Monthly Archives: April 2018

What are Franchisees’ Rights When the Franchisor Sells the System?

Apr 30, 2018 - Blog by |

While franchisees’ transfer rights are usually subject to numerous conditions, franchisors typically reserve broad rights to sell the system. Franchisors do not need their franchisees’ consent to sell, and they are not required to cure outstanding defaults or consider the potential impact on franchisees when they seek to court the highest bidder. As a result, sales of successful franchise systems are common, with typical buyers including competing brands as well as private equity companies seeking to add assets to their portfolios. Earlier this year, Red Lion Hotels Corporation agreed to buy the Knights Inn franchise system from Wyndham Worldwide for $27 million. BrightStar Care also recently acquired the regional chain, HomeChoice Senior Care, for an undisclosed sum. While the consequences of these types of sales can vary, some of the potential implications for franchisees include the following: 1. Limited Options for Challenging the Sale Generally speaking, franchisees’ options for legally challenging the sale of a franchise system are limited. Franchise agreements almost universally include provisions acknowledging the franchisor’s right to sell; and, even though these provisions are extraordinarily one-sided, they will typically be enforced by the courts. It is standard for proposed sales and the terms of franchise system acquisitions to be kept confidential, so the “surprise” of learning that you will have a new franchisor is generally not sufficient grounds to pursue a claim for bad faith or fraud. There may be exceptions in limited circumstances (for example, if you recently purchased your franchise and specifically relied on representations […]

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What Happens if I Stop Paying My Franchise Royalties?

Apr 27, 2018 - Blog by |

As a franchisee, if you are wondering about the consequences of ceasing to pay royalties, this likely means one of two things: Either (i) you are facing a dispute with your franchisor and you do not believe that you should have to pay, or (ii) you are unable to pay your royalties and pay your business’s other monthly expenses. While your desire to withhold payment of royalties (and potentially your advertising fund fees as well) is understandable, there are several reasons why this is not likely to be a good idea. The Risks of Withholding Royalties as a Franchisee Nonpayment of royalties is almost certainly considered a material default under the terms of your franchise agreement. Franchisors aggressively protect their “right” to payment, and many franchisors will not hesitate to declare a default when a royalty check or electronic funds transfer (EFT) doesn’t come through. Most franchise agreements also include a “no offset” provision, which states that the franchisee does not have a right to withhold payment on the grounds that it is owed money from the franchisor. So, if you stop paying your royalties, sooner or later your franchisor will declare a default; and, not only could you be on the hook for your outstanding royalties, but potentially for lost future royalties as well. What if I Have a Claim Against My Franchisor? What if you have a claim against your franchisor? What if your franchisor has not provided the support it promised? Or, what if your franchisor granted […]

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6 Factors to Consider When Buying an Existing Franchise

Apr 25, 2018 - Blog by |

Buying an existing franchise is a unique business opportunity that comes with unique legal considerations. It blends aspects of buying a new franchise with aspects of buying an independent business, and addressing the risks involved requires thorough due diligence combined with an in-depth understanding of the legal issues at play. Here are six preliminary issues to consider if you are thinking about buying an existing franchise: 1. Conditions on Transfer In order to sell (or “transfer”) a franchise, the existing franchisee and the prospective buyer must meet the requirements set forth in the existing franchise agreement. These requirements are typically structured as “conditions,” and franchisors almost universally reserve broad rights to approve and reject proposed transfers. Some typical transfer conditions include: Cure of any outstanding defaults under the franchise agreement; Franchisor approval of the prospective buyer; Updating to then-current system standards; Compliance a franchisor right of first refusal; and, Buyer execution of the franchisor’s then-current franchise agreement. 2. Negotiating the Franchise Agreement In most cases, when you buy an existing franchise, you will be required to sign the franchisor’s then-current franchise agreement. It is critical to review the terms before signing, and you should not assume that the franchisor’s current terms are identical to those in the seller’s agreement. Franchisors routinely update their standard franchise agreements in order to adopt new franchisor-friendly protections, and there may be new or old provisions that you should try to negotiate. 3. Term and Renewal Even if you are required to sign the franchisor’s […]

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Special Considerations When Purchasing an Area Development Agreement or Multi-Unit Development Agreement

