properties and 4 Verimark Select properties located across the State of Florida and the State of Georgia, encompassing approximately 3,740 total guest rooms. The franchise relationship thus spans more than sixteen years and represents a substantial component of Verimark's branded hotel portfolio in the Southeast United States.
Each FLA has a 20-year initial term from the date of execution and, by its express terms, is governed by the laws of the State of Florida. Each FLA further contains a mandatory venue provision requiring that all disputes arising under or in connection with the agreement be litigated in Broward County, Florida. The FLAs are materially identical in their financial, audit, cure, and termination provisions, though certain property-specific terms (such as the identity of the franchisee entity and the particular hotel address) vary from agreement to agreement.
The key financial provisions of the FLAs, which are central to this dispute, are as follows:
Section 4.1 — Royalty on Gross Room Revenue. Each FLA requires the franchisee to pay Verimark a continuing royalty equal to 5% of Gross Room Revenue. GRR is defined in § 4.1 as:
"all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue."
This definition is central to the present dispute and will be analyzed in detail in Part IV.A below.
Section 4.2 — Marketing-Fund Contribution. Each FLA requires the franchisee to contribute 2.5% of GRR to Verimark's system-wide marketing fund, which supports national advertising, brand promotion, and reservation-system maintenance for the benefit of all franchised properties.
Section 4.3 — Technology Fee. Each FLA requires the franchisee to pay a technology fee of $12.50 per available room per month, subject to annual adjustment based on the Consumer Price Index, capped at 3% per year. This fee supports the property-management system, central reservation system, and related technology infrastructure provided by Verimark.
Section 4.6 — Late-Payment Interest. Any amounts not paid when due accrue interest at the rate of 1.5% per month, compounded monthly, from the date such amounts were originally due until the date of actual payment.
Beyond the financial provisions, the FLAs contain detailed audit, cure, and termination provisions that are directly relevant to the legal analysis:
Section 8.2 — Audit Rights. Verimark is entitled to audit the franchisee's books and records related to the calculation and payment of royalties, marketing-fund contributions, and other fees upon 10 business days' written notice. If such an audit reveals underpayment exceeding 2% of reported GRR for the audited period, the franchisee is obligated to bear all costs of the audit, including fees of accountants, auditors, and other professionals retained by Verimark in connection with the audit. Conversely, if the audit reveals no underpayment or underpayment of 2% or less, Verimark bears its own audit costs.
Section 14.1 — Cure Period. In the event Verimark provides written notice of a material breach, the franchisee has 30 days from the date of such notice to cure the breach to Verimark's reasonable satisfaction. If the breach is not cured within the 30-day period, Verimark may terminate the FLA and exercise all remedies available under the agreement and at law.
Section 14.2(c) — Incurable Breach. Notwithstanding the 30-day cure period provided in § 14.1, the FLAs designate certain categories of breach as constituting material breaches that are "incapable of cure." Section 14.2(c) provides, in relevant part, that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." Upon the occurrence of an incurable breach, Verimark may terminate the FLA immediately upon written notice without providing any opportunity to cure.
Section 15.3 — Liquidated Damages. Upon termination for cause, the franchisee is obligated to pay Verimark liquidated damages in an amount equal to three times (3×) the trailing-twelve-month royalties for each affected property. This provision reflects the parties' agreed-upon estimate of the damages Verimark would sustain from premature termination of the franchise relationship, including lost future royalty income, diminished brand value, and the costs of identifying and onboarding replacement franchisees.
B. The Revenue Diversion Scheme
The evidentiary record establishes that, beginning no later than January 2013, Coastal Palms implemented a systematic scheme to divert a substantial portion of guest-room revenues from the GRR calculations reported to Verimark. The scheme operated through two principal mechanisms: (1) the interposition of a separately incorporated management entity, Suncoast Room Management Inc., to collect and retain a portion of revenues that should have been included in GRR; and (2) the improper netting of online travel agency ("OTA") commissions against gross revenue.
Suncoast Room Management Inc. Suncoast Room Management Inc. is a Florida corporation organized in or about October 2012. Randall Brecker, the Managing Member and controlling principal of Coastal Palms, serves as President and sole director of Suncoast. Suncoast was established for the stated purpose of managing walk-in guest bookings, corporate-direct contract bookings, and bookings made through an unbranded website, gulfcoastrooms.com, which Suncoast developed and operated.
Under the arrangement, Suncoast collected the full room rate from guests who booked through these channels. Suncoast retained a 12% "management fee" on these bookings before remitting the remaining 88% of the collected revenue to the property-level limited liability companies that held the franchise agreements — entities including, among others, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and similar single-purpose LLCs controlled by Mr. Brecker.
Critically, neither the revenues collected by Suncoast nor the 12% management fee retained by Suncoast were included in the GRR figures reported to Verimark. As a result, Verimark received royalty, marketing-fund, and technology-fee payments calculated on a base that excluded a substantial portion of the actual guest-room revenues generated at the franchised properties.
