MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Yuki Nakamura, Lead Associate, Litigation (General)
FROM: Carlos Espinoza, Working Associate, Litigation (General)
DATE: August 25, 2023
RE: Enforceability of FLA § 15.3 Liquidated Damages Provision Under Florida Law — Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006 (Cir. Ct. 17th Jud. Cir., Broward Cty., Fla.)
CLIENT: Verimark Hospitality Group Inc.
MATTER: Calderwood & Harkness LLP Matter No. 1021-00006
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 Priya Anand, Responsible Partner, in anticipation of the dispositive motion strategy being formulated for Counts I through III and Count VIII (Declaratory Judgment — FLA Termination) of Verimark's operative Second Amended Complaint.
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 determined by Verimark's audit. Applied across all 22 franchised properties using corrected GRR figures derived from the forensic analysis performed by Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC, the aggregate liquidated damages total approximately $105.5 million.
This figure constitutes the single largest component of Verimark's approximately $150 million total claimed damages. The remaining components consist of $16.095 million in direct underpayments of franchise fees (royalties, marketing-fund contributions, and technology fees), and $28.4 million in contractual late-payment interest computed under FLA Section 4.6. Together, these three damage categories represent the full scope of Verimark's economic claims against Coastal Palms arising from the systematic underreporting scheme orchestrated through the Suncoast Room Management Inc. intermediary.
The enforceability of the § 15.3 liquidated-damages provision is thus the pivotal question for Verimark's overall damages posture. If the provision is upheld, Verimark's total provable damages approach $150 million and the settlement leverage is substantial. If the provision is struck as an unenforceable penalty, Verimark's readily quantifiable damages drop to approximately $44.5 million, and any claim for lost future royalties would need to be proved separately through expert testimony — a more uncertain and expensive undertaking.
This memorandum proceeds as follows. Part II sets forth the factual background relevant to the liquidated-damages analysis, including the structure of the FLAs, the fee provisions, the full text and application of Section 15.3, the revenue-diversion scheme giving rise to the material breach, and Coastal Palms' anticipated defenses. Part III surveys Florida's legal framework for evaluating liquidated-damages provisions, including the common-law penalty doctrine, the relevant public policy considerations, and the analogy to Florida Statutes Section 672.718 (Florida's enactment of UCC Article 2). Part IV applies the two-prong reasonableness test to the facts of this case. Part V examines the penalty doctrine in greater detail, identifying the factors that favor enforcement and the arguments Coastal Palms is likely to raise. Part VI addresses the implications of the Court's February 9, 2024 partial summary judgment order on the liquidated-damages analysis. Part VII discusses the interaction between the liquidated-damages claim and the other components of Verimark's damages model. Part VIII provides strategic recommendations for the summary judgment and trial phases, as well as settlement implications. Part IX states my overall conclusion and risk assessment.
Based on the analysis set forth herein, it is my conclusion that the § 15.3 liquidated-damages provision is more likely than not enforceable under Florida law, though the large aggregate dollar amount presents a litigation risk that warrants careful management through both briefing and trial strategy.
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 agreement governing a specific hotel property, though the agreements share substantially identical terms and were executed using Verimark's standard-form franchise documentation, with negotiated modifications reflected in property-specific addenda.
Each FLA carries a 20-year initial term measured from the date of execution. All 22 FLAs are governed by Florida law pursuant to Section 22.1 (Choice of Law) and contain a mandatory venue provision designating Broward County, Florida, as the exclusive forum for any litigation arising under the agreement. The FLAs are signed on behalf of Coastal Palms by its managing member, Trevor Sands, and on behalf of Verimark by various authorized officers of the company.
The 22 franchised properties are divided between two Verimark brand tiers: 18 properties operate under the "Verimark Suites" brand, and 4 properties operate under the "Verimark Select" brand. The properties are located across Florida and Georgia, with the majority concentrated along the Gulf Coast and in the greater Orlando market. Together, the 22 properties comprise approximately 3,740 total guest rooms. The portfolio represents a significant franchise relationship for both parties and one of the largest single-franchisee portfolios within Verimark's domestic franchise system.
B. Key Fee Provisions
The FLAs impose several recurring fee obligations on the franchisee, all of which are calculated by reference to Gross Room Revenue. The key fee provisions are as follows:
Royalty Fee (§ 4.1). The franchisee is obligated to pay Verimark a royalty equal to 5% of Gross Room Revenue for each reporting period. GRR is defined in Section 1.12 of the FLAs 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 notable for its breadth, particularly the language "regardless of the entity collecting such revenue," which is directly relevant to the revenue-diversion scheme through Suncoast Room Management Inc.
Marketing-Fund Contribution (§ 4.2). The franchisee is obligated to contribute 2.5% of Gross Room Revenue to Verimark's system-wide marketing fund. These contributions support national and regional advertising, digital marketing, loyalty program administration, and brand promotion activities that benefit all franchisees within the Verimark system.
Technology Fee (§ 4.3). The franchisee pays a technology fee of $12.50 per available room per month, subject to annual CPI adjustment with a cap of 3% per year. This fee supports the proprietary reservation system, property management system interface, revenue management tools, and guest-facing digital platforms operated by Verimark on behalf of its franchise system.
