Firm founder and nationally-recognized franchisee lawyer Jeffrey M. Goldstein was recently quoted by the Franchise Times. The quote comes from Mr. Goldstein’s statements during the 2021 Franchise Times Legal Eagles Roundtable, which took place on June 10, 2021. The Goldstein Law Firm was a sponsor of the Roundtable discussion.
During the Roundtable, Mr. Goldstein and other lawyers discussed the implications of the COVID-19 pandemic on the franchise industry, and on the relationship between franchisors and their franchisees in particular. When the discussion turned to whether franchisors should terminate franchisees who were unable to meet their royalty obligations during the pandemic, Mr. Goldstein stated: “I think it’s ill-advised. . . . Franchisors doing that as a group, courts are going to look at motivation and pretext.”
Franchisors May Use Underperformance During the COVID-19 Pandemic as a Pretext for Termination
Mr. Goldstein’s comments during the Roundtable discussion allude to the fact that franchisors will often look for excuses to terminate franchisees they no longer want in their systems. Franchisors may want to expel franchisees for a variety of different reasons unrelated to financial performance. Perhaps they want to get rid of a “difficult” franchisee, or perhaps they want to clear the way for a franchisor-owned outlet or a large multi-unit operator. Whatever the case may be, absent legal justification, franchisors cannot simply kick unwanted franchisees to the curb.
As a result, they will often look for pretexts—and underperformance during the COVID-19 pandemic is a classic example. During the pandemic, many franchisors offered grace periods, fee waivers (often accompanied by release language), and even additional support to their struggling franchisees. It goes without saying that the pandemic was difficult for everybody (though certainly more difficult for some than others), and franchisees in a broad range of industries struggled due to factors well beyond their control.
So, while franchisees’ struggles during the pandemic might technically provide grounds for termination when evaluating franchisors’ efforts to terminate franchisees, Mr. Goldstein suggests that the courts will look beyond their stated grounds for termination. In other words, is the franchisee’s non-payment of royalties or marketing fund contributions during the pandemic really what is driving the termination? Or, is there a subtext that offers an alternate explanation?
This question is particularly pertinent at the current stage of the pandemic, as many franchisees are finally starting to see their revenue come back. If a franchisee’s non-payment was really an issue, why is the franchisee still in the system? Additionally, why is the franchisor terminating now—when the franchisee has greater means to pay any amounts that may be outstanding? Depending on the answers to these types of questions, franchisees who are facing termination may have grounds to challenge their terminations in arbitration or in court.
Request a Free Consultation with Franchisee Lawyer Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchisee lawyer who has been exclusively representing franchisees and dealers for more than 30 years. If you are facing termination and would like to discuss your legal rights with Mr. Goldstein, you can call 202-293-3947 or contact us online to arrange a free consultation.