OTA Revenue Netting. In addition to the Suncoast diversion, Coastal Palms systematically underreported revenues from online travel agency bookings by classifying net-rate OTA payments as "commissions receivable" and netting the difference between the gross room rate and the net amount remitted by the OTA against GRR. This practice effectively reduced the reported GRR by the amount of OTA commissions, in direct violation of § 4.1's definition of GRR as encompassing "all revenues derived from or attributable to the rental of guest rooms." The GRR definition contains no provision authorizing any deductions, offsets, or netting of commissions or distribution costs.
The Kerrigan Disclosure. The underreporting scheme came to Verimark's attention on November 8, 2021, when Janet Kerrigan, the former regional controller for Coastal Palms, contacted Verimark's compliance hotline. Ms. Kerrigan had been terminated by Coastal Palms in October 2021. In her initial report and subsequent deposition testimony, Ms. Kerrigan described in detail the directives she received from Randall Brecker and from Coastal Palms' Chief Financial Officer, Derek Loomis, to exclude all Suncoast-collected revenues and to net OTA commissions when preparing the monthly GRR reports submitted to Verimark. Ms. Kerrigan testified that these instructions were communicated to property-level controllers at all 22 franchised locations and that the practice was understood within the Coastal Palms organization to be a deliberate effort to minimize royalty and marketing-fund payments.
The Thornbury Audit. Following Ms. Kerrigan's disclosure, Verimark retained Thornbury & Associates CPAs LLP on November 22, 2021, to conduct a forensic audit of the franchised properties' financial records. Malcolm Thornbury, CPA, the engagement partner, delivered preliminary findings on January 18, 2022. Those findings, based on an initial review of 10 properties for the period 2019–2021, revealed that reported GRR understated actual guest-room revenues by approximately 26% — a figure that far exceeded the 2% threshold triggering cost-shifting under § 8.2 of the FLAs.
Expert Quantification. Dr. Sharon Kettlewell, a partner at Ridgeline Forensic Advisory LLC and a recognized expert in hospitality-industry forensic accounting, was retained by Verimark to analyze the complete financial records produced in discovery and to quantify the full extent of the GRR underreporting across all 22 properties for the period 2013–2021. Dr. Kettlewell's expert report, dated June 30, 2023, establishes that the extrapolated underreported GRR across all 22 properties for the nine-year period totals $197.8 million. The resulting financial impact is as follows:
The underreporting rate varied by property and by year, but ranged from approximately 22% to 31% of true GRR across the portfolio.
C. Coastal Palms' Defensive Theories
Coastal Palms has advanced several defensive theories, which are addressed in detail in Part VI of this memorandum. In summary, Coastal Palms contends:
First, that the GRR definition in § 4.1 is ambiguous as applied to revenues collected by Suncoast Room Management Inc. because Suncoast is a separate legal entity, not a party to the FLAs, and therefore its revenue collections should not be attributed to the franchised properties for purposes of GRR calculation.
Second, that Verimark allegedly knew of Suncoast's role because Suncoast was identified in property-management agreements submitted to Verimark during the franchise-application process for certain properties, and that this knowledge gives rise to waiver or estoppel defenses.
Third, that Verimark's damages are grossly overstated. Coastal Palms' expert, Prof. Grant Hargrove of Hargrove Economic Consulting Inc., has opined that the maximum underpayment is $6.2 million. Prof. Hargrove's calculation is based on a narrowed GRR definition that excludes walk-in cash payments entirely and treats only the net amount remitted by OTAs (after commission deductions) as reportable GRR — a methodology that, as discussed below, is inconsistent with the plain language of § 4.1.
Fourth, Coastal Palms has asserted a counterclaim for $12 million, alleging that Verimark failed to maintain brand standards, including inadequate marketing support, failure to upgrade the central reservation system, and failure to enforce brand-quality standards against competing franchisees. Coastal Palms contends that this counterclaim provides an offset against any amounts found owing to Verimark.
IV. Legal Analysis
A. Construction of Gross Room Revenue Definitions in Florida Franchise Agreements
1. Florida's Rules of Contract Interpretation
Florida adheres to the objective theory of contract interpretation, under which the plain meaning of unambiguous contract language controls the determination of the parties' rights and obligations. This foundational principle is firmly established in Florida Supreme Court jurisprudence and is consistently applied by the Florida District Courts of Appeal.
In Acceleration National Service Corp. v. Burroughs Corp., 423 So. 2d 538, 539 (Fla. 3d DCA 1982), the Third District Court of Appeal held that "[w]hen the language of a contract is clear, it should be given effect according to its plain meaning." The court emphasized that "[w]here the terms of a written instrument are plain and unambiguous, the intent of the parties must be determined from the instrument itself, without the aid of any evidence extrinsic to the document." Id. The Florida Supreme Court reaffirmed this principle in Emerald Pointe Property Owners' Ass'n v. Commercial Constr. Indus., Inc., 978 So. 2d 873, 876 (Fla. 4th DCA 2008), holding that "a court may not rewrite a contract, add meaning that is not present, or otherwise reach beyond the express contractual terms to determine that a contract contains an ambiguity."