Late-Payment Interest (§ 4.6). Any amounts not paid when due accrue interest at 1.5% per month, compounded monthly. This rate, which equates to an effective annual rate of approximately 19.56%, is within the range recognized as enforceable under Florida law for commercial agreements between sophisticated parties.
C. The Liquidated-Damages Provision (§ 15.3)
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 based on the greater of (a) the Gross Room Revenue as reported by Franchisee for such period, or (b) the Gross Room Revenue as determined by Franchisor's audit pursuant to Section 8.2. The Parties acknowledge and agree that (i) the actual damages Franchisor would sustain as a result of early termination of this Agreement are difficult to ascertain with certainty at the time of execution of this Agreement; (ii) the foregoing formula represents a reasonable estimate of such damages, agreed upon at arm's length and after consultation with their respective advisors; and (iii) the amount payable hereunder is intended to compensate Franchisor and is not intended to penalize Franchisee.
Several features of this provision merit emphasis for purposes of the enforceability analysis.
First, the provision explicitly characterizes the payment as "liquidated damages and not as a penalty." While such labeling is not dispositive under Florida law, it is evidence of the parties' intent and is given weight by courts as part of the overall analysis.
Second, the provision includes a self-correcting mechanism for GRR calculation: the liquidated damages are computed using the "greater of" reported GRR or audited GRR. This mechanism is directly relevant in this case, where the breach consists of systematic underreporting of GRR. The provision ensures that the franchisee cannot minimize its liquidated-damages exposure through the very conduct (underreporting) that constitutes the material breach.
Third, the provision includes express recitals acknowledging that actual damages are "difficult to ascertain," that the formula represents a "reasonable estimate," and that it was "agreed upon at arm's length and after consultation with their respective advisors." While these recitals are not conclusive, they carry evidentiary weight and create a record of the parties' mutual understanding at the time of contracting.
Application to the present case. The corrected trailing-twelve-month royalties (5% of corrected GRR) for all 22 properties aggregate to approximately $7.28 million on an annual basis. A simple 3× multiplier of this aggregate would yield approximately $21.84 million. However, the actual liquidated-damages figure is substantially higher — approximately $105.5 million — because Section 15.3 applies independently to each FLA and each property. When the 3× formula is applied on a per-property basis using individual property corrected GRR (as the provision requires), the total reflects the variance in revenue performance across the 22-property portfolio and the compounding effect of the per-property calculation methodology.
The $105.5 million figure was derived by Dr. Kettlewell's forensic team by applying Section 15.3 individually to each of the 22 FLAs using corrected trailing-twelve-month GRR for each property. The corrected GRR reflects the forensic finding that Coastal Palms underreported GRR by between 22% and 31%, varying by property and year, through the diversion of direct-booking revenues to Suncoast Room Management Inc. The use of corrected GRR is consistent with the FLA's directive that liquidated damages be calculated using GRR "as determined by Franchisor's audit" where that figure exceeds reported GRR.
D. The Material Breach and Termination Provisions
The FLAs contain a detailed breach-and-cure framework in Article 14 that governs the circumstances under which Verimark may terminate a franchise relationship for cause.
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 constituted systematic underreporting of GRR over a period spanning at least nine years (2013–2021).
Verimark issued a formal Notice of Material Breach to Coastal Palms on February 4, 2022, detailing the Suncoast revenue diversion and the resulting underreporting of GRR. The notice was sent to Coastal Palms' registered agent and managing member, Trevor Sands, as well as to Coastal Palms' outside counsel at Whitfield, Barrow & Crane LLP (attention: Nathan Whitfield III). Despite invocation of Section 14.2(c) (no cure available), Verimark also elected to afford the standard 30-day cure period as a precautionary measure. The 30-day cure period expired on March 6, 2022. No cure was tendered. Instead, Coastal Palms' counsel responded by letter dated February 28, 2022, denying that any material breach had occurred and asserting that the GRR definition in Section 4.1 did not encompass revenues collected by a "separate management entity" such as Suncoast.
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 approximately 26% of GRR for the top 10 properties during the 2019–2021 period — an underreporting rate that exceeds the 2% threshold by an order of magnitude and underscores the systematic nature of the diversion.
E. The Revenue Diversion Scheme
The factual predicate for Verimark's termination-for-cause determination — and, consequently, for the triggering of the § 15.3 liquidated-damages provision — is the revenue-diversion scheme conducted through Suncoast Room Management Inc.
The scheme operated as follows. No later than January 2013, Coastal Palms established Suncoast Room Management Inc. ("Suncoast"), a Florida corporation whose sole member and manager is Trevor Sands, the same individual who serves as managing member of Coastal Palms. Suncoast was interposed as a management intermediary between certain revenue channels and the property-level operating entities. Specifically, Suncoast collected revenues from the following booking channels: walk-in guests, corporate-direct contract bookings, and reservations placed through gulfcoastrooms.com, a website owned and operated by Suncoast that marketed the franchised properties outside of Verimark's branded booking platforms.
Suncoast retained a 12% management fee from the revenues it collected before remitting the balance to the property-level operating entities — Gulf Breeze Hospitality LLC (for the Florida properties) and Savannah Lodging Partners LLC (for the Georgia properties). Critically, neither the gross revenues collected by Suncoast nor the 12% management fee retained by Suncoast was included in the GRR figures reported by Coastal Palms to Verimark in its monthly royalty reports. This resulted in a systematic and sustained underreporting of GRR across all 22 franchised properties.
