Franchisor Fraud Difficult to Prove
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |FRANCHISOR FRAUD USUALLY IMMUNE UNDER FRANCHISE AGREEMENT In cases where a customer is able to show that statements a salesman made are fraudulent, salespeople accused of fraud regularly invoke various legal rules and contract clauses to shield themselves from liability. Franchisors often use these rules and contract clauses to defend themselves when franchisees claim the franchisor misrepresented the terms of a deal. This is significant as cases containing franchise fraud claims are filed almost daily. First, many businesses, including franchisors, put terms in their written agreements that are called “merger” clauses or “integration” clauses. Basically, these clauses state that the franchisee forgives the salesman for any fraudulent statements the seller may have made to the customer during the sales process. Such clauses also state that the customer agrees never to argue or claim that the seller made misleading statements. Further, a merger or integration clause states that the written agreement is the complete statement of all the agreed-upon terms. The merger or integration clause therefore keeps out of the legally binding agreement any statements or promises made in conversation (unless those statements or promises are finally written into the agreement’s text). This means that in the face of merger and integration clauses in a franchise agreement, a franchisee cannot rely on any promise or statement made by the franchisor or its sales staff if that promise has not been clearly written in the franchise agreement. Like other businesses, franchise companies regularly rely upon merger clauses and integration clauses included in […]
A Brief Survey of Restaurant Franchise Supply Cases in the Courts
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |Wendy’s Supply Restrictions Could Violate the Antitrust Laws Burda v. Wendy's Intern., Inc. (2009) Restaurant franchise supply cases have a great historical significance. In the old days, pre-Reagan, such franchise antitrust claims had notable vitality; nowadays, in contrast, they have little legal strength. Fast food restaurant franchisee, asserting that franchisor imposed illegal tying arrangement by requiring it to purchase buns and food supplies from particular vendors, sufficiently alleged market power in “tying product.” The franchise agreement did not contain language putting a potential franchisee on notice that franchisor would be able eliminate all competition by naming an exclusive bun supplier or that it could impose a surcharge on approved suppliers, especially in light of the allegations that the market for these supplies was competitive prior to the alleged tie. Sherman Act. Editor’s Note: Although franchisors historically been immune from antitrust claims, the Burda case above, as well as the United States Supreme Court case of Kodak upon which it was based, have provided franchisees with a small window of opportunity in cases where a franchisor requires that its franchisees obtain supplies only either directly from them or from approved suppliers, and the prices of the supplies thereafter increase. In so noting, it is important to understand that this exception applies only in very narrow and complicated circumstances. However, if you are now experiencing issues or concerns regarding purchase of supplies or services it is worth having a franchise attorney examine whether your circumstances might afford you an opportunity to be compensated […]
Franchisees: Get Everything In Writing
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |Franchisees: Get Everything In Writing Franchisees involved in franchise agreement reviews or FDD reviews must get everything in writing; if not, courts judging franchise disputes that arise during the course of the franchise relationship will probably not help. In cases where a franchisee or dealer is able to show that statements a salesman made are fraudulent, salespeople accused of fraud regularly invoke various legal rules and contract clauses to shield themselves from liability. Franchisors often use these rules and contract clauses to defend themselves when franchisees claim the franchisor misrepresented the terms of a deal. First, many businesses, including franchisors, put terms in their written agreements that are called “merger” clauses or “integration” clauses. Basically, these clauses state that the franchisee forgives the salesman for any fraudulent statements the seller may have made to the customer during the sales process. Such clauses also state that the customer agrees never to argue or claim that the seller made misleading statements. Further, a merger or integration clause states that the written agreement is the complete statement of all the agreed-upon terms. The merger or integration clause therefore keeps out of the legally binding agreement any statements or promises made in conversation (unless those statements or promises are finally written into the agreement’s text). This means that in the face of merger and integration clauses in a franchise agreement, a franchisee cannot rely on any promise or statement made by the franchisor or its sales staff if that promise has not been clearly written in […]
The Covenant Not-To-Compete in Franchise Agreements
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |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 […]
Franchisor-Imposed Supply Restrictions
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |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 […]
Breaches of Franchise Support Normally Don’t Allow Franchisees to Stop Paying
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |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 […]
To Walk Or Not To Walk: Franchisee Abandonment
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |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 […]
Arbitration: Fast But Not Necessarily Fair
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |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.
Don’t Expect Support From Franchisors
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |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.
April 2010 Recent Franchise Cases
May 7, 2015 - Franchise Articles by Jeffrey M. Goldstein |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.