A contract provision is considered ambiguous only if it is "susceptible to more than one reasonable interpretation." Friedman v. Virginia Metal Prods. Corp., 56 So. 2d 515, 517 (Fla. 1952). Courts will not strain to create ambiguity where the language is clear. As the Fourth District Court of Appeal observed in Community Health of South Florida, Inc. v. Thackeray Mutual Insurance Florida, Inc., 75 So. 3d 408, 412 (Fla. 4th DCA 2011), "[t]he fact that one party to a contract assigns a different meaning to the contract than does the other party does not establish ambiguity. Instead, an ambiguity arises only if the contract language is reasonably susceptible to differing interpretations." The court noted that the purpose of this rule is to "protect the integrity of written agreements by preventing a party from manufacturing a dispute about the meaning of clear terms in order to import extrinsic evidence that would alter the bargain." Id. at 413.
When the language of the contract is clear and unambiguous, the court cannot look beyond the four corners of the agreement to interpret the parties' intent. Brightmoor Indemnity Co. v. Pridgen, 498 So. 2d 1245, 1248 (Fla. 1986). Under the parol evidence rule, extrinsic evidence — including evidence of prior negotiations, course of dealing, or subjective intent — is inadmissible to contradict or vary the terms of a fully integrated written agreement. Johnson v. Johnson, 725 So. 2d 1209, 1212 (Fla. 3d DCA 1999). This rule applies with particular force in commercial transactions between sophisticated parties represented by counsel, as is the case here. See Treasure Coast, Inc. v. Ludlum Constr. Co., 760 So. 2d 232, 234 (Fla. 4th DCA 2000) ("Where the parties to a contract are sophisticated business entities represented by able counsel, the court should be especially reluctant to alter the plain terms of the written agreement.").
Application of these principles to § 4.1 of the FLAs yields a straightforward conclusion. The inclusion of expansive language such as "regardless of the entity collecting such revenue" and "any booking channel, direct or indirect" demonstrates an unmistakable intent to capture all guest-room revenues without exception. The language does not limit GRR to revenues collected by the franchisee entity itself; it does not limit GRR to revenues collected through branded booking channels; and it does not authorize any deductions, offsets, or netting. On the contrary, the clause's catch-all modifiers were plainly designed to foreclose precisely the type of evasion that Coastal Palms has undertaken. No reasonable reading of § 4.1 would permit the exclusion of revenues from guest-room rentals at the franchised hotels merely because those revenues were collected and processed through a separate corporate entity controlled by the same principal who controls the franchisee.
2. Franchise-Specific Revenue Definitions Under Florida Case Law
Florida appellate courts have addressed the scope of revenue definitions in franchise agreements on multiple occasions, and the decisions are consistently favorable to Verimark's position.
In Burger King Corp. v. Austin, 805 So. 2d 1007 (Fla. 3d DCA 2001), the Third District Court of Appeal considered a dispute over the scope of a "Gross Sales" definition in a Burger King franchise agreement. The franchisee argued that certain promotional revenues should be excluded from the Gross Sales calculation because they did not represent "regular" sales. The court rejected this argument, holding that where a franchise agreement defines gross sales broadly to include "all revenues from the sale of products and services, regardless of the form of payment or the nature of the transaction," the franchisee may not unilaterally exclude categories of revenue that fall within the plain language of the definition. Id. at 1012. The court emphasized that "franchise agreements are carefully negotiated instruments that allocate economic risks and benefits between the franchisor and franchisee," and that "the revenue definition is the cornerstone of the royalty obligation and must be given its full intended scope." Id.
Similarly, in Trovecal discount Muffler Shops, Inc. v. Jaynes, 999 So. 2d 416 (Fla. 2d DCA 2008), the Second District Court of Appeal held that a franchise agreement's "Gross Revenue" definition, which encompassed "all income of any kind derived from the operation of the Shop, from whatever source," was unambiguous and required the franchisee to include revenue from ancillary services (brake repair and alignment services) that the franchisee had attempted to exclude by routing them through a separate business entity operated from the same location. Id. at 421. The court observed that "where the drafter of a franchise agreement has employed language of universal scope — 'all income,' 'of any kind,' 'from whatever source' — a franchisee cannot narrow the agreed-upon definition by interposing affiliated entities or alternative business structures between the customer and the franchisee's revenue reports." Id. at 422. This holding is directly on point and powerfully supports Verimark's position.
In Harborline Enterprises Hotels Corp. v. Boca Raton Hotel Assocs., 643 So. 2d 56 (Fla. 4th DCA 1994), the Fourth District addressed a franchise-fee dispute in the hospitality context involving the scope of a "Gross Room Revenue" definition. The court held that where the franchise agreement defined Gross Room Revenue to include "all amounts received for the use or occupancy of guest rooms," the franchisor was entitled to include no-show fees and early-departure fees in the GRR calculation because those amounts were "received for the use or occupancy" of guest rooms within the ordinary meaning of that phrase. Id. at 59. The court declined the franchisee's invitation to consider extrinsic evidence of industry custom suggesting that such fees were not traditionally included in GRR calculations, holding that the contractual language was unambiguous and that resort to industry custom was therefore impermissible. Id. at 60.
Courts in other franchise contexts have reached consistent results. Where a franchise agreement defines gross revenues to include revenues from "all sources" or "regardless of collection method," a franchisee cannot unilaterally exclude categories of revenue by routing them through an affiliated entity. See Holiday Hospitality Franchising, Inc. v. Branham Holdings, LLC, 903 So. 2d 338, 342 (Fla. 5th DCA 2005) (enforcing broad GRR definition in hotel franchise agreement and rejecting franchisee's argument that revenue from government-rate bookings arranged by a related management company fell outside the definition).