Over the 2013–2021 period, the cumulative underreported GRR is estimated at $197.8 million, based on Dr. Kettlewell's forensic reconstruction of Suncoast's financial records, bank statements, property management system data, and third-party booking records. For Fiscal Year 2021 alone, Coastal Palms reported GRR of $112.4 million, compared to an estimated true GRR of $145.6 million — a gap of $33.2 million, representing approximately 23% underreporting for that year.
The cumulative direct underpayments attributable to the revenue diversion total $16.095 million, broken down as follows: $9.89 million in unpaid royalties (5% of $197.8 million), $4.945 million in unpaid marketing-fund contributions (2.5% of $197.8 million), and $1.26 million in underpaid technology fees (reflecting the undercount of available rooms attributable to certain properties that were partially or wholly managed outside the reported portfolio).
F. Coastal Palms' Anticipated Defenses on Liquidated Damages
Based on discovery responses, expert reports, and Coastal Palms' briefing to date, the defense is expected to challenge the § 15.3 liquidated-damages provision on several grounds.
Penalty defense. Coastal Palms will argue that the $105.5 million aggregate liquidated-damages figure is grossly disproportionate to Verimark's actual harm and therefore constitutes an unenforceable penalty under Florida law. This argument will likely emphasize the ratio between the $105.5 million liquidated-damages claim and the $6.2 million maximum underpayment figure estimated by Coastal Palms' retained expert, Professor Grant Hargrove of Hargrove Economic Consulting Inc.
Expert testimony on damages. Professor Hargrove has opined that the maximum underpayment by Coastal Palms was $6.2 million, not $16.095 million. His opinion rests on a narrower construction of the GRR definition that excludes revenues collected by Suncoast on the theory that Suncoast was a "separate entity" and that its collections were not "revenues derived from or attributable to the rental of guest rooms at the Hotel" within the meaning of Section 1.12. As discussed in Part VI below, the Court has already rejected this narrower construction on summary judgment, which significantly undermines Professor Hargrove's opinion.
GRR ambiguity defense. Coastal Palms has maintained throughout this litigation that Section 4.1's GRR definition was ambiguous as to revenues collected by a separate management entity. If this argument were to gain traction, Coastal Palms could contend that the § 15.3 liquidated-damages formula is based on an inflated GRR denominator, resulting in an inflated liquidated-damages figure that exceeds the parties' reasonable expectations at the time of contracting.
Counterclaim offset. Coastal Palms has filed a $12 million counterclaim alleging brand-standard violations by Verimark and over-billing for technology services. Coastal Palms may argue that any liquidated-damages award should be offset by the counterclaim amount, or may cite the counterclaim as evidence that the franchise relationship was deteriorating due to mutual fault, undermining the characterization of Coastal Palms as the sole breaching party.
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 breach, provided that the stipulated amount does not operate as a penalty. This principle reflects both the libertarian tradition of Florida contract law — which places a high value on the ability of sophisticated parties to allocate risk through voluntary agreement — and the practical recognition that predetermining damages can serve valuable commercial functions, including reducing litigation costs, providing certainty of outcome, and facilitating rational risk assessment at the time of contracting.
The burden of proving that a liquidated-damages clause constitutes an unenforceable penalty falls squarely on the party challenging the provision. This allocation of the burden of proof is significant in this case because it means that Coastal Palms, as the party seeking to invalidate § 15.3, bears the burden of demonstrating that the provision fails the two-prong reasonableness test. Verimark need not affirmatively prove that the provision is enforceable; rather, it need only show that the provision satisfies the basic prerequisites and rebut Coastal Palms' specific challenges.
Florida follows a well-established two-prong test for evaluating liquidated-damages provisions. Under this test, a liquidated-damages clause is enforceable if: (1) the damages contemplated by the breach were uncertain in nature or difficult to ascertain at the time of contracting; and (2) the amount stipulated was a reasonable estimate of the damages that would result from the breach. Both prongs must be satisfied, though courts have applied the test with varying degrees of rigor depending on the sophistication of the parties, the commercial context, and the nature of the transaction. The two-prong test is discussed in detail in Part IV below.
B. Public Policy Considerations
Florida courts have articulated a strong public policy favoring the enforcement of bargained-for terms in commercial contracts between sophisticated parties. This policy is particularly robust in the context of arm's-length transactions involving entities that were represented by counsel, had the opportunity to negotiate the terms at issue, and voluntarily agreed to the liquidated-damages formula as part of the overall bargain. Courts have reasoned that sophisticated commercial actors are in the best position to evaluate the risks of their transactions and to negotiate appropriate remedial provisions, and that judicial intervention to rewrite or invalidate such provisions should be reserved for cases of clear overreaching or manifest unreasonableness.
The franchise context is one in which Florida courts have been particularly receptive to liquidated-damages provisions. The inherent difficulty of measuring certain categories of franchise-termination damages — including brand dilution, lost goodwill, disruption to system-wide marketing programs, impact on other franchisees' performance, and the costs of redeploying or re-franchising a terminated location — has led courts to recognize that franchise agreements are paradigmatic situations in which liquidated-damages clauses serve a legitimate compensatory function.
