Franchise Articles

With most franchise systems, when you want to buy a franchise, you need to go through an application process. Franchisors use this process to gather as much information as possible about prospective franchisees, which they then use to weed out undesirable candidates. If you are thinking about buying a franchise, knowing what to expect can help the application process go more smoothly, and being prepared can increase your chances of submitting a successful application. What Do Franchisors Look for in Franchise Candidates? While some franchise systems have more-rigorous screening procedures than others, generally speaking, franchisors will rely on the following types of information when evaluating franchise candidates: 1. Education, Employment and Business Experience Franchisors will typically ask for information about prospective franchisees’ education, employment history and prior business experience, if any. While franchisors often expect their franchisees to be first-time business owners, having a business background can make you a more-attractive candidate (in addition to potentially increasing your chances of success as a franchisee). 2. Background Check Most franchisors will conduct criminal background checks as well. If you have a criminal record, it may be best to be up front about it with the franchisor and proactively address any concerns you have run into in previous situations. 3. Financial Documentation Whether you will be financing your franchise yourself or relying on funding from a bank, family member or private investor, you can expect the franchisor to request plenty of documentation about your source(s) of capital. Inadequate capitalization is among the […]

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The Food and Drug Administration’s (FDA) long-anticipated menu labeling requirements went into effect on May 7, 2018. These requirements apply to predominantly to restaurant franchisees. As explained by the FDA: “The menu labeling requirements apply to restaurants and similar retail food establishments that are part of a chain with 20 or more locations. In addition, they must be doing business under the same name and offering for sale substantially the same menu items.” So, if you own a restaurant franchise in a system with 20 or more outlets, you are likely subject to the new menu labeling law. What do you need to know? Franchisee Compliance with the FDA’s New Menu Labeling Requirements 1. The New Menu Labeling Law is Already Effective First, May 7, 2018 was the compliance date for restaurant owners to adopt the new labeling requirements. If you are subject to the law and you have not yet updated your menus, you should consult with an attorney about coming into compliance promptly. 2. The Law Applies to More than Just “Restaurants” The new labeling law applies to “restaurants and similar retail food establishments.” As explained by the FDA, this means that the law applies to all types of food service businesses. This includes: Bakeries Cafeterias Coffee shops Convenience stores Food delivery and take-out businesses Food service locations in amusement parks and other entertainment venues Full-service restaurants Grocery stores Quick-service restaurants Specialty food stores 3. As a Franchisee, it is Up to You to Comply As a franchisee, […]

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As a franchisee, encroachment by the franchisor or another franchisee can be among the greatest risks to long-term sustainability. If would-be customers (most of whom do not understand independent franchise ownership) have access to your brand at a more-convenient location, they will have little incentive to visit your store or restaurant. As a result, territorial protections are among the most-important protections available to franchisees, and state franchise relationship laws often provide critical protections when disputes regarding encroachment arise. A recent successful lawsuit filed by El Pollo Loco franchisees in California state court illustrates the types of protections that are available to franchisees in cases of encroachment: California Jury Rules in Favor of Husband-and-Wife Franchisee The case involved a dispute between husband-and-wife franchisees Michael and Janice Bryman and restaurant franchisor El Pollo Loco Inc. According to news reports, the Brymans sued after their franchisor opened two new locations within their territory. El Pollo Loco Inc. apparently did so in reliance on a standard provision in their franchise agreement which stated that it had the right to place company-owned locations “in the immediate vicinity of or adjacent to” its franchisees’ outlets, the franchisee’s territorial rights notwithstanding. Critically, prior to the jury verdict on damages, the trial judge ruled that this provision of the franchise agreement was unconscionable as a matter of law. As such, it was unenforceable, and could not be used to justify the opening of two company-owned outlets that competed directly with the franchisees’ restaurants. Subsequently, the jury also found […]

