Disputes between franchisors and their franchisees can involve a wide range of issues. As a franchisee, it is important to be aware of these issues so that you know when legal action may be necessary to protect your franchise. When these issues arise, informed decision-making is critical, and this makes it important to speak with an experienced franchise attorney as soon as possible.
What Are Some of the Most Common Issues that Lead to Franchisor-Franchisee Disputes?
So, when might you need to be prepared for legal action as a franchisee? Here are 10 examples of common issues that can lead to franchisor-franchisee disputes:
1. Nonpayment of Royalties and Advertising Fees
One of the easiest ways to get into trouble with your franchisor is by failing to pay your royalties and advertising fees. But, while some fee disputes are fairly straightforward, others are much more complex. In some cases, franchisors will accuse their franchisees of underpaying their royalties, and then their franchisees will be left to prove that they have fully paid what they owe.
2. Noncompliance with the Operations Manual
Noncompliance with the Operations Manual is another common allegation in franchisor-initiated litigation. The “Incorporation” clause in the franchise agreement makes the Operations Manual legally binding, and franchisors typically reserve the right to modify their Operations Manuals to reflect changes in their branding and system standards. Franchisees typically must comply with these modifications at their own expense, and if they can’t (or don’t believe that doing so is in their best interests), this can lead to a dispute.
3. Other Breaches of the Franchise Agreement
Along with nonpayment and noncompliance with the Operations Manual, various other breaches of the franchise agreement can lead franchisors to pursue legal claims against their franchisees as well. This includes everything from using unapproved suppliers to opening another franchise with another franchisor. These disputes are almost always highly fact-specific, and understanding whether your franchisor has a valid claim will require a careful review of your franchise agreement as well.
4. The Franchisor’s Breach of the Franchise Agreement
Franchisors aren’t the only ones that can initiate dispute resolution proceedings. In many cases, franchisees will also need to take action to assert their legal rights. If your franchisor has breached the terms of your franchise agreement by failing to meet its obligations or attempting to enforce compliance with obligations that you don’t actually have, you will want to speak with a franchise attorney about the options you have available.
5. Territorial Encroachment
If you have an exclusive or protected territory, placing a company-owned location or another franchise-owned location in your territory may constitute territorial encroachment. Advertising in your territory or granting an overlapping territory to another franchisee may encroach upon your territorial rights as well. Territorial encroachment can have a significant impact on your ability to build and maintain a profitable business, and taking action promptly can help to mitigate the costs of dispute resolution.
6. Franchisor Discrimination or Selective Enforcement
Franchisees can also pursue claims for discrimination and selective enforcement. While franchisors have a certain amount of discretion to decide when enforcement is warranted, this discretion is not absolute. Laws protect franchisees against discriminatory treatment, and if you believe that you are a victim of discrimination or unlawful selective enforcement, you should discuss your options with a franchise attorney promptly in this circumstance as well.
7. Franchisor Fraud
Franchisor fraud is a pervasive issue in franchising. Franchisors engage in fraud to sell franchises, take money from their franchisees and protect themselves when they know they are at risk for litigation. State franchise laws provide franchisees with specific causes of action for franchisor fraud in many jurisdictions, and in states without franchise laws, franchisees can seek appropriate remedies on other grounds.
8. Illegal Price Fixing and Other Statutory Violations
Price fixing, engaging in uncompetitive and unfair franchise practices, and various other statutory violations can also give franchisees causes of action against their franchisors. As a franchisee, your legal rights are not limited to the rights set forth in your franchise agreement. Franchisors are subject to numerous statutory requirements and prohibitions, and when they violate the law, they can—and should—be held accountable.
9. Denial of Renewal or Transfer
As a franchisee, your renewal and transfer rights are extremely important. While these rights are typically subject to a variety of conditions, franchisors can—and do—overreach when they don’t want to renew a particular franchisee’s agreement or deal with a transfer. When dealing with denial of a renewal or transfer, taking action promptly can be especially important, as it can be much more difficult to achieve a favorable resolution once your franchise agreement has expired or a prospective buyer has moved on.
10. Wrongful Franchise Termination
If you are dealing with a wrongful franchise termination, or if your franchisor has threatened to terminate your franchise on illegitimate grounds, you should speak with a franchise attorney right away. Termination of your franchise can trigger various financial and non-financial obligations, and if your franchisor accuses you of violating these post-termination obligations, this could add to the cost and complexity of resolving your dispute.
While these are 10 of the most common issues in franchisor-franchisee disputes, these are far from the only issues that can lead to mediation, arbitration or litigation with your franchisor. If you are dealing with any legal issue related to your franchise, you should discuss your options with a franchise attorney as soon as possible. Attorney Jeffrey M. Goldstein has well over 30 years of experience representing franchisees, and he can help you make informed decisions about your next steps.
Schedule a Free Initial Consultation with Franchise Attorney Jeffrey M. Goldstein
If you would like to discuss your next steps with Mr. Goldstein, we invite you to get in touch. Unlike many other franchise law firms, we exclusively represent franchisees. To discuss your dispute with Mr. Goldstein in confidence as soon as possible, please call 202-293-3947 or tell us how we can reach you online today.