The sophistication of the parties in this case strongly favors enforcement. Verimark is a publicly traded company with $1.42 billion in consolidated revenue and a franchise segment generating $218 million in annual revenue. It is one of the larger hospitality franchise platforms in the United States and has extensive experience negotiating and administering franchise agreements. Coastal Palms, while a private entity, operates a 22-property portfolio generating $145.6 million in corrected annual GRR and is itself a sophisticated commercial enterprise managed by an experienced hotel operator (Trevor Sands) who was represented by counsel throughout the FLA negotiation process. Neither party can credibly claim to have been unsophisticated, uninformed, or disadvantaged in the negotiation of the FLAs or the § 15.3 provision.
C. Statutory Framework — Fla. Stat. § 672 (UCC Article 2 Analogy)
While the FLAs are franchise agreements for the provision of services and the license of intellectual property — and are therefore not governed by Article 2 of the Uniform Commercial Code — Florida courts have drawn instructive analogies to Florida Statutes Section 672.718, which is Florida's enactment of UCC § 2-718 governing liquidated damages in contracts for the sale of goods. The analogy is not a matter of direct application but rather of persuasive reasoning: Florida courts have looked to the policies and analytical framework of § 672.718 when evaluating liquidated-damages provisions in contexts outside the sale of goods, including commercial services agreements and franchise relationships.
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 damages is void as a penalty."
The analytically significant feature of § 672.718 is its use of the disjunctive standard: reasonableness may be measured against either "anticipated" harm (a prospective analysis, evaluated as of the time of contracting) or "actual" harm (a retrospective analysis, evaluated as of the time of breach or thereafter). This is more favorable to the party seeking to enforce a liquidated-damages provision than the traditional common-law test, which focuses exclusively on the prospective analysis — i.e., whether the stipulated amount was a reasonable estimate of anticipated damages at the time the contract was formed.
The strategic implication for this case is substantial. If the Court is persuaded to adopt the § 672.718 analogy and its disjunctive standard, Verimark gains the advantage of arguing that the $105.5 million in liquidated damages is reasonable when measured against the actual harm caused by Coastal Palms' breach. The actual harm includes not only the $16.095 million in direct underpayments and $28.4 million in contractual late-payment interest, but also the lost royalty stream over the remaining terms of the 22 FLAs. Depending on the assumptions used for revenue growth and discount rates, the present value of the lost royalty stream alone ranges from approximately $80 million to $170 million across the portfolio. On virtually any calculation methodology, the total actual harm substantially exceeds the $105.5 million liquidated-damages claim, which strongly supports a finding of reasonableness under the retrospective standard.
Even if the Court declines to adopt the § 672.718 analogy and applies only the traditional common-law prospective test, the provision remains defensible for the reasons discussed in Part IV. However, the availability of the retrospective analysis provides an important additional basis for enforcement and should be featured prominently in our briefing.
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 existed when the FLAs were executed, not in hindsight.
At the time each FLA was executed — spanning the period from June 15, 2007 through September 3, 2019 — the parties could not predict with precision the actual damages that Verimark would sustain in the event of a material breach resulting in early termination of the franchise relationship. The categories of damages flowing from such a breach are numerous, varied, and inherently resistant to precise ex ante quantification.
The following categories of harm illustrate the difficulty of prospective damage calculation:
(a) Lost future royalty stream. Each FLA carries a 20-year initial term. Upon termination for cause, Verimark loses the right to receive royalty payments (5% of GRR) for the remainder of the term. The magnitude of this loss depends on future room-revenue performance, which is a function of macroeconomic conditions, local market dynamics, competitive positioning, brand strength, seasonal patterns, and numerous other variables that cannot be predicted with certainty at the time of contracting.
(b) Lost marketing-fund contributions. The termination of a franchise relationship also eliminates the 2.5% marketing-fund contribution from the terminated property. These contributions support system-wide brand promotion activities that benefit all franchisees. The loss of marketing-fund revenue from a terminated property reduces the total marketing budget, potentially impairing the effectiveness of system-wide campaigns.
(c) Brand dilution and reputational harm. The termination and de-identification of a franchised property can cause confusion among consumers who associate the property with the Verimark brand. If the property continues to operate under a competing brand or as an independent hotel, former guests may attribute any decline in quality to the Verimark brand. The costs of brand dilution are notoriously difficult to quantify and are a paradigmatic example of damages that justify the use of liquidated-damages provisions.
(d) Costs of redeployment or re-franchising. Following the termination of a franchise relationship, Verimark incurs costs associated with de-identifying the terminated property (ensuring removal of Verimark branding, signage, and proprietary systems) and, potentially, identifying and onboarding a replacement franchisee for the market. These costs vary widely depending on the location, market conditions, and the availability of qualified replacement franchisees.
(e) Administrative disruption to the franchise system. The termination of a significant franchise relationship — particularly one involving 22 properties — causes administrative disruption to the franchise system, including reallocation of franchise support personnel, revision of system-wide performance metrics, and potential renegotiation of system-wide vendor agreements that are priced based on aggregate room counts.
