May 7, 2015 - Franchise Articles by |

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.

In Burger King Corp. v. Hinton, Inc., a federal court in Florida found that the franchisor, Burger King, was justified in terminating Hinton, a Burger King franchisee that withheld recurring fees in “retaliation” for Burger King’s failure to provide it with adequate operational, training, marketing, and advertising support.  The court found that, as a matter of law, a franchisor need not provide “general support” to its franchisee unless the specific language in the parties’ franchise agreement expressly requires it.  The court also held that a franchisee does not have a claim against a franchisor for the franchisor’s failure to perform support obligations where the franchise agreement leaves such performance to “the franchisor’s sole discretion.”

Hinton, a franchisee who operated eighteen Burger King restaurants in South Carolina, received a notice of default from Burger King in June 2001.  According to the notice of default, Hinton had failed to pay royalties, advertising fees, and other fees required by the parties’ franchise agreement and leases.  When Hinton failed to remit