Apr 23, 2018 - Blog by |

For prospective franchisees with sufficient access to capital, entering into an area development agreement or a multi-unit development agreement can seem like a smart investment. A multi-unit opportunity will allow you to leverage what you learn about the system through economies of scale while protecting your geographic region from competition from other franchisees, and it will make it more difficult for the franchisor to push you out in the event that you do not see eye to eye. While a multi-unit development opportunity can be a profitable investment for the right franchisee under the right set of circumstances, these types of franchise opportunities raise some unique legal issues as well. These issues include the following: Multi-Unit Franchisee vs. Subfranchisor Although there are numerous variations, most multi-unit development opportunities fall into one of three categories. They involve either (i) direct development of multiple franchised outlets; (ii) serving as a “subfranchisor” in your region; or (iii) an option to either own or subfranchise your allotted number of franchises. Operating as a multi-unit franchisee and serving as a subfranchisor are two very different businesses; and, if you pursue the subfranchisor route, you will need to comply with the applicable federal and state registration and disclosure requirements. Right to Develop vs. Obligation to Develop When pursuing a multi-unit development opportunity, it is important to maintain realistic expectations. Entering into an area development agreement or multi-unit development agreement will typically not only give you the right to open multiple outlets (subject to various conditions), but […]

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Franchises are Making Headlines for All the Wrong Reasons. What are the Implications for Franchisees?

Apr 20, 2018 - Blog by |

In recent months, Panera Bread has experienced a massive data breach, Domino’s Pizza has been embroiled in a visa fraud scandal, Waffle House’s former CEO has gone on trial for alleged sexual extortion, and there have been reports of “mayhem” within the Subway franchise system. When franchises make headlines for the wrong reasons, what are the implications for franchisees, and what rights, if any, do they have available? When Bad Publicity Affects the Entire Franchise System While it may have previously been the case that there was no such thing as bad publicity, that old adage does not necessarily hold true today. In today’s world of click-bait headlines and instant social media backlash, bad news (or apparent bad new) can spread quickly, and this can have devastating impacts for businesses. Particularly when customers do not understand the nature of franchising, when the franchisor – or even a single franchisee – does something to cause an uproar, it can affect sales at franchised outlets across the country, if not around the world. Take, for example, the recent data breach at Panera Bread. According to the Washington Post, some experts are estimating that as many as 37 million customers may have had their personal information compromised due to a vulnerability in the franchisor’s website. With its premium pricing and notoriously-long lunch lines, Panera Bread’s loyalty program and online ordering have become key benefits for many customers. But, will customers be willing to put their privacy at risk to save time and a […]

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2017 Best Franchise Litigators

Apr 11, 2018 - Reformist Thoughts by |

2017 Best Franchise Litigators — USA By Jeffrey M. Goldstein   Over my 30 years of practice I’ve from time to time been asked by clients “if we hadn’t chosen you as our litigator, which lawyers would you have recommended that we had chosen to litigate our case?” Just again two weeks ago, during some dead-time during one of the prolific break-out sessions during Mediation for one of my clients, the issue was broached yet again. Interestingly, I had never provided a full and thoughtful answer to the question in the past. In addition, these clients wanted to know the best franchise lawyers ‘on both sides.’ For whatever reasons, prompted by that last Mediation discussion, I finally set about to list those litigators whose names I’d put on my personal informal list of ‘go to litigators’ for franchise and distribution. In preparing my information and non-scientific list I’ve used roughly the following criteria: (1) he or she has a minimum of 10-12 years in the franchise or distribution litigation ‘industry’; (2) franchise or distribution litigation (not franchise or distribution counseling or transactions) must predominate in his or her practice; (3) his or her ability and willingness to do battle in court are commensurate with their reputations; and (4) he or she participates in a full-time private practice. In essence, I have tried to informally distinguish between those who merely have prolific helpful professional ‘connections’ or ‘contacts’ in the franchise world (either within their law firms or in franchise corporations) and […]

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Reasonable Franchise Growth or Unreasonable Encroachment?

Apr 8, 2018 - Franchise Articles by |

Reasonable Franchise Growth or Unreasonable Encroachment? By: Jeffrey M. Goldstein New franchise openings are a lightning rod in the franchise world; while franchisor advocates see new location openings as a legitimate mode of franchise growth, franchisee advocates view such openings as unreasonable franchise encroachment. On a semantic level, one of the most exasperating problems hindering meaningful discussion of the franchise growth issue is the unsystematic and undisciplined use of the term encroachment. Very simply, encroachment is an outcome-determinative term; as used in the franchise context it includes both reasonable and unreasonable growth. Accordingly, because it includes any growth that could or does cause any negative impact on an existing franchisee, the term is descriptively, conceptually and analytically useless at best, and destructive at worst. Further, the term encroachment similarly fails to account for the crucial distinction between non-opportunistic and opportunistic growth. In this regard, opportunistic behavior may be found in both the reasonable and unreasonable growth scenarios. Making matters worse from a semantic perspective is that the term opportunism itself is uncertain, ambiguous and anecdotal. Although opportunism in the relevant law and economics literature possesses elements of selfishness and self-interest, there is no consensus on whether all forms of opportunism harm efficiency. Again, the literature has failed to provide a uniformly-accepted definition of opportunism in the world of contracts, economics and franchising. Whereas many types of conduct have been identified as opportunistic (e.g., shirking, free-riding, stealing), no uniform theoretical definition has been formulated or accepted. One common element of many […]

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