## Facts

- Postal Instant Press, Inc. (PIP) franchised printing businesses; Sue and Steve Sealy operated a PIP franchise under a 20-year agreement formed in 1979.
- The agreement required monthly payments of royalties (6% of gross revenues) and advertising contributions (1% of gross revenues).
- Nonpayment after notice qualified as a material breach, allowing PIP to terminate and seek damages, including the “benefit of its bargain.”
- After years of operation, the Sealys became repeatedly delinquent on royalties and advertising fees; PIP accepted some late payments and took a promissory note for overdue amounts.
- In 1991, the Sealys again failed to make regular payments and also became delinquent on the note.
- On January 22, 1992, PIP sent a letter declaring material breach and terminating the franchise.
- PIP sued for breach of contract, seeking past-due amounts and more than seven years of projected future royalties and advertising fees for the remaining term.
- The trial court awarded PIP past-due amounts and future lost royalties/fees based on estimated future gross revenues.
- The Sealys appealed the award of future lost royalties after termination.

## Issues

1. Whether a franchisor that terminates a franchise agreement for nonpayment may also recover future royalties and advertising fees for the remaining contract term.
2. Whether, on these facts, projected future royalties are recoverable contract damages where the claimed loss is not proximately caused by the breach or is excessive relative to actual harm.

## Decision

- The Court of Appeal reversed the portion of the judgment awarding future lost royalties and advertising fees.
- The court held PIP could recover past-due amounts but not projected royalties/fees for the remaining years after PIP terminated the franchise.
- The court concluded the Sealys’ nonpayment did not proximately cause PIP’s loss of future royalties because PIP’s election to terminate cut off the revenue stream.
- The court also found the future-royalty award excessive, oppressive, and disproportionate to PIP’s actual loss.

## Legal Principles

- Contract damages must be the natural and direct consequence of the breach; the breach must be the proximate cause of the claimed loss.
- When a franchisor terminates based on past nonpayment, future royalties that would have accrued only if the franchise continued may be unrecoverable where termination, not the breach, causes the loss.
- Contract remedies are compensatory; projected lost-profit awards that function like a penalty, or are excessive relative to the harm proven, are not permitted.
- Contract language authorizing termination and “benefit of the bargain” damages does not eliminate proximate-cause limits or permit disproportionate recovery.

## Conclusion

The court set aside the future-royalty award because PIP’s termination decision, rather than the franchisees’ past nonpayment, caused the loss of future royalties, and because the projected multi-year award was disproportionate to the harm; PIP remained entitled to recover amounts already accrued and unpaid.


Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 51 Cal. Rptr. 2d 365 (Ct. App. 1996)