(f) Impact on system-wide performance metrics. Verimark discloses system-wide Average Daily Rate ("ADR") and Revenue Per Available Room ("RevPAR") metrics to investors, securities analysts, and prospective franchisees. The loss of 22 properties and approximately 3,740 rooms from the system affects these metrics and can have downstream effects on franchise sales activity and investor perception.
The FLA itself contains an express recital that actual damages from early termination are "difficult to ascertain with certainty at the time of execution of this Agreement." While such recitals are not dispositive — a court will not enforce a liquidated-damages provision solely because the parties labeled it as such — Florida courts have given weight to such recitals as evidence of the parties' mutual understanding at the time of contracting. The recital reflects the commercial reality that both Verimark and Coastal Palms recognized the difficulty of prospective damage calculation and agreed to the § 15.3 formula as a pragmatic solution.
Application to our facts. The franchise relationships at issue here span up to 20-year terms. At the time of execution, neither party could forecast with certainty the trajectory of room revenues, the pace of brand development in each market, the costs of de-identification and re-franchising, or the magnitude of brand-dilution effects from the loss of a particular property. The difficulty is compounded by the fact that the FLAs were executed over a 12-year period (2007–2019) encompassing a wide range of economic conditions, including the 2008–2009 financial crisis and its aftermath. This strongly supports a finding that Prong One is satisfied.
B. Prong Two: Reasonableness of the Stipulated Amount
The second prong asks whether the stipulated liquidated-damages amount was a "reasonable estimate" of the anticipated harm at the time of contracting, as distinguished from a punitive figure designed to coerce performance or punish breach. This is the prong on which Coastal Palms' challenge will primarily focus, and it warrants careful analysis.
The § 15.3 formula stipulates liquidated damages equal to 3× the trailing-twelve-month royalties for the terminated property. In practical terms, this amount equals 3 years of royalty revenue, or 15% of one year's GRR (since the royalty rate is 5% of GRR, and 5% × 3 = 15%). Several considerations support the reasonableness of this formula.
Comparison to the remaining contract term. Each FLA has a 20-year initial term. Even the earliest FLA (executed June 15, 2007) would not expire until June 2027, meaning that at the time of breach (2022), approximately 5 years of the royalty stream remained. The more recently executed FLAs — including FLAs executed as late as September 3, 2019 — have approximately 16 years of remaining term. In all cases, the 3-year multiplier represents a fraction of the total royalty stream that Verimark loses as a result of early termination. A formula that captures only 3 out of 5–16 remaining years of royalties is inherently conservative and well within the bounds of reasonableness.
Comparison to total franchise fees. The royalty fee (5% of GRR) is only one component of the franchise fees that Verimark loses upon termination. In addition to royalties, Verimark loses the 2.5% marketing-fund contribution and the per-room technology fee. The § 15.3 liquidated-damages formula captures only the royalty component. It does not include any multiplier for the marketing-fund contributions or technology fees. If the formula were designed to capture the full suite of lost franchise fees, the multiplier would need to be significantly higher than 3× to approximate total lost revenue. The formula's limitation to royalties alone further supports its characterization as a conservative estimate rather than a punitive measure.
Industry benchmarking. Liquidated-damages provisions in the hospitality franchise industry commonly employ multipliers ranging from 2× to 5× trailing royalties. The 3× multiplier used in the Verimark FLAs falls squarely within the mainstream of industry practice. While industry custom is not itself dispositive, it is probative of reasonableness: a formula that is consistent with prevailing commercial norms is less likely to be deemed unreasonable or punitive than one that deviates significantly from the market.
Potential vulnerability: aggregate size. The aggregate amount of $105.5 million across all 22 properties is large in absolute terms and is likely to attract judicial attention. Coastal Palms can be expected to emphasize this figure in an effort to invoke a visceral reaction from the Court. However, the aggregate size is a function of the number of contracts at issue and the revenue scale of the franchised portfolio, not a reflection of an unreasonable formula. Florida courts have recognized that the aggregate size of liquidated damages across multiple contracts does not render the per-contract formula unreasonable. Each FLA is an independent contract, and the reasonableness of the liquidated-damages formula must be evaluated on a per-contract, per-property basis.
Per-property analysis. On a per-property basis, the liquidated damages range from approximately $2.1 million (for the smallest property, a 94-room Verimark Suites in Valdosta, Georgia) to approximately $8.7 million (for the largest property, a 312-room Verimark Select in Fort Lauderdale, Florida). These amounts are computed as 3× the corrected trailing-twelve-month royalties for each respective property. When compared to the remaining-term royalty losses for each FLA — which range from approximately $3.5 million (for the earliest FLA with 5 years remaining) to approximately $27 million (for the most recent FLA with 16 years remaining) — the per-property liquidated-damages figures are demonstrably proportionate and, in most cases, conservative.
C. The "Prospective vs. Retrospective" Distinction
As discussed in Part III.C above, Florida law admits of two analytical frameworks for evaluating the reasonableness of liquidated damages: a prospective analysis (focused on the time of contracting) and a retrospective analysis (focused on the time of breach or thereafter). The applicable framework depends on whether the Court applies the traditional common-law test or adopts the Fla. Stat. § 672.718 analogy.
