Monthly Archives: June 2016

Top Ten Worst Provisions in a Franchise Agreement

Jun 29, 2016 - Blog by |

If you are in the process of performing your due diligence on a franchise opportunity, you are probably struggling to comprehend the seemingly-unending legalese in the franchise agreement. Indeed, even the best franchise lawyer struggles to interpret what the drafters intended when they wrote some of the language in many of these agreement templates that, frankly, should have been overhauled long, long ago. That said, most franchise agreement provisions can be interpreted, and the news often is not good for prospective franchisees. Based on more than 30 years of franchise law experience, here are 10 of the absolute worst provisions in franchise agreements: 1. Mandatory Mediation and Arbitration. We’ll start with a big one: Many franchise agreements contain provisions that require franchisees to submit all disputes to mediation or arbitration (or both) before they can enforce their rights in court. While mediation and arbitration have their virtues, these provisions are often designed to make it harder (and more expensive) for franchisees to pursue valid claims against their franchisor. 2. Choice of Venue. In addition, franchise agreements will usually contain provisions stating that all disputes are subject to jurisdiction and venue in the state (and sometimes the city or county) where the franchisor’s headquarters are located. This, again, makes it more difficult and expensive for the franchisee – and provides home field advantage for the franchisor. 3. Non-Competition Covenants. Non-competition covenants in franchise agreements will often prohibit franchisees from operating independently once their franchise agreement expires. While there are some legitimate […]

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So, Your Franchise Agreement is About to Expire…

Jun 27, 2016 - Blog by |

When you purchased your franchise, hopefully you went into it with the understanding that, at some point, your franchise rights would come to an end. If that time has come, you need to make a decision about what you are going to do next. At a high level, you have two primary options. You can either: Let your franchise agreement expire; or, Seek to renew for another franchise term. Letting Your Franchise Agreement Expire If you are ready for your franchise venture to come to an end, you may simply choose to let your franchise agreement expire. But, before you do, there are a few key provisions in most franchise agreements that you will want to keep in mind: Non-Competition. It is very possible that your franchise agreement contains a “non-competition” covenant that prevents you from competing with the franchisor and its other franchisees. What exactly it means to “compete” will depend on the specific language in your contract. But, at a minimum, you can generally expect to be prohibited from opening a similar type of business within a certain radius of your franchised outlet for at least a couple of years. Non-Solicitation. In addition to non-competition covenants, most franchise agreements also include provisions that prohibit solicitation of your franchise customers – for any business whatsoever. That customer list that you thought was yours? It actually belongs to your franchisor. Post-Termination Obligations. When your franchise expires, you will be expected to completely de-brand and stop use of any and all […]

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Is Your Franchise Territory Exclusive, Protected, or Non-Existent?

Jun 24, 2016 - Blog by |

As a franchisee (or prospective franchisee), among the many important issues you need to consider is the question of geographic protection. When you buy a franchise, you expect to benefit from the franchisor’s brand, systems and goodwill, and the last thing you want is for another franchisee – or even the franchisor – to end up using these against you. When many people hear that they have a “territory,” they assume this means that their territory is exclusive—that is, that no one else within the franchise system will be able to compete against them in their territory. Unfortunately, this isn’t always the case, and the actual territorial rights that are offered (if any) often are not clear in the franchise agreement or the Franchise Disclosure Document (FDD). Exclusive vs. Protected Territories Although they are often used interchangeably, “exclusive” and “protected” can actually have different meanings in the franchise context. If your franchise territory is truly exclusive, your business should be the only source of the franchisor’s goods or services in the territory. On the other hand, if your territory is merely protected, then your franchise agreement may authorize certain forms of competition, such as franchisor sales through alternative channels of distribution (i.e. the internet). As a third option, some franchise systems do not offer any territorial protection at all. In these systems, the franchisor is free to open competing outlets and use alternative channels wherever it pleases. While you may initially be willing to trust your franchisor not to “cannibalize” […]

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Should You Hire an Attorney to Review Your Franchise Agreement and FDD?

