As a franchisee, there may come a time when you want to sue your franchisor. This can happen for a variety of reasons, and it can happen at virtually all stages of the franchise relationship. But, should you sue—and can you? Answering these questions requires the advice and representation of an experienced franchise attorney.
With that said, if you are seriously considering a lawsuit against your franchisor (or taking your franchisor to arbitration, if required under your franchise agreement), it can be helpful to gain an understanding of the types of claims franchisees can file. With this in mind, we’ve compiled this list of 10 (potential) grounds to sue your franchisor.
When Can You Sue Your Franchisor (or Take Your Franchisor to Arbitration)?
As a franchisee, when can you sue your franchisor (or take your franchisor to arbitration)? Here are 10 common causes of action in franchisee-franchisor litigation:
1. State Franchise Law Violations
Several states have adopted franchise laws that give franchisees the right to sue under varying circumstances. These laws are not uniform, so you will need to consult with an experienced franchise attorney about the grounds to sue (if any) in your state. Broadly speaking, however, the types of claims franchisees can file under these laws fall into two categories:
- Franchise Disclosure Violations – Some state franchise laws give franchisees the right to seek rescission and other remedies for franchise disclosure violations.
- Franchise Relationship Violations – Some states have franchise relationship laws instead of (or in addition to) franchise disclosure laws that allow franchisees to file claims for non-renewal, termination and other issues.
2. Refusals to Deal
In some cases, franchisees can file claims against their franchisors based on unilateral refusals to deal. These cases involve violations of federal antitrust laws, which prohibit practices such as only selling certain products to franchisees in certain geographic locations and refusing to supply products to franchisees who will not agree to sell above a certain price.
3. Tying Arrangements and Price Fixing
Tying arrangements and price-fixing schemes can also give rise to claims under federal antitrust laws. A tying arrangement involves conditioning a franchisee’s ability to purchase one product on the franchisee’s purchase of another (i.e., only allowing franchisees to buy branded equipment if they also buy a certain volume of branded merchandise). Price fixing schemes involve requiring franchisees to sell their products above a certain minimum price—even if this price does not allow the franchisee to operate a sustainable business.
4. Unfair Franchise Practices
Along with refusals to deal, tying arrangements and price-fixing schemes, franchisees can file claims for a variety of other unfair franchise practices as well. These include imposing unreasonable sourcing restrictions, system standards and other requirements that interfere with their franchisees’ ability to profit from their operations.
5. Unlawful Restraint of Trade
Unlawful restraint of trade claims involve franchisor practices that cause harm to both franchisees and their customers. Tying arrangements and minimum price-fixing schemes are both examples of unlawful restraints. Various other unreasonable restraints can be deemed unlawful as a result of violating public policies favoring free competition as well, and franchisees in many states can challenge the enforcement of their franchisors’ post-termination covenants.
6. Franchise Discrimination
Several states have laws in place that prohibit franchisors from discriminating against their franchisees. Franchise discrimination involves treating similarly situated franchisees differently for no valid business purpose. Discrimination claims can involve disparate treatment with respect to the enforcement of royalties, purchasing restrictions, advertising restrictions and virtually all other aspects of the franchise relationship.
7. Franchisor Fraud
Even when state franchise disclosure laws don’t apply, franchisees can pursue claims for franchisor fraud in some cases. While franchisors will typically try to protect themselves against these claims by inserting “integration” clauses into their franchise agreements, these clauses do not preclude fraud claims in all cases. If you believe that your franchisor has misled you with respect to any aspect of your franchise—whether before or after purchasing—you should talk to a franchise attorney about the options you have available.
8. Territory Encroachment
If you have exclusive territory rights under your franchise agreement, your franchisor’s violation of these rights constitutes territory encroachment. Encroachment can involve either opening a franchised or company-owned outlet in your territory, operating or marketing a company-owned business in your territory or granting an overlapping “exclusive” territory to another franchisee. All of these are prohibited, and they can all potentially serve as grounds to file a lawsuit or initiate arbitration against your franchisor.
9. Other Franchise Agreement Breaches and Extra-Contractual Enforcement
Along with violation of your exclusive territory rights, various other franchise agreement breaches can justify lawsuits or claims in arbitration as well. This includes everything from failing to provide promised support to terminating your franchise rights even after you have timely cured a default.
In some cases, franchisees can pursue claims for extra-contractual enforcement as well. This involves franchisors attempting to enforce obligations to which their franchisees have not contractually agreed. For example, if your franchisor is trying to force you to buy products from a designated supplier and your franchise agreement does not require the use of designated suppliers, your franchisor’s attempt to enforce this requirement could justify legal action.
10. Wrongful Termination
In many cases, former franchisees can file lawsuits or initiate arbitration to challenge the wrongful termination of their franchises. Ideally, franchisees will engage legal counsel before their franchisors take action to terminate, though this isn’t possible in all cases. Former franchisees can pursue wrongful termination claims on various grounds, and remedies in these cases can range from reinstatement to financial damages.
Contact Franchise Attorney Jeffrey M. Goldstein
Do you have questions about filing a lawsuit against your franchisor? If so, we encourage you to get in touch. Franchise attorney Jeffrey M. Goldstein has well over 30 years of experience representing franchisees in litigation and arbitration. To discuss your options with Mr. Goldstein in confidence, please call 202-293-3947 or request a free initial consultation online today.