Prospective analysis. Under the traditional common-law test, reasonableness is judged as of the time of contracting. At the time each FLA was executed (2007–2019), 3× annual royalties was a conservative estimate of the damages Verimark would sustain from early termination of a 20-year franchise agreement. The estimate accounts for lost future royalties (5 to 16+ years), lost marketing contributions, lost technology fees, brand dilution, and redeployment costs. A 3-year multiplier applied to only the royalty component significantly underestimates the total anticipated harm, supporting a finding of reasonableness even under the stricter prospective standard.
Retrospective analysis. Under the Fla. Stat. § 672.718 analogy, reasonableness may also be evaluated by reference to the actual harm caused by the breach. In this case, the actual damages include: (i) $16.095 million in direct underpayments of franchise fees; (ii) $28.4 million in compounded late-payment interest on those underpayments; and (iii) the present value of the lost royalty stream for the remaining terms of all 22 FLAs, which, as noted above, ranges from approximately $80 million to $170 million depending on revenue-growth and discount-rate assumptions. On virtually any reasonable calculation methodology, the total actual economic harm to Verimark substantially exceeds the $105.5 million liquidated-damages claim. If the Court adopts the retrospective standard, this comparison strongly favors a finding that the liquidated-damages amount is reasonable and does not constitute a penalty.
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 to ascertain at the time of contracting; (2) the stipulated amount is reasonably related to actual or anticipated harm; and (3) the provision was negotiated at arm's length between informed parties. Conversely, a provision is deemed a penalty — and is therefore void and unenforceable — if it (1) fixes an amount that is grossly disproportionate to any reasonable estimate of harm; (2) is designed to punish the breaching party or coerce performance rather than compensate the non-breaching party for its loss; or (3) bears no rational relationship to the potential loss that could result from the breach.
Florida appellate courts have articulated several important principles in drawing this distinction:
Sophisticated parties are held to their bargains. Courts consistently hold that sophisticated commercial parties who negotiate liquidated-damages provisions at arm's length and with the benefit of counsel are presumed to have understood and accepted the risks associated with the provision. Absent clear evidence of overreaching, unconscionability, or gross disproportionality, courts will enforce the provision as written.
A large absolute dollar amount does not create a penalty. The question is not whether the liquidated-damages amount is large in absolute terms, but whether it is proportionate to the anticipated or actual harm from the breach. A $100 million liquidated-damages provision is not inherently unreasonable if the anticipated harm from the breach is $200 million; conversely, a $50,000 provision may be unreasonable if the maximum conceivable harm is $5,000. The inquiry is one of proportionality, not magnitude.
Courts will not rewrite or reduce liquidated damages. Under Florida law, the penalty inquiry is an all-or-nothing determination. If the liquidated-damages provision is found to be an unenforceable penalty, the entire provision is void, and the non-breaching party must prove its actual damages. Courts do not have the authority to "blue pencil" or judicially reduce the liquidated-damages amount to a level the court deems "reasonable." This all-or-nothing feature is favorable to Verimark if the formula is deemed reasonable, because it means Coastal Palms cannot argue for a reduced liquidated-damages amount as a compromise position. The provision is either enforceable in full or void entirely.
B. Factors Favoring Enforcement in This Case
Applying the foregoing principles to the facts of this case, several factors strongly favor the enforceability of § 15.3:
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 allegation of duress, undue influence, or inequality of bargaining power.
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 evidentiary weight under Florida law.
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 GRR underreporting.
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 enforcement, Coastal Palms will raise several arguments in support of its penalty defense. Each argument is set forth below, together with our anticipated response.
Aggregate size. Coastal Palms will argue that $105.5 million in liquidated damages across 22 properties is facially unreasonable and constitutes a windfall to Verimark. This argument is designed to appeal to the Court's intuition about proportionality by focusing on the aggregate dollar amount rather than the per-contract analysis.
Response: Each FLA is an independent contract, and the reasonableness of the liquidated-damages formula must be evaluated on a per-contract, per-property basis. The aggregate size of the liquidated-damages claim is a function of the number of contracts at issue (22) and the revenue scale of the franchised portfolio ($145.6 million in annual corrected GRR), not a reflection of an unreasonable formula. On a per-property basis, the liquidated damages range from $2.1 million to $8.7 million — amounts that are well within the range of remaining-term royalty losses for each respective FLA. Florida courts have rejected the argument that the aggregate size of liquidated damages across multiple contracts renders a per-contract formula unreasonable.
Relationship to actual underpayments. Coastal Palms will argue that its own expert (Professor Hargrove) estimated maximum underpayment of only $6.2 million, making $105.5 million in liquidated damages "grossly disproportionate" to Verimark's actual harm. This argument attempts to frame the relevant comparator as the amount of the underpayment rather than the damages from franchise termination.
Response: This argument fundamentally mischaracterizes the purpose of the liquidated-damages provision. Section 15.3 does not compensate Verimark for the underpayment of franchise fees — that is the function of the direct underpayment claim (Count I) and the late-payment interest provision (§ 4.6). Rather, § 15.3 compensates Verimark for the consequences of termination of the franchise relationship, which was triggered by the material breach. The relevant comparator is not the amount of the underpayment, but the total economic harm from the loss of a 20-year franchise relationship, including lost future royalties, lost marketing contributions, lost technology fees, brand dilution, and redeployment costs. When measured against these losses, the $105.5 million figure is reasonable and, in many cases, conservative. Moreover, Professor Hargrove's $6.2 million estimate is based on a GRR definition that the Court has already rejected on summary judgment, further undermining the relevance of this comparator.
