Video Transcription

Hi, my name is Jeff Goldstein of the Goldstein Law Group. Today I’d like to speak to you a bit about a common issue that comes in my office several times a week. This is where a franchisee complains that he’s not receiving services from the franchisor as it’s required under the franchise agreement, and the franchisee decides to stop paying the royalties or fees under the franchise agreement.

It seems logical that a party under a franchise agreement or any agreement, who’s not obtaining the benefits that he signed up for will be able to stop paying for those benefits. In a franchise context, however, this is an issue that seems somewhat counterintuitive and has been embraced by the courts. The courts say that a franchisee who is dissatisfied with the services he’s getting from the franchisor cannot stop paying royalties and continue to operate as a member of the franchise system. The courts have said that the franchisee can either stop paying royalties and discontinue operating as a member of the franchise community, or, pay his royalties, continue, and then sue the franchisor for damages while it is still operating.

Another side issue that relates to the one we’re speaking about today permeates all of franchise law, and that is whether a breach by either party is material, or significant, or important enough to permit the other side to terminate the agreement. This requires, obviously, that the party who is breaching have violated an obligation in a franchise agreement. Since a franchisor has so few obligations under a franchise agreement, it’s very difficult for a franchisee to make out a breach by the franchisor in any way, never mind one that is considered material.

Franchisees, on the other hand, have prolific obligations under a franchise agreement and, therefore, the franchisor can find a breach almost at will. Then the question is whether the breach itself is material enough to permit the franchisor to terminate the franchisee. So, for instance, if a franchisee pays late or he doesn’t engage in certain advertising, or he fails at a quality assurance standard, the franchisor would be permitted to terminate that franchisee. There are other types of violations of a franchise agreement that would permit an immediate termination. An example of that would be where a franchisee is convicted of some type of criminal activity.

The bottom line today, and the message I want to get across to franchisees is that if you feel aggrieved, or that the obligations of the franchisor aren’t being carried out, you should consult a franchise attorney, because you should not do what you’d consider to be a common sense alternative, which is to stop paying the franchisor for what you view you’re not getting.

Thanks for visiting with us today, and I’ll see you in the next video.

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