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When you buy a franchise, the terms of your relationship with the franchisor will primarily be governed by three documents: (i) the Franchise Disclosure Document (FDD), (ii) the Franchise Agreement and (iii) the Operations Manual. These are three very different documents that impact your rights and obligations in different ways, and having a basic understanding of each is one of the first steps toward understanding what you can expect as a franchisee. 1. The Franchise Disclosure Document When you apply to purchase a franchise, the franchisor will provide you with a copy of its Franchise Disclosure Document. The FDD is a federally-mandated form disclosure which consists of 23 “Items” and a series of exhibits or attachments. Although the form of the FDD is established by federal regulation and there are industry standards for the information that franchisors choose to disclose, the FDD should still be heavily-customized to reflect the unique terms of your chosen franchise opportunity. FDDs can be dense and difficult to digest. But, it is important that you take the time to understand the information disclosed (as well as the implications of any missing or “negative” disclosures). For help dissecting the FDD, you can read: Understanding Your Franchisor’s FDD – Part 1(Items 1 through 7) Understanding Your Franchisor’s FDD – Part 2(Items 8 through 14) Understanding Your Franchisor’s FDD – Part 3 (Items 15 through 23) 2. The Franchise Agreement The Franchise Agreement is the contract you sign when you purchase a franchise. This is a legally-binding and […]

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As a franchisee, there is a reasonable probability that, at some point, you will have a disagreement with your franchisor. Whether you think that advertising fund contributions could be better spent or you believe that the franchise system is failing as a whole, the longer you own your franchise, the more likely it will become that a dispute will arise. Not all disputes are grounds for litigation. Franchise agreements provide extraordinarily-broad protections to franchisors; and, in some cases, it simply will not be worth the cost to hire an attorney. But, franchise litigation is more common than many franchisees realize; and, if you think you may have a claim against your franchisor (or if you are concerned that your franchisor may take legal action against you), it is worth taking appropriate steps to prepare. What Not to Do When Anticipating Franchise Litigation When preparing for the possibility of litigation (or mandatory mediation or arbitration), knowing what not to do is just as important as knowing what to do. The following are all potentially-costly mistakes that franchisees should avoid when anticipating mediation, arbitration or litigation with their franchisor: 1. Stopping Payment of Royalties and Advertising Fund Contributions No matter how dissatisfied you may be with your franchisor, and regardless of whether your franchisor has violated the terms of your franchise agreement, you should not stop payment of royalties and advertising fund contributions unless advised to do so by your legal counsel. Even if your franchisor owes you money, you are not […]

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Franchise Disclosure Documents and Dr. Frankenstein By: Jeffrey M. Goldstein An article in the WSJ today provides a glimpse of the interesting results obtained by Professor Uri Benoliel in a new franchise study finding that it takes more than 20 years of education to understand a Franchise Disclosure Document (FDD). The conceptual purpose of disclosure under the FDD is simple – to provide the potential franchisee with all material facts, accurately and concisely, so that he or she may understand and evaluate what he or she is considering buying. Using that simple goal as the benchmark of success, from my perspective, the Federal Trade Commission’s FDD program in practice has been a tremendous failure. The WSJ article accurately sets forth the rote responses to the study of the two other main players in the omnipresent FDD debate: the FTC and the IFA. The FTC, the Dr. Frankenstein of the FDD program, of course “declined comment.” And, the IFA, the titular spokesman for all franchisors, simply ‘read out loud’ one of the canned responses it gives to every inquiry regarding any pro-franchisee observation or proposal: ‘Buying a franchise is complex; make sure that you do your due diligence before buying.’ However, in the IFA’s defense, there’s really no need for it to do any meaningful work on researching the FDD dispute or providing intellectually honest answers regarding it. The number of national lawyers representing solely franchisees has dwindled literally to under a handful, and the number of academics siding with franchisees […]