Alleged ambiguity in the GRR definition. If Coastal Palms renews its argument that the GRR definition in Section 4.1 was ambiguous as to revenues collected by a separate management entity, it may contend that the liquidated-damages formula is based on an inflated GRR denominator.
Response: The Court's February 9, 2024 partial summary judgment order found, as a matter of law, that the exclusion of Suncoast-collected revenues from GRR constituted a material breach of Sections 4.1 and 4.2 of each FLA. This ruling effectively resolves the GRR-definition issue in Verimark's favor. Coastal Palms cannot relitigate the scope of GRR in the context of the liquidated-damages enforceability analysis after the Court has definitively construed the definition.
Windfall argument. Coastal Palms may argue that Verimark would receive a windfall because it claims both direct underpayments ($16.095 million) and liquidated damages ($105.5 million), resulting in a double recovery.
Response: There is no double recovery because each damages component addresses a distinct category of harm. The direct underpayment claim compensates Verimark for franchise fees that were earned and owed during the period of the revenue diversion (2013–2021) but were never paid. The liquidated-damages claim compensates Verimark for the future losses resulting from the termination of the franchise relationship — losses that are separate from, and in addition to, the accrued but unpaid historical fees. The FLA does not contain any provision limiting the cumulative recovery of both accrued underpayments and forward-looking liquidated damages, and the two components address temporally and conceptually distinct injuries. Florida law does not prohibit the recovery of both accrued contractual obligations and liquidated damages for termination, provided they compensate for different harms.
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 4.2 of each FLA as a matter of law. The Court rejected Coastal Palms' argument that the GRR definition was ambiguous and held that the plain language of Section 1.12 — defining GRR as revenues "regardless of the entity collecting such revenue" — unambiguously encompassed revenues collected by Suncoast.
The Court simultaneously denied Coastal Palms' cross-motion for summary judgment. The Court deferred all issues of damages to trial, which has been continued to May 2024.
The partial summary judgment order has several important implications for the § 15.3 liquidated-damages analysis:
Predicate for termination for cause. The Court's liability finding on Counts I and II establishes that Coastal Palms committed a material breach of the FLAs by systematically underreporting GRR. This finding provides the factual and legal predicate for Verimark's termination of the FLAs for cause under Sections 14.1 and 14.2(c). Because § 15.3 is triggered only upon "termination of this Agreement for cause by Franchisor pursuant to Section 14," the existence of a material breach is a prerequisite to the liquidated-damages claim. The Court's ruling on Counts I and II effectively satisfies this prerequisite.
Foreclosure of the GRR-ambiguity defense. The Court's rejection of the GRR-ambiguity defense forecloses Coastal Palms' argument that corrected GRR (incorporating Suncoast revenues) is an improper basis for the liquidated-damages calculation. Because § 15.3 directs that liquidated damages be calculated using GRR "as determined by Franchisor's audit" where that figure exceeds reported GRR, and because the Court has ruled that audited GRR properly includes Suncoast revenues, the corrected GRR figures used by Dr. Kettlewell are the appropriate inputs for the § 15.3 calculation.
Distinct legal question of enforceability. Notwithstanding the foregoing, the enforceability of § 15.3 itself remains a distinct legal question that the Court has not yet addressed. The partial summary judgment order resolved liability under Counts I and II but did not address the validity of the liquidated-damages provision. Coastal Palms retains the right to challenge § 15.3 as an unenforceable penalty, either through a dispositive motion or at trial. The enforceability analysis requires application of the two-prong reasonableness test discussed in Part IV, which involves a separate legal inquiry from the breach-of-contract liability determination.
It is also worth noting that the Court's deferral of damages to trial suggests a possible inclination to treat damages-related questions — including the enforceability of liquidated-damages provisions — as issues requiring factual development. This may signal that the Court would be reluctant to resolve the § 15.3 enforceability question on summary judgment and would prefer to hear trial testimony on reasonableness. This possibility is discussed further in Part VIII (Strategic Recommendations).
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 GRR. The late-payment interest represents the contractual interest on those underpayments at a rate of 1.5% per month, compounded monthly, from the date each payment was due through the present. The liquidated damages represent the stipulated compensation for the future losses Verimark will sustain as a result of the termination of the 22 franchise relationships.
The FLA does not contain express language limiting the cumulative recovery of all three components, nor does it provide that liquidated damages are intended as the exclusive remedy for termination. Section 15.3 addresses damages arising from termination; Section 4.6 addresses late-payment interest on accrued obligations; and the direct underpayment claims are based on the contractual obligation to pay fees on reported GRR that was never fulfilled.
