Post-Term Restrictive Covenants Not-To-Compete In Franchise Agreements The existence of a post-term restrictive covenant (also known as a franchise noncompete clause,a franchise covenant not to compete or franchise covenant not-to-compete) in franchise agreements or distribution agreements that prohibits franchisees and dealers from working or operating competitive independent businesses at the conclusion of their franchise terms is common-place. Very simply, these provisions bar franchisees from operating or owning competitive businesses in their post-franchisee lives. Although franchise lawyers and franchisees object vociferously to the validity of such post-term restrictive covenants, courts nevertheless readily approve of and enforce them; however, from time to time a good franchisee lawyer is able to convince a court to invalidate such a restriction. Franchisors contend that they are necessary to protect the goodwill associated with former franchisees’ businesses, franchisees argue that they are the ones who created the good will in the first place, and that they need a way to earn a living. Sometimes the antipathy of some courts towards franchisees in general is so strong that it leads to the odd situation where a court will strike down the covenant not-to-compete, but finds that the franchisee's post-termination competition is unlawful for other reasons.  Restrictive covenants are triggered not only by terminations, but expirations as well. They apply regardless whether the franchisee has been at fault at any time during the franchise term. The test applied by courts in evaluating whether a covenant-not-to-compete is valid, is whether the prohibition is “reasonable” in time and substantive scope. Courts grant franchisors such great a latitude in […]

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Franchise Supply Restrictions Franchise supply restrictions exist in almost every franchise system. They are so important that they have been given “item status” in Franchise Disclosure Documents. In addition to meeting all of the necessary disclosure requirements, supply arrangements must not collide with the prohibitions of the antitrust laws. Purchasing requirements must also steer clear of the few state franchise laws that regulate them. Economic justifications for and against such purchasing requirements abound. Many times these finely nuanced economic analyses vary based merely upon the particular phraseology used to formulate a given sub-issue associated with supply arrangements. A few of the prolific issues raised by purchasing requirements include: whether the relevant restricted products are so specialized that they should and can be purchased from only one source; whether a preferred supplier is charged a fee that is or is not kept by the franchisor; whether a significant portion of the franchisor’s revenue comes from its franchisees’ purchases of the identified products; whether the relevant products are priced ‘fairly’ and ‘reasonably’ and do not provide an ‘unfair profit’ to the franchisor (whatever those terms mean); whether the dictated standards are reasonably related to the professed need for product uniformity; whether the required products are supplied directly by the franchisor or affiliates of the franchisor; whether the final decision as to the specific products is made by the franchisor alone and with or without franchisee input; whether the franchisor permits franchisees to source reasonably equivalent products or services; whether purchasing cooperatives have […]

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NO SUPPORT OR ASSISTANCE FROM YOUR FRANCHISOR?  IT MAY BE SUICIDE TO STOP PAYING FRANCHISE FEES Franchisees often complain that their franchisors refuse to provide them with adequate support.  In general, however, a franchisor's breach of its obligations to support its franchisees will not justify a franchisee's naked refusal to pay its royalties. Not even immigrants recruited by franchisors have a right to expect franchisors to provide adequate support.  At the very heart of the franchise relationship is the belief that a franchisee has the right to receive from his franchisor support and training in exchange for the franchisee’s ongoing investment in the franchise and franchise system.  However, far too many times, this “give and take” scenario turns into a one-sided “take” situation where the franchisor “takes” recurring fees from the franchisee each month but “gives” very little or nothing to the franchisee in return.  Unfortunately, most franchise agreements do not obligate the franchisor to provide support to its franchisees – regardless of whether support is crucial to the franchise’s success.  Similarly, neither federal nor state laws obligate the franchisor to provide such support. Breaches of franchise support pervade very many franchise systems.  A recent court decision rendered by the United States District Court for the Northern District of Illinois (Century 21 Real Estate Corporation v. CLTM Associates), however, shows that some courts will closely examine a franchisor’s refusal to provide support to its franchisees.  In that case, Century 21, a national real estate franchisor, claimed that one of its […]

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Franchisees often become so frustrated with the lack of success of their franchises that they choose to abandon or “walk away” from their franchises.  Under most state laws, however, a franchisee who walks away from his franchise may be successfully sued by his franchisor for abandonment.  Further, under many state laws, a franchisee who walks away from his franchise may forfeit some or all of the claims that he may have had against his franchisor. A recent federal court case in Illinois ( Zeidler v. A&W Restaurants, Inc.) is an example of how a franchisee’s abandonment of his franchise resulted in the franchisee’s loss of his claims against his franchisor.  Zeidler involved an A&W restaurant franchisee, Zeidler, who had signed a franchise agreement with A&W Restaurants, Inc. (“A&W”) in 1993.  Approximately four years after Zeidler signed the franchise agreement, his relationship with A&W began to deteriorate.  A&W suddenly started alleging that Zeidler was not operating his franchise in compliance with A&W’s health and sanitation standards and was not maintaining the minimum amounts of insurance required by the parties’ franchise agreement.  A&W sent letters to Zeidler threatening to terminate Zeidler’s agreement. Believing that A&W was acting in bad faith and trying to “drive him out of business” in order to take back and then resell his franchise to another franchisee, Zeidler closed his restaurant and removed all of his equipment.  Shortly after learning that Zeidler had abandoned his restaurant, A&W sent a letter to Zeidler formally terminating the franchise. Approximately one […]