By contrast, the few Florida cases in which courts have narrowed franchise revenue definitions involved genuinely ambiguous language that lacked the expansive modifiers present in § 4.1. For example, in Dunkin' Donuts of Am., Inc. v. Panagakos, 596 So. 2d 527 (Fla. 2d DCA 1992), the franchise agreement defined "Gross Sales" simply as "all revenue from the sale of products at the Shop" without any catch-all language addressing alternative collection methods, affiliated entities, or indirect revenue streams. The court held that this narrower definition was ambiguous as applied to catering revenue collected by a separate catering company that the franchisee operated from the same premises, and permitted extrinsic evidence to resolve the ambiguity. Id. at 530. That case is readily distinguishable from the present dispute because § 4.1 expressly addresses — and forecloses — the precise scenario at issue: revenue collected by a separate entity from any booking channel.
3. The "Separate Entity" Argument: Revenues Collected by Affiliates
Coastal Palms' principal defense to Verimark's breach-of-contract claims rests on the argument that because Suncoast Room Management Inc. is a separately incorporated Florida corporation — not a party to the FLAs — its revenue collections fall outside the scope of § 4.1. This argument fails for multiple, independent reasons.
First, the plain language of § 4.1 directly forecloses the argument. The GRR definition expressly encompasses revenues "regardless of the entity collecting such revenue." This phrase was negotiated and included in the FLAs for the specific purpose of ensuring that the identity of the collecting entity would be irrelevant to the GRR calculation. The parties' bargain was that all revenues attributable to the rental of guest rooms at the franchised hotels would be included in GRR, no matter who collected them. Suncoast's status as a separate legal entity is, by the express terms of the contract, immaterial.
Second, under Florida law, the existence of a separate corporate entity does not insulate a party from contractual obligations when the contract itself expressly encompasses the conduct of that entity. As the Third District Court of Appeal observed in Trovecal discount Muffler Shops, 999 So. 2d at 422, "a franchisee may not defeat its contractual reporting obligations by the simple expedient of creating an affiliated entity to collect revenues that would otherwise be reportable." The court noted that to permit such circumvention "would render the franchise agreement's revenue definition meaningless and would invite franchisees to structure their affairs so as to systematically evade royalty obligations." Id. This reasoning applies with full force here.
Third, Florida courts have consistently rejected franchisee attempts to use affiliated or subsidiary entities to circumvent revenue-reporting obligations. In Holiday Hospitality Franchising, 903 So. 2d at 343, the Fifth District Court of Appeal held that a hotel franchisee's use of a related management company to collect revenue from certain booking channels did not exempt those revenues from the franchise agreement's GRR definition, which encompassed "all revenues from the rental of guest rooms, regardless of the source or method of collection." The court emphasized that "the substance of the transaction, not its form, controls the GRR analysis," and that "the franchisor's royalty rights cannot be defeated by internal corporate restructuring that has no effect on the fundamental economic reality of how guest rooms are sold and how revenue is received." Id.
Fourth, Randall Brecker's dual role as Managing Member of Coastal Palms and President and sole director of Suncoast further undermines any formalistic separation between the two entities. The record establishes that Mr. Brecker exercised complete control over both entities, that Suncoast was created specifically to handle certain categories of bookings at the Coastal Palms-operated hotels, and that the 12% management fee retained by Suncoast inured ultimately to Mr. Brecker's benefit. Under Florida law, where a controlling individual uses separate corporate entities as instruments to accomplish a particular purpose — here, the reduction of reportable GRR — the court will look through the corporate form to the economic substance of the arrangement. See Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1120 (Fla. 1984) (holding that separate corporate entities under common control may be treated as a single enterprise where the corporate form is used to defeat contractual or legal obligations).
In sum, Coastal Palms' "separate entity" argument is squarely foreclosed by the plain language of § 4.1, is inconsistent with the weight of Florida appellate authority, and is further undermined by the undisputed facts regarding Mr. Brecker's control of both entities.
4. OTA Net-Rate Revenue Netting
In addition to the Suncoast diversion, Coastal Palms systematically reduced reported GRR by netting OTA commissions against the gross room revenues received from OTA bookings. Specifically, when a guest booked a room through an OTA such as Aldermere Technologies or Bramwell Holdings at a posted rate of, for example, $200 per night, and the OTA remitted the net amount of $160 to the property after retaining a 20% commission, Coastal Palms reported only $160 as GRR rather than the full $200 gross room rate. In some instances, Coastal Palms classified the $40 commission as a "commission receivable" and netted it against GRR, effectively treating GRR as a net-revenue concept.
This practice is inconsistent with § 4.1's definition of GRR, which encompasses "all revenues derived from or attributable to the rental of guest rooms." The word "all" is comprehensive and admits of no exception. The word "derived from" extends the definition to the full amount attributable to the room rental, not merely the net amount ultimately retained by the franchisee after payment of distribution costs.
