May 7, 2015 - Franchise Articles by |

NO SUPPORT OR ASSISTANCE FROM YOUR FRANCHISOR?  IT MAY BE SUICIDE TO STOP PAYING FRANCHISE FEES

Franchisees often complain that their franchisors refuse to provide them with adequate support.  In general, however, a franchisor's breach of its obligations to support its franchisees will not justify a franchisee's naked refusal to pay its royalties. Not even immigrants recruited by franchisors have a right to expect franchisors to provide adequate support. 

At the very heart of the franchise relationship is the belief that a franchisee has the right to receive from his franchisor support and training in exchange for the franchisee’s ongoing investment in the franchise and franchise system.  However, far too many times, this “give and take” scenario turns into a one-sided “take” situation where the franchisor “takes” recurring fees from the franchisee each month but “gives” very little or nothing to the franchisee in return.  Unfortunately, most franchise agreements do not obligate the franchisor to provide support to its franchisees – regardless of whether support is crucial to the franchise’s success.  Similarly, neither federal nor state laws obligate the franchisor to provide such support. Breaches of franchise support pervade very many franchise systems. 

A recent court decision rendered by the United States District Court for the Northern District of Illinois (Century 21 Real Estate Corporation v. CLTM Associates), however, shows that some courts will closely examine a franchisor’s refusal to provide support to its franchisees.  In that case, Century 21, a national real estate franchisor, claimed that one of its franchisees, CLTM, had breached the parties’ franchise agreement by allegedly failing to pay recurring fees and failing to comply with the audit requirements set forth in the parties’ franchise agreement.  CLTM filed a counterclaim in which it alleged, among other things, that Century 21 had materially breached the franchise agreement by failing to list it in the Century 21 system directory for approximately two years and refusing to communicate with or provide adequate support staff and resources to CLTM.

Century 21 filed a motion for summary judgment in which it asked the court to “skip over” a trial and enter “summary judgment” in its favor on both its claims and CLTM’s counterclaims. Franchise lawyers for franchisors regularly request these preliminary rulings on behalf of their franchisor clients.

With regard to Century 21's claims for breach of contract against CLTM, the court stated that Century 21 needed to satisfy each element of a four-prong test.  First, Century 21 had to prove that a valid and binding contractual relationship existed between Century 21 and CLTM.  Second, Century 21 had to prove that Century 21 complied with and performed its obligations under the contract. Third, Century 21 had to prove that CLTM did not comply with its own contractual obligations.  Last, Century 21 had to prove that it sustained damages as a result of the alleged breach.

Although CLTM did not dispute Century 21's contentions that the parties had a binding franchise agreement and that CLTM had not remitted royalty payments, it argued that it was legally “justified” in having failed to pay royalties because Century 21 had not honored its own contractual obligations.  In particular, CLTM asserted that Century 21 failed to list it in the system directory, thus depriving CLTM of the referrals that were crucial to its survival.  In addition, CLTM argued that, after Century 21's corporate parent acquired the competing Coldwell Banker real estate franchise system, Century 21 stopped communicating with CLTM and devoted its resources to supporting the Coldwell Banker system.  According to CLTM, Century 21's neglect of its duties to support CLTM and other Century 21 franchisees violated the franchise agreement and caused CLTM to lose business – contributing to the franchise’s demise.

In light of the strength of CLTM’s argument that Century 21 had itself failed to meet its obligations under the franchise agreement, the court refused to grant summary judgment in favor of Century 21.  In so doing, the court concluded that genuine issues of material fact existed as to the following three issues: (1) whether Century 21 ceased contact with CLTM, (2) whether and for how long CLTM was excluded from the system directory, and (3) what impact Century 21's alleged actions had on CLTM’s business.  The court found that the facts relating to these issues were important not only to determine whether Century 21 had performed its obligations under the franchise agreement, but also in determining the amount of CLTM’s alleged damages.

As demonstrated by the court in this case, franchisors often ignore their contractual obligations to provide support and assistance, to the extent any such obligations are even contained in their franchise agreements.  In most cases, franchisors are able to get away with such neglect, making a franchisee’s decision to withhold payment of fees due to a lack of support very understandable, but at the same time potentially deadly.  Nonetheless, this case shows that franchisors may, on rare occasions, be held accountable.  If you believe you are being deprived of the benefits under your franchise agreement as a result of your franchisor’s failure or refusal to provide you with necessary support and assistance, you should immediately discuss the issue with experienced franchise counsel.  Do not engage in “self-help” by refusing to meet your obligations under your franchise agreement.

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