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Arbitration: Fast But Not Necessarily Fair Fair Arbitration is not always achievable by franchisees. An increasing number of franchise agreements contain arbitration clauses that require disputes to be resolved by binding arbitration instead of in state or federal courts.  While franchisors argue that the purpose of an arbitration clause is to obtain a faster and more efficient way of resolving litigation, it cannot be disputed that several aspects of an Arbitration heavily favor the franchisor over the franchisee.

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BEWARE: FRANCHISEES MAY HAVE NO GENERAL RIGHT TO RELY ON THEIR FRANCHISORS FOR SUPPORT Franchisees often purchase a franchise based on the mistaken belief that their franchisors will provide the assistance necessary to help franchisees succeed.  Unfortunately, most franchisors intentionally draft franchise agreements that impose very few, if any, obligations requiring them to provide “support” to franchisees.  Further, even in those rare instances where franchisors do include support requirements in their franchise agreements, the franchise agreements tend to state the requirements in broad, unenforceable language, usually reserving to the franchisor the right to exercise its “sole discretion” in deciding whether to provide support.  In contrast, obligations of franchisees, such as the monthly payment of royalties and other “recurring fees” to the franchisor, are always set forth in great detail in franchise agreements.

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Franchisees Purchase Half-Million Dollar Franchise Computer System A recent case by the United States Circuit Court for the Sixth Circuit, Heartland v. La Quinta and Baymont, rejected the hotel franchisee’s argument that the franchisor breached the franchise agreement through its implementation of a new and costly computerized reservations system standards regulation. In so doing, the court held that the franchisee breached the franchise agreement when it failed to install the computer system in conformance with the franchisor’s modified system standard regulation.

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HOTEL DISPUTES: SOME ADVICE ON ADVICE – LAWYERS OR CONSULTANTS? Hotel franchises are preyed upon frequently by consultants masquearding as lawyers. Franchise consulting companies have recently begun advertising that they are able to provide “all solutions to all people.” In turn, many clients and potential clients of The Goldstein Law Group, PC, have asked us whether franchise consulting companies have the ability to provide them with effective solutions to their business problems.

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SURVEY OF FRANCHISE DECISIONS JULY-AUGUST 2010 Franchisor’s President Found Personally Liable For Franchisor’s Misrepresentations Zantum, LLC, v. Daniel Wencel, (June 2010) The founder and president of a franchisor of remanufactured ink cartridge businesses was liable to one of its area franchisees for making negligent misrepresentations that induced the franchisee to sign an area franchise development agreement. After the franchisor went out of business, the area developer, who had been terminated, sued the franchisor and its President and founder. In finding that the President could be held personally liable, the court applied the general rule that vicarious liability for torts is imposed upon employers for acts of their employees within the course and scope of employment. The specific misrepresentations found to exist included the following: (1) That Caboodle’s remanufactured cartridges met OEM quality and specifications; (2) That remanufactured Caboodle cartridges could be sold at a price 50 to 65% lower than OEM prices; (3) That Caboodle remanufactures nearly five hundred different cartridges, and (4) That “all of this is done at our centralized manufacturing facilities.'” Even though the court found that the President made the representations in good faith, it also found that the President lacked a reasonable basis for the representations at the time they were made.

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KFC Corp. v. Kazi, Slip Copy, 2013 WL 2257606 (W.D.Ky. 2013) A federal court in the Western District of Kentucky on May 22, 2013, decided in essence to wipe out the protections that had been given to a KFC franchisee in a formal written settlement agreement that had resolved a previous remodeling dispute between the franchisor and franchisees in the Kentucky Fried Chicken System. On May 2, 2011, the franchisee Defendants’ franchise agreements for its California stores were terminated when Defendants failed to comply with the agreements' express conditions and several remodel agreements. As part of the Settlement Agreement, KFCC reinstated Defendants' franchise agreements for three California stores, conditioned on Defendants remodeling the stores by certain deadlines. In this case, KFCC moved to enforce the parties' Settlement Agreement, asking the Court to order the franchisee to close the stores because the franchisee did not meet its remodeling obligations that had been reestablished in the settlement agreement. The Settlement Agreement provided the consequences for Defendants' failure to remodel in a timely manner. In Paragraph 4(c), the Settlement Agreement stated: “If the upgrade actions set forth in paragraph (a) above are not completed within the Time Frame for any California Stores, the Respective Franchisees must close and complete for each non-upgraded California Store the De–Image Obligations as described in paragraph 12 below no later than thirty (30) calendar days after the respective Time Frame.” The franchisees did not meet this deadline, although they had what they viewed to be a valid legal […]

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