Is the payment of liquidated damages by a Big Blue Swim School franchisee considered a penalty?
Big_Blue_Swim_School Franchise · 2025 FDDAnswer from 2025 FDD Document
be bound by the non-solicitation covenant contained in Section 20.E for one (1) year beginning on the closing date.
You may not under any circumstances sell any of the School's assets until we have exercised or elected not to exercise our right to purchase those assets, as provided in this Section.
20.H. Liquidated Damages
If we terminate this Agreement for cause under Section 19.B, or if you terminate this Agreement without cause, before the Term's scheduled expiration date, you acknowledge and confirm that we will suffer substantial damages as a result of such termination, including Brand Damages. "Brand Damages" means lost Royalties, lost Brand Fund Contributions, lost market penetration and goodwill, loss of BIG BLUE Swim School representation in the School's market area, customer confusion, lost opportunity costs, and expenses that we will incur in developing or finding another franchisee to develop another BIG BLUE Swim School in the School's market area. We and you acknowledge that Brand Damages are difficult to estimate accurately, and proof of Brand Damages would be burdensome and costly, although such damages are real and meaningful to us. Therefore, upon termination of this Agreement, as provided above, before the Term's scheduled expiration date, you agree to pay us in a lump sum, within the timeframe we specify, liquidated damages equal to the product of either twenty-four (24) or the number of months that would have remained in the Term (as of the effective date of termination) had it not been terminated, whichever is shorter, multiplied by the average monthly Royalties and Brand Fund contributions that were due and payable to us during the twelve (12) months before the month of termination (or for such lesser period that the School has been open, if less than twelve (12) months).
You agree that the liquidated damages calculated under this Section 20.H represent the best estimate of our Brand Damages arising from any termination of this Agreement before the Term expires. Your payment of the liquidated damages to us will not be considered a penalty but, rather, a reasonable estimate of fair compensation to us for the Brand Damages we will incur because this Agreement did not continue for the Term's full length.
Source: Item 22 — CONTRACTS (FDD pages 75–76)
What This Means (2025 FDD)
According to the 2025 Big Blue Swim School FDD, the liquidated damages are not explicitly referred to as a penalty. Instead, the FDD states that if the Franchise Agreement is terminated either by Big Blue Swim School for cause or by the franchisee without cause before the end of its term, the franchisee acknowledges that Big Blue Swim School will suffer substantial damages, including Brand Damages. Brand Damages include lost Royalties, lost Brand Fund Contributions, lost market penetration and goodwill, loss of Big Blue Swim School representation in the School's market area, customer confusion, lost opportunity costs, and expenses that Big Blue Swim School will incur in developing or finding another franchisee to develop another Big Blue Swim School in the School's market area.
The FDD states that these Brand Damages are difficult to estimate accurately, and proving them would be burdensome and costly, although such damages are real and meaningful to Big Blue Swim School. Therefore, the franchisee agrees to pay liquidated damages upon termination. These damages are calculated as the product of either 24 or the number of months remaining in the term, whichever is shorter, multiplied by the average monthly Royalties and Brand Fund contributions due during the 12 months before termination (or a shorter period if the School has been open for less than 12 months).
This clause aims to compensate Big Blue Swim School for the anticipated losses resulting from early termination, rather than to penalize the franchisee. The FDD also specifies that if a Big Blue Swim School franchisee, any of their affiliates, or any other entity (including any buyer of the School) begins construction or operation of a swim school at the Site other than a Big Blue Swim School at any time during the twenty-four (24) months following the effective date of termination of this Agreement, then the franchisee or their owners must pay Big Blue Swim School liquidated damages equal to the difference between (i) the amount that would have been payable under Section 20.H at the time of termination, less (ii) the amount of liquidated damages actually paid at the time of termination pursuant to this Section.