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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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What are your rights as a franchisee? Whether you are looking for more ways to grow your business or facing a potential dispute with a franchisor, this is a very important question. While you own your own business, you and your franchisor are inseparably intertwined, and your rights are largely dictated by the terms of your franchise agreement. However, there are various laws that apply to the franchise relationship; and, depending on where you operate your franchise, you may have additional protections under your state’s franchise law as well. Then, there are the general rights that exist by virtue of the fact that your franchise agreement is silent on certain subjects. Q&A with Franchise Attorney Jeffrey M. Goldstein Q: Are franchisors required to impose uniform standards on all franchisees? As a general rule, franchisors can impose different standards on different franchisees. While uniformity is one of the hallmarks of the franchise model, there are a variety of reasons why some franchisees may be subject to different standards than others. For example, franchisees in urban areas may need to do more to stand out from their competition than those in rural towns. Or, some franchisees may have negotiated additional protections into their franchise agreements. However, there are limits on franchisors’ ability to treat franchisees differently. Providing disparate treatment without a justifiable basis may constitute franchise discrimination. Franchise discrimination is a violation of franchisees’ rights, and legal remedies are available. Q: Do I have the right to negotiate my franchise agreement? Yes, […]

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Franchisee Waves Goodbye to Car Dealership due to Ineffective Waiver By: Jeffrey M. Goldstein A recent decision by the United States District Court for the Sixth Circuit affirmed a lower federal court’s ruling that Chrysler (“Chrysler” or “Franchisor”) had legally terminated one of its car dealers in Riverhead, NY, (“Eagle Auto-Mall”, “Dealer” or “Franchisee”) for the Dealer’s failure to have built new dealership facilities within the contractually specified time period set out in the parties’ Letter of Intent (“LOI”).  FCA US LLC v. Eagle Auto-Mall Corp., No. 16-2375, 2017 U.S. App. LEXIS 13232 (6th Cir. July 20, 2017).  Finding that the time deadline terms had not been waived or modified, the Court of Appeals (“Court”) held that Eagle committed a material breach of the agreement by failing to complete its renovations within the LOI’s eight-month window. The facts as related by the Court are as follows. Eagle had been a long-time car dealer selling Chrysler and Jeep vehicles out of a single facility that also housed its Mazda-Kia-Volvo dealership. After Chrysler filed for bankruptcy in 2009, it attempted to cancel its dealership agreement with Eagle; however, Eagle resisted, and Eagle obtained a court order requiring Chrysler to enter into a Letter of Intent (“LOI”) with Eagle for a new dealership. Under the LOI, Eagle was required to complete the construction of a dealer facility before it had a right to obtain a franchise agreement. Specifically, the LOI established three ways in which Eagle could provide for a legally compliant facility, […]

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Franchisee Bill of Rights Doesn’t Ensure Franchisor Competency By: Jeffrey M. Goldstein A recent suit in the United States District Court for the Western District of New York resulted in the denial of a franchisee’s motion for a preliminary injunction to prevent the franchisor from requiring the franchisee to install a new computer system. JDS Grp. Ltd. v. Metal Supermarkets Franchising Am., Inc., No. 17-CV-6293 (MAT), 2017 U.S. Dist. LEXIS 94779 (W.D.N.Y. 2017). In JDS, the franchisee JDS brought a suit against its franchisor Metal Supermarkets Franchising America (MSFA) for violation of the Washington State Franchise Investment Protection Act (FIPA), which includes a Franchisee Bill of Rights, as well as for breach of the implied covenant of good faith and fair dealing. The facts as found by the Court include the following. JDS owned two retail stores that sold metal components used in various industries. The stores were in Kent, Washington, and Portland, Oregon. JDS had been a franchisee of MSFA for approximately ten years. JDS used a software system called “Metal Magic,” that was provided by MSFA. In 2012, MSFA determined that Metal Magic was outdated, inefficient, and unable to accommodate anticipated growth and functionality changes. As a result, MSFA undertook development of a new, modern software system, called “MetalTech,” which cost over $1,000,000 and took three years to develop. In 2015, MSFA began installing MetalTech at its franchisee locations. JDS did not want to use MetalTech in its stores, but instead wanted to keep using Metal Magic. Plaintiff […]

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