Coastal Palms may nevertheless argue that the "stacking" of all three components constitutes a penalty in the aggregate, particularly where the combined total ($150 million) substantially exceeds the amount of the underlying underpayments ($16.095 million) by a factor of approximately 9.3×. This argument has surface appeal but conflates distinct categories of harm. Each component addresses a temporally and conceptually different injury: past underpayments (compensatory, looking backward), the time-value of money for those underpayments (interest, looking backward), and future losses from the termination of the franchise relationship (looking forward). There is no duplication or overlap among the three components. A landlord who recovers past-due rent, late fees, and early-termination damages is not receiving a windfall; each recovery addresses a distinct harm arising from the tenant's breach. The same principle applies here.
B. Unjust Enrichment (Count VII) as Alternative
Count VII of Verimark's Second Amended Complaint asserts a claim for unjust enrichment and is pleaded in the alternative to the contract-based damages claims. If the Court were to strike the § 15.3 liquidated-damages provision as an unenforceable penalty, the unjust-enrichment claim would provide an alternative theory for recovering the value of the franchise relationship and the benefits conferred by Verimark upon Coastal Palms — including the use of Verimark's brand, reservation system, marketing platforms, and other proprietary assets — that were exploited by Coastal Palms while simultaneously diverting revenues away from the franchise fee calculations.
While the unjust-enrichment theory is not a perfect substitute for the liquidated-damages claim (because it is subject to its own legal limitations and would require independent proof of the value of the benefits conferred), it serves as an important backstop in the event that § 15.3 is invalidated. The availability of this alternative theory should be communicated to the Court in any briefing on the liquidated-damages issue, both to demonstrate that Verimark is not "wedded" to the liquidated-damages provision and to underscore the magnitude of the harm that the provision was designed to address.
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 benefit of counsel; the provision contains explicit recitals acknowledging the difficulty of ascertaining damages and the reasonableness of the formula; the 3× royalty multiplier is conservative relative to the remaining contract terms (5 to 16 years); and the formula is consistent with industry-standard practices in the hospitality franchise sector.
However, I note an important risk. Some Florida courts have treated the reasonableness prong as a question of fact rather than a question of law, particularly where the parties have presented competing evidence on the proportionality of the stipulated amount to anticipated or actual harm. If the Court in this case views reasonableness as a fact question — a not-unlikely possibility given the large dollar amounts at issue and the competing expert opinions on damages — summary judgment on enforceability may be denied, and the issue would proceed to trial. A denial of summary judgment on this issue, while not a substantive loss, could be perceived as a signal that the Court has reservations about enforceability, which could affect settlement dynamics.
As an alternative to filing a standalone motion for partial summary judgment on § 15.3 enforceability, the engagement team should consider whether to include the enforceability argument in the existing Motion for Partial Summary Judgment briefing (the return date for which is September 29, 2023) or to reserve the argument for inclusion in trial briefs and motions in limine. Per Priya Anand's September 5, 2023 strategy memorandum, the existing partial summary judgment motion targets only Counts I and II (breach of contract liability) and does not address damages. Adding the § 15.3 enforceability issue could broaden the scope of the motion in a way that risks diluting the strength of the liability arguments.
My recommendation is to discuss with Priya Anand whether to seek leave to supplement the existing motion to address § 15.3 enforceability or, alternatively, to reserve the issue for trial and address it through a motion in limine or a trial brief seeking a pretrial ruling on the legal enforceability of the provision.
B. Trial Preparation
Regardless of whether the enforceability issue is addressed on summary judgment or at trial, the engagement team should prepare the following categories of affirmative evidence to support the reasonableness of the § 15.3 formula:
(1) Expert testimony from Dr. Sharon Kettlewell (Ridgeline Forensic Advisory LLC). Dr. Kettlewell should be prepared to testify not only to the corrected GRR figures and the resulting liquidated-damages calculations, but also to the economic value of the lost franchise relationships and a comparative analysis demonstrating that the liquidated damages are proportionate to — and in many cases less than — the actual and projected losses from termination of the 22 FLAs.
(2) Fact testimony from Deidre Langston (SVP Franchise Operations, Verimark). Ms. Langston should testify to the practical consequences of franchise termination, including the costs of de-identification, the impact on system-wide brand integrity, the disruption to marketing programs, and the difficulty and cost of redeploying or re-franchising terminated locations. This testimony will provide the factual foundation for the argument that the § 15.3 formula is a conservative estimate of the multifaceted harm from termination.
(3) Industry expert or comparable-transaction evidence. If available, testimony or documentary evidence showing that the 3× trailing-royalty formula is consistent with or more conservative than liquidated-damages provisions in comparable hospitality franchise agreements. This evidence supports the reasonableness of the formula by reference to market norms.
(4) Negotiation history. Evidence of the negotiation history of the FLAs, including any correspondence or drafts reflecting the parties' discussion of the liquidated-damages formula, the availability of alternative terms, and the mutual understanding that the formula was a bargained-for allocation of risk. If the negotiation files contain evidence that Coastal Palms negotiated over the multiplier (e.g., proposing 2× instead of 3×), this would further support the arm's-length-negotiation factor.
In addition, the engagement team should prepare to rebut Coastal Palms' anticipated penalty arguments:
(a) Per-property proportionality analysis. Prepare a demonstrative exhibit (suitable for use at trial or in briefing) showing, for each of the 22 properties: (i) the liquidated-damages amount under § 15.3; (ii) the remaining-term royalty loss; (iii) the remaining-term total f