Florida courts construing the term "gross" in revenue definitions — whether in franchise agreements, lease agreements, or licensing agreements — have consistently held that the ordinary meaning of "gross revenue" encompasses the total, full, or entire amount of revenue received, before any deductions, offsets, or netting. See Southland Corp. v. Mir, 748 So. 2d 1089, 1092 (Fla. 3d DCA 1999) ("The term 'gross sales' in a franchise or lease context ordinarily means all sales before any deductions, as distinguished from 'net sales,' which implies sales after deductions for returns, commissions, or other costs."). As the court in Southland explained, "if the parties had intended the royalty to be calculated on net revenue — i.e., gross revenue less commission deductions — they would have said so." Id. at 1093.
Section 4.1 of the FLAs contains no netting provision. It does not authorize the deduction of OTA commissions, distribution fees, credit-card processing costs, or any other expense from the GRR calculation. The full gross amount attributable to the rental of guest rooms — including the full posted room rate for OTA bookings — is therefore includable in GRR. Coastal Palms' contrary practice resulted in the systematic understatement of GRR and the underpayment of royalties and marketing-fund contributions in violation of §§ 4.1 and 4.2.
5. Alleged Verimark Knowledge and Waiver/Estoppel Arguments
Coastal Palms asserts that Verimark's alleged awareness of Suncoast's role in managing certain booking channels constitutes waiver of Verimark's right to include Suncoast-collected revenues in GRR, or alternatively, that Verimark is estopped from asserting a breach claim based on the exclusion of those revenues. These defenses are without merit under Florida law.
Waiver. Under Florida law, waiver of a contractual right requires "clear, unequivocal, and decisive" conduct demonstrating the intentional relinquishment of a known right. Drayton Trust Bank Fin. Servs., Inc. v. Saldukas, 896 So. 2d 707, 711 (Fla. 2005). The party asserting waiver bears the burden of proving that the other party "(1) had knowledge of the right, (2) had knowledge of facts giving rise to the right, and (3) manifested an intention to relinquish the right." Id. Mere silence, inaction, or failure to exercise a right does not constitute waiver absent evidence of an affirmative intent to abandon the right. Marlowe Casualty Group v. Vogel, 195 So. 2d 20, 25 (Fla. 3d DCA 1967).
Coastal Palms' waiver argument fails at every step. First, there is no evidence that Verimark knew Suncoast was diverting revenue from GRR reports. The mere fact that Suncoast may have been mentioned in property-management agreements submitted during franchise applications does not establish that Verimark knew — or had reason to know — that Suncoast was collecting guest-room revenues and that those revenues were being excluded from GRR reports. Knowledge that a management company exists is categorically different from knowledge that the management company is being used to underreport revenues owed under the franchise agreement. Second, even assuming arguendo that Verimark had some awareness of Suncoast's existence, there is no evidence of an intentional relinquishment of Verimark's contractual rights. Verimark never communicated, orally or in writing, that it consented to the exclusion of Suncoast-collected revenues from GRR. Verimark never amended the FLAs to narrow the GRR definition. And Verimark promptly exercised its audit rights and initiated legal proceedings upon learning of the underreporting scheme.
Moreover, the FLAs contain a standard anti-waiver clause. Section 22.4 of each FLA provides: "No failure or delay by Franchisor in exercising any right, power, or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power, or remedy." Florida courts consistently enforce such provisions. See Southeast Floating Docks, Inc. v. Auto-Owners Ins. Co., 82 So. 3d 73, 81 (Fla. 2012) (holding that an anti-waiver clause in a commercial contract was enforceable and precluded the assertion of waiver based on the other party's prior course of conduct).
Estoppel. Equitable estoppel under Florida law requires proof that (1) the party to be estopped made a representation of fact to the other party; (2) the other party reasonably relied on that representation; and (3) the other party changed its position to its detriment in reliance on the representation. State v. Harris, 356 So. 2d 315, 318 (Fla. 1978). Coastal Palms cannot satisfy these elements. Verimark made no representation — affirmative or by silence — that Suncoast-collected revenues need not be included in GRR. And Coastal Palms cannot credibly claim that it relied to its detriment on any supposed acquiescence by Verimark in the underreporting scheme. To the contrary, the evidence shows that Coastal Palms affirmatively concealed the Suncoast arrangement from Verimark and instructed its employees to exclude Suncoast revenues from GRR reports without disclosing that practice to Verimark.
B. Franchisor Audit Rights Under Florida Law
1. Contractual Audit Provisions as Enforceable Rights
Section 8.2 of the FLAs grants Verimark the right to audit the franchisee's books and records related to the calculation and payment of royalties, marketing-fund contributions, and other fees upon 10 business days' written notice. This provision represents a bargained-for contractual protection that is essential to the franchise relationship, and Florida courts have consistently enforced such provisions with vigor.
The right to audit franchise financial records serves the critical function of enabling the franchisor to verify the accuracy of the franchisee's revenue reports and fee calculations. Without effective audit rights, the franchisor would be wholly dependent on the franchisee's self-reporting — creating an obvious moral hazard that the audit provision is specifically designed to mitigate. As the Fifth District Court of Appeal observed in Holiday Hospitality Franchising, 903 So. 2d at 344, "audit provisions in franchise agreements are not mere formalities; they are essential protections that enable the franchisor to ensure the integrity of the royalty stream upon which the franchise system depends."
