Video Transcription

Hi. My name’s Jeff Goldstein of The Goldstein Group in Washington D.C. We represent franchisees, dealers and distributors in disputes against franchisors and manufacturers. We’ve been discussing in the last few videos the question of whether a franchisor has a minimum level of competency that it’s required to meet in a franchise relationship. We’ve also seen that, in general, the answer to this question is no. This isn’t like a case of a doctor being sued for failure to meet a minimum level of competency. A franchisor’s requirements are those that are set out in a franchise agreement and, from time to time, in certain state laws that will make certain relationship obligations very specific and create an obligation on a franchisor, but those circumstances are very unique.

So, what we did was we went back to look at the contract, the franchise agreement, to determine how a franchisee might be able to make a case, looking at the cracks, the nooks and crannies of these agreements. We also know that the franchise agreement, over time, has been made more ironclad by franchisors, such that the franchise agreement itself is very asymmetrical with regard to the obligations that a franchisor must meet, versus those that a franchisee must meet. And we pointed out that there may be 8 or 10 pages of obligations of a franchisee in the franchise relationship, and only half a page for the franchisor. And courts will most likely follow those requirements and not add any requirements to the franchisor that might go to creating a minimum level of competency.

A franchisee suing on competency grounds might believe that there’s some type of warranty that a franchisor would be giving to a franchisee. After all, the franchisor has experience, expertise, will pick the site or approve the site, and franchisees would understandably think that there is some warranty that the law would impose. There are two problems with this. One, franchisors, in very many spots in franchise agreements, explicitly state, “We are giving the franchisee no warranty on anything. No warranty on revenues, no warranty on products, no warranty on site selection,” so they explicitly disclaim any warranty whatsoever. Even if those warranties weren’t there or held not to be valid, you’d still have a problem looking somewhere in the law to create a warranty.

Warranties are usually, in the commercial context, associated with the Uniform Commercial Code, the UCC. And there have been some cases in dealership relationships where, for instance, a franchisor or a manufacturer sells products to a franchisee, and the question is whether there was some incompetency involved with manufacturing candy, for instance. In that case, the candy is a product, it’s not a service that the franchisor would be providing to a franchisee. So, where a product is involved versus a service, the UCC would impose some type of warranty obligation on the franchisor. But as I say, these are very unique circumstances and you’d be safe to, as a franchisee, assume that there isn’t gonna be any type of warranty. So, you’re pushed again, the franchisee is pushed again, towards examining the franchise agreement and trying to find some obligation that goes to competency that would protect the franchisee.

When a franchisee or a franchisee’s lawyer takes the franchise agreement, and looks and sees that there are so few obligations that the franchise agreement imposes on the franchisor, they naturally begin looking off the franchise agreement, outside of the franchise agreement, to conversations that the franchisor had with the franchisee before the franchise was signed, for documents given by the franchisor to the franchisee before the franchise agreement was signed. In general, this turns up to be a really poor area. It’s not a fertile area of where franchisees and the franchise lawyers can find something to grab onto to bring to court. This is primarily because of what are called integration clauses or merger clauses, and you may have heard the concept of parole evidence.

In general, these documents, these doctrines all together, say that, “If it’s not written in the franchise agreement, the franchisee cannot later say that the franchisor violated the franchise agreement or the franchise relationship in some way.” The franchisee and his lawyer are gonna try and add to the franchise agreement obligations that may have been created by documents given to the franchisee before the franchise agreement was signed, or statements made by the franchisor and its employees to the franchisee before the document was signed.

I wanted to thank you for taking your time today to listen to this video and the other two in this series regarding franchisor competency. If you have any questions regarding this issue, issues raised by those videos or other franchise relationship matters, please give me a ring. My name is Jeff Goldstein at The Goldstein Law Group in Washington D.C. Thank you.

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