Jun 22, 2016 - Blog by |

When you are considering a new franchise opportunity, the franchisor will provide you with two main legal documents: a Franchise Disclosure Document (FDD) and a franchise agreement (at least initially, the franchise agreement will be included as an exhibit or attachment to the FDD). By federal regulation, the franchisor must provide you with the FDD at least 14 days before you sign the franchise agreement, and some states’ franchise laws require even earlier disclosure. Part of the reason for this is that these documents are exceedingly complex (and long), and it is critical to make sure that you have a thorough understanding of the franchise opportunity before you sign on the dotted line. The Importance of Understanding Your Franchise Agreement and FDD So, should you hire an attorney to review your franchise agreement and FDD? Absolutely. Despite the franchise relationship and disclosure laws that exist in some states, most franchise relationships are still extremely one-sided. If you are not familiar with the way FDDs and franchise agreements are written, you will almost certainly overlook important issues that could have drastic financial and legal implications over the life of your franchise. An experienced franchise lawyer will be able to assess your franchise opportunity in light of industry standards and with an eye toward ensuring that you have reasonable protections in the event that something goes wrong. Top Reasons to Hire a Franchise Agreement Lawyer Before You Sign a Franchise Agreement With these considerations in mind, here are five of the top […]

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Does Your State Have a Franchise Law that Protects Franchisees?

Jun 20, 2016 - Blog by |

As a franchisee, it is important to have at least a basic understanding of the laws that protect you. With the recent growth of the franchise industry, more companies are turning to the franchise model for growth, and unfortunately more franchisees in new and established systems alike are finding themselves in situations where they need to take legal action to enforce their rights. States With Franchise Relationship, Registration and Disclosure Laws Currently, 21 states and the District of Columbia have franchise relationship or franchise registration and disclosure laws (or both). These laws serve different purposes, but the overarching concept is that they are designed to provide at least some measure of protection for franchisees. It is widely understood that franchisors have the upper hand in franchise agreement negotiations and in the ongoing franchise relationship, and as a result state franchise laws provide franchisees with certain rights even if those rights are not explicitly stated in the franchise agreement. Along with Washington D.C., the following states currently have franchise laws in place: Arkansas California Connecticut Delaware Hawaii Idaho Illinois Indiana Iowa Kentucky Maryland Michigan Minnesota Mississippi Missouri Nebraska New Jersey Tennessee Virginia Washington Wisconsin What if Your State Does Not Have a Franchise Law? If your state does not have a franchise law (or even if it does), there still may be other statutes or case law that protect you. For example, many states have industry-specific laws that franchisees and their franchise attorneys can use to their advantage. States also have […]

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Exxon’s Zone Pricing Program Exerts Too Much Control Over Franchisees

Jun 7, 2016 - Franchise Articles by |

A recent case decided by the United States District Court for the District of New Jersey may breathe new life into the New Jersey Franchise Practices Act and the Robinson-Patman Act. South Gas, Inc. v. Exxonmobil Oil Corp., 2016 WL 816748 (D.N.J. February 29, 2016). The plaintiff franchisees’ claims in the case focused primarily on Exxon’s pricing practices, which pivoted off of a labyrinthine discriminatory pricing program known as zone pricing.  In ruling for the Exxon franchisees, the Court was careful to point out that its ruling was preliminary, and as such, was limited to the question whether the plaintiff franchisees had alleged enough in the Complaint to meet their initial pleading obligation, not whether the franchisees had substantively proven their claims. The plaintiff franchisees in this case were independent service station dealers that purchased refined gasoline directly from Exxon and other suppliers for resale to the public at retail service stations in New Jersey. Exxon’s zone pricing scheme divided New Jersey into approximately 100 zones and charged retail gas stations different wholesale prices for gas depending on the station’s zone placement. Because Exxon’s zone pricing scheme favored certain stations and disfavored other stations, including the plaintiffs, the franchisees claimed they were forced to charge higher retail prices to cover their operating expenses. Some of these wholesale price differences were so significant that they resulted in wholesale prices in some zones exceeding the retail prices in other contiguous zones. Further exacerbating the financial plight of the franchisees was Exxon’s questionable […]

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