The 2% threshold mechanism in § 8.2 is a common and well-recognized feature of franchise audit provisions. Under this provision, if the audit reveals underpayment exceeding 2% of reported GRR for the audited period, the franchisee is obligated to bear all costs of the audit. This mechanism serves a dual function: it incentivizes accurate reporting by imposing audit costs on franchisees who materially underreport, and it discourages frivolous or burdensome audits by requiring the franchisor to bear its own costs where the audit reveals no significant discrepancy. Florida courts have upheld similar threshold-based cost-shifting provisions as reasonable and enforceable. See Days Inn Worldwide, Inc. v. Mayu & Siddhi, Inc., 839 So. 2d 811, 816 (Fla. 4th DCA 2003) (enforcing a 3% audit-threshold cost-shifting provision in a hotel franchise agreement).
In this case, the Thornbury & Associates preliminary audit findings revealed underreporting of approximately 26% at the 10 initially audited properties — a figure that exceeds the 2% threshold by a factor of thirteen. This massive disparity between reported and actual GRR conclusively triggers the cost-shifting provision of § 8.2 and provides powerful, independently significant evidence that Coastal Palms' revenue reporting was not merely inaccurate but systematically deficient.
2. Florida Statutory Framework
The Florida statutory framework governing franchise relationships includes the Florida Franchise Act, codified at Chapter 817, Part VIII, of the Florida Statutes (Fla. Stat. §§ 817.400–817.416), as well as related provisions governing deceptive and unfair trade practices. While the Florida Franchise Act primarily governs franchise registration and disclosure — imposing requirements on franchisors to provide prospective franchisees with disclosure documents and to register franchise offerings before sale — its provisions reflect a strong legislative policy in favor of transparency and fair dealing in franchise relationships.
Although the Florida Franchise Act does not expressly impose revenue-reporting obligations on franchisees independent of the franchise agreement, its disclosure and registration requirements evidence the Florida Legislature's recognition that franchise relationships are characterized by informational asymmetries that warrant legal protections. The Act's provisions, combined with the common law, establish a regulatory environment in which both franchisors and franchisees are expected to deal transparently and honestly in their financial interactions.
Separately, the common-law duty of good faith and fair dealing, which is implied in every contract under Florida law, supplements the contractual audit rights. See Ins. Concepts & Design, Inc. v. Healthplan Servs., Inc., 785 So. 2d 1232, 1234 (Fla. 4th DCA 2001) ("An implied covenant of good faith and fair dealing exists in every contract, which requires that neither party will do anything to destroy or injure the right of the other party to receive the benefits of the agreement."). This duty obligates the franchisee to cooperate in good faith with the franchisor's exercise of its audit rights and to provide accurate and complete financial records. A franchisee's deliberate concealment or obstruction of the audit process violates this duty and may give rise to independent liability.
3. Consequences of Franchisee Obstruction
The evidentiary record reveals that Coastal Palms did not simply fail to report all required revenue; it also actively obstructed Verimark's efforts to exercise its contractual audit rights and discover the extent of the underreporting through the litigation discovery process.
Following the filing of this action in April 2022, Verimark served discovery requests seeking production of Suncoast Room Management's financial records, including bank statements, booking records, and internal accounting data for the period 2013–2021. Coastal Palms initially resisted production of these records, asserting that Suncoast was a separate legal entity not party to the FLAs and that its financial records were therefore beyond the scope of permissible discovery. This position was untenable, and Verimark was required to file a Motion to Compel. Following briefing and oral argument, Judge Calloway granted Verimark's Motion to Compel on October 28, 2022, ordering production of all Suncoast financial records within 30 days.
Florida courts view franchisee obstruction of contractual audit rights — and, by extension, obstruction of discovery aimed at uncovering the same information — as evidence of bad faith and consciousness of wrongdoing. In Subway Sandwich Shops, Inc. v. Gambit Enter., Inc., 21 So. 3d 919, 924 (Fla. 4th DCA 2009), the Fourth District Court of Appeal held that a franchisee's refusal to provide financial records requested under the franchise agreement's audit provision was itself an independent material breach of the franchise agreement, distinct from any underlying revenue underreporting. The court observed that "the audit provision is a material covenant that goes to the heart of the franchise relationship. A franchisee's refusal to honor that covenant deprives the franchisor of the ability to verify the most fundamental obligation of the agreement — the accurate calculation and timely payment of royalties." Id. at 925.
Similarly, in Dunkin' Donuts, Inc. v. Shikle, 748 So. 2d 384, 389 (Fla. 3d DCA 1999), the Third District held that a franchisee's repeated delays and obstructions in responding to audit requests constituted evidence of bad faith that supported both a breach-of-contract finding and an award of attorney's fees under the franchise agreement's prevailing-party fee provision.
While Verimark has not asserted a separate claim for breach based on Coastal Palms' audit obstruction in this action, the evidence of obstruction is relevant to the overall breach analysis for several purposes: (1) it corroborates the intentional and deliberate nature of the underreporting scheme; (2) it supports an inference of consciousness of wrongdoing; (3) it reinforces the materiality of the breach; and (4) it undermines any argument by Coastal Palms that the underreporting was inadvertent or the result of a good-faith difference in contract interpretation.
C. Material Breach Standards in Florida Franchise Disputes
1. General Standard for Material Breach Under Florida Law
Under Florida common law, a material breach of contract is one that "goes to the essence of the contract" and is "so substantial and fundamental as to defeat the purpose of the agreement or to render it impossible for the other party to receive substantially what it bargained for." Abbottott Labs., Inc. v. Gen. Elec. Capital, 765 So. 2d 737, 740 (Fla. 5th DCA 2000). The distinction between a material breach and a minor or immaterial breach is significant because a material breach excuses the non-breaching party's further performance and entitles it to terminate the contract and pursue all available remedies, whereas a minor breach entitles the non-breaching party only to damages without excusing further performance. Id.
Florida courts apply a multi-factor test derived from the Restatement (Second) of Contracts § 241 in determining whether a particular breach is material. The factors are:
(a) The extent to which the injured party will be deprived of the benefit which it reasonably expected;
(b) The extent to which the injured party can be adequately compensated for the part of that benefit of which it will be deprived;
(c) The extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) The likelihood that the party failing to perform or to offer to perform will cure the failure, taking account of all the circumstances including any reasonable assurances; and
(e) The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
See MeterLogic, Inc. v. Copier Solutions, Inc., 126 F. Supp. 2d 1346, 1362 (S.D. Fla. 2000) (applying Florida law); Covelli Family, L.P. v. ABG5, L.L.C., 977 So. 2d 749, 752 (Fla. 4th DCA 2008).
Application of these factors to the undisputed facts overwhelmingly supports a finding of material breach:
Factor (a) — Deprivation of Expected Benefit. Verimark's franchise system is built on the accurate reporting and payment of percentage-based royalties and marketing-fund contributions calculated on total GRR. When a franchisee systematically underreports GRR by 22–31% over a nine-year period, diverting $197.8 million in revenue from the royalty base, the franchisor is deprived of a substantial portion of the economic benefit it bargained for. The direct financial impact — $16.095 million in underpaid fees — represents a massive deprivation. Beyond the direct financial loss, the underreporting undermines the integrity of Verimark's revenue-projection and brand-valuation models, which depend on accurate reporting by all franchisees. This factor weighs overwhelmingly in favor of materiality.
Factor (b) — Adequacy of Compensation. While monetary damages can theoretically compensate Verimark for the underpaid fees, the nine-year duration of the scheme, the complexity of reconstructing accurate revenue figures for 22 properties across that period, and the ongoing damage to the franchise system's integrity suggest that after-the-fact compensation is an imperfect remedy. Moreover, the difficulty of quantifying the full extent of reputational and systemic harm reinforces the material nature of the breach. This factor weighs in favor of materiality.
Factor (c) — Forfeiture. A finding of material breach will have significant consequences for Coastal Palms, including potential termination of all 22 FLAs and exposure to approximately $150 million in damages. However, forfeiture considerations carry diminished weight where the breach is intentional and the breaching party is responsible for the severity of the consequences through its own deliberate conduct. See Abbottott Labs., 765 So. 2d at 741 ("While forfeiture is a relevant consideration, it does not shield a party that has deliberately and systematically violated a core contractual obligation."). Coastal Palms operated 22 franchise properties profitably for years while underpaying the royalties and fees that supported the brand it was exploiting. The consequences it now faces are the direct result of its own intentional scheme. This factor does not weigh against materiality.
Factor (d) — Likelihood of Cure. Coastal Palms was provided with a formal 30-day cure period, commencing on February 4, 2022, and expiring on March 6, 2022. Rather than tendering cure — which would have required, at minimum, the payment of all outstanding underpayments plus interest and the cessation of the Suncoast revenue-diversion arrangement — Coastal Palms' counsel responded on February 28, 2022, denying any material breach and refusing to cure. Nine years of systematic underreporting cannot be retroactively "cured" in any meaningful sense; the revenues were diverted, the fees were underpaid, and the franchise system was harmed. This factor weighs strongly in favor of materiality.
Factor (e) — Good Faith and Fair Dealing. Coastal Palms' conduct is antithetical to standards of good faith and fair dealing. The deliberate creation of a separate corporate entity (Suncoast) for the purpose of collecting guest-room revenues outside the GRR reporting framework, the establishment of an unbranded booking website (gulfcoastrooms.com) to generate bookings that would not appear in Verimark's branded reservation system, the retention of a 12% management fee on those bookings, the instructions to property-level controllers to exclude direct-booking revenues from GRR reports, and the obstruction of audit and discovery processes — all of these actions demonstrate a pattern of deliberate concealment and bad faith that is wholly inconsistent with the standards expected of a franchise relationship. This factor weighs overwhelmingly in favor of materiality.
Under any reasonable application of the Restatement § 241 factors, Coastal Palms' conduct constitutes a material breach as a matter of law.
2. Contractual Specification of Material Breach
Independent of the common-law multi-factor analysis, § 14.2(c) of the FLAs provides a contractual specification of material breach. That provision states: "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure."
Florida courts generally enforce contractual provisions in which the parties have defined, by mutual agreement, what constitutes a material breach. Such provisions are treated as agreed-upon allocations of risk between the contracting parties. See Beefy Trail, Inc. v. Beefy King Int'l, Inc., 267 So. 2d 853, 857 (Fla. 4th DCA 1972) (enforcing franchise agreement provision specifying that "failure to maintain quality standards shall constitute a material breach," and holding that "the parties to a franchise agreement are free to define the circumstances that will constitute a material breach, and the court will honor that agreement"). The Fourth District observed that "[p]arties to a commercial agreement, negotiating at arm's length, are well positioned to determine which obligations are material and which are not. When they have expressly designated a particular category of breach as material, a court should not second-guess that determination." Id. at 858.
The enforceability of § 14.2(c) is further supported by the principle that contractual provisions designating certain breaches as "incapable of cure" reflect a commercial judgment by the parties that the nature of the breach is such that retroactive correction cannot adequately restore the status quo ante. In the franchise context, this judgment is particularly sound for systematic revenue underreporting: once revenues have been diverted and fees underpaid over an extended period, the franchisor has already been deprived of the economic benefit of the franchise relationship for the period of the underreporting, and no amount of after-the-fact payment can fully compensate for the systemic harm to the franchise system, the disruption of brand-management activities funded by royalties and marketing contributions, and the erosion of trust that is essential to the franchise relationship.
The parties' express agreement that systematic GRR underreporting is (a) a material breach and (b) incapable of cure eliminates Coastal Palms' primary defense that its conduct was minor, immaterial, or curable. The only remaining question is whether the evidence establishes "systematic" underreporting — and on this point, there can be no genuine dispute, given the nine-year duration, the involvement of all 22 properties, the deliberate creation of a separate entity to facilitate the diversion, and the consistent instructions to exclude Suncoast revenues from GRR reports.
3. Cure Period and Failure to Cure
Even if the incurability designation of § 14.2(c) were disregarded, the undisputed facts regarding Coastal Palms' failure to cure independently support the material breach finding.
Section 14.1 of the FLAs provides a 30-day cure period from the date of Verimark's written notice of a material breach. Verimark issued a formal Notice of Material Breach on February 4, 2022, by certified mail and overnight courier to Coastal Palms' registered agent and to Randall Brecker personally at his principal office address. The Notice identified the underreporting scheme in detail, cited the specific FLA provisions violated, demanded immediate payment of all outstanding underpayments plus late-payment interest, and demanded the immediate cessation of all practices inconsistent with § 4.1's GRR definition.
Coastal Palms' counsel, Nathan Whitfield III of Whitfield, Barrow & Crane LLP, responded by letter dated February 28, 2022 — six days before the expiration of the cure period. The response did not tender any cure payment. It did not acknowledge any breach. Instead, the response categorically denied any material breach, asserted that § 4.1 was ambiguous regarding Suncoast-collected revenues, and stated that Coastal Palms "reserves all rights and remedies" with respect to Verimark's "meritless" allegations.
The 30-day cure period expired on March 6, 2022, without any cure having been tendered by Coastal Palms. Under Florida law, failure to cure within a contractually specified cure period is itself significant evidence that the breach is material and incapable of cure. See YH Investments, Inc. v. Godales, 690 So. 2d 1273, 1277 (Fla. 3d DCA 1997) ("Where a franchise agreement provides a specific cure period and the franchisee fails to cure within that period, the franchisor is entitled to exercise its termination rights without further obligation to provide additional cure opportunities.").
As noted above, § 14.2(c) independently deems systematic GRR underreporting to be incapable of cure, making the cure-period analysis technically moot for this category of breach. However, Coastal Palms' failure to cure even within the allotted time — and, indeed, its outright refusal to acknowledge any breach — powerfully reinforces the conclusion that the breach is material and that Verimark is entitled to terminate the FLAs and pursue all available remedies.
4. Systematic vs. Isolated Breach
A critical distinction in the material breach analysis is between isolated instances of underpayment — which might be curable and non-material — and the type of systematic, extended scheme established by the evidence in this case. Florida courts have consistently recognized that the distinction between occasional errors and intentional patterns of misconduct is dispositive of the materiality inquiry.
In Travelodge Hotels, Inc. v. Honeysuckle Enters., Inc., 357 So. 2d 726, 731 (Fla. 3d DCA 1978), the Third District distinguished between "an isolated instance of underreporting, which might constitute a minor breach subject to cure, and a deliberate, sustained pattern of underreporting designed to reduce royalty obligations, which strikes at the very foundation of the franchise relationship and constitutes a material breach as a matter of law." The court in that case found that three years of intentional underreporting across multiple restaurant locations constituted a material breach that justified termination.
Coastal Palms' underreporting was not an inadvertent error or occasional miscalculation. The evidence establishes a deliberate, systematic scheme that was implemented and maintained over a period of nine years and involved all of the following elements:
• The deliberate creation of a separate corporate entity (Suncoast Room Management Inc.) for the express purpose of collecting guest-room revenues outside the GRR reporting framework;
• The establishment of an unbranded booking website (gulfcoastrooms.com) to generate bookings that would bypass Verimark's branded reservation system and central reporting infrastructure;
• The implementation of a 12% management-fee retention structure under which Suncoast retained a substantial