May 7, 2015 - Franchise Articles by |

HOTEL DISPUTES: SOME ADVICE ON ADVICE – LAWYERS OR CONSULTANTS?

Hotel franchises are preyed upon frequently by consultants masquearding as lawyers. Franchise consulting companies have recently begun advertising that they are able to provide “all solutions to all people.” In turn, many clients and potential clients of The Goldstein Law Group, PC, have asked us whether franchise consulting companies have the ability to provide them with effective solutions to their business problems.

The short and simple answer is “sometimes yes” and “sometimes no.” So long as consulting companies limit their services to traditional areas (e.g., feasibility studies, market analyses, growth strategies, industry choices, industry surveys), they can be helpful in providing business solutions to franchisees and dealers.

On the other hand, when consulting companies expand their services to include legal issues, beyond their traditional expertise (e.g., litigation, tax issues, lease and purchase agreement reviews), they can be detrimental to franchisees.  For instance, there are now consulting companies who claim to have the expertise to negotiate, review and finalize legal documents.  Similarly, there are those who claim that they and their associates have the skills necessary to resolve complex legal disputes, even those pending in court.  When franchise consulting companies venture outside their areas of expertise, they have the potential to worsen rather than solve franchisees’ problems.

So, then, why do franchisees consider using consulting companies who lack the expertise and experience necessary to professionally address their legal problems?  Our clients and potential clients have attempted to answer this in two ways. First, they have suggested that using a non-lawyer for litigation disputes and the negotiation of legal documents is “less expensive” than using a law firm.  Second, they have suggested that, by using business consultants who are former officers or employees of franchisors, they will obtain outcomes that only a former “insider” could obtain. Neither of these is very realistic.

With regard to the first issue, that of alleged cost effectiveness, it appears that some business consultants charge a flat price for a franchise review and negotiation; the numbers we have heard are between $2500 and $3000. Putting aside for the moment the inability of a non-lawyer to properly and effectively review any legal document – and certainly not an agreement that has a ten-year term and spans over 50 single-spaced pages – the review and negotiation by an attorney with expertise in commercial litigation and franchise work should run under $1500.  The concept of someone holding themselves out to franchisees as an expert also suggests the ability of the claimed expert to do the job in less time than a non-expert.

Further, a consulting company’s former ties with a franchisor are not likely to result in substantially better franchise terms than the franchisee would otherwise obtain.  Indeed, in 2010, most franchisors offer their franchise agreements on a “take it or leave it” basis.  Although there sometimes is some wiggle room for negotiation on a few terms — most notably “exit windows,” royalty rates, exclusive territories, initial fees, contract duration and capital investment or punch list items – many other terms are not subject to negotiation or modification.  The chances of a franchisee obtaining favorable concessions on these issues depends much more on the size of the franchisee or the strength of the relevant market, rather than on the identity of the consultant or lawyer.

In addition to placing calls to a franchisor and asking it to provide contractual concessions, the person handling a franchisee’s negotiations must have the legal expertise to perform two other very crucial tasks.  First, in the event the franchisee has been successful in negotiating certain terms, the terms must be drafted artfully in a way that will be recognized and acknowledged by a Court if a dispute about the terms later arises.  As every good businessman should know, even a comma or semicolon in the wrong place can destroy a franchisee’s business.

Second, regardless of whether a franchisee has been able to obtain any concessions from the franchisor, it is imperative that the franchisee obtain a full and complete understanding of the legal meanings and consequences of the terms that are contained in the franchise agreement.  For instance, an attorney is able to explain whether under a particular state’s laws a franchisee must have every future dispute heard in only an exclusive arbitration or in state court in his franchisor’s back yard, or that a covenant not to compete or exclusive territory is rendered void by any immaterial default of the franchisee; this permits the franchisee to up front, before he signs the agreement, assess the potential legal consequences of the franchise agreement.  At the end of the day, these consequences – not necessarily the monetary terms of the franchise agreement – will spell the difference between success and disaster.

In cases where a legal dispute arises during the term of the franchise agreement, the same two issues – cost and the need for legal expertise – appear to be relied upon by franchisees and dealers in choosing whether to use a business consultant or an attorney to assist in resolving the dispute. First, with regard to cost, some business consultants charge a flat price to “try to resolve or settle” the monetary dispute.  Prices charged by some business consultants for this run close to $3900-$4000, with concurrent promises by the business consultant that he will save the franchisee “at least that much” in settling the franchisee’s dispute.  Such promises, however, are somewhat disingenuous; it is not difficult – and in many cases a slam dunk – to get a franchisor to initially lower its damages demand by many thousands of dollars to settle a case up front. The difficult and more relevant question is whether the franchisor’s legal claims have any legs.

Some franchisees have suggested that paying a business consultant a $4000 fee is less than they would otherwise have to pay an attorney to settle their cases; again this is in most circumstances incorrect.  Looking at costs alone, in the event a franchisee chooses to try to settle a legal dispute before the case results in full scale litigation, and asks his attorney to do so, the charges for a lawyer to make a few phone calls or write a couple of letters to a franchisor (the services provided by most non-legal consultants), should run no more than $2000.

Second, the terms upon which a franchisee’s dispute ought to settle, should be based upon the strength of the franchisee’s legal claims or defenses; assessing these strengths is exclusively within the province of an experienced litigator.  It is patently obvious that it would be self-defeating – if not incredibly expensive – for a franchisee or dealer with very strong legal claims or defenses to settle by paying the same amount of damages to a franchisor as would a franchisee with very weak legal claims.  Without the advice and analysis of an experienced litigator, such a costly error is likely to occur.

We live in a relatively litigious society. Given this reality, for a franchisee to attempt to negotiate and finalize a franchise agreement, or to attempt to settle a legal dispute, without the expert advice of an experienced litigator, is no better than bringing a knife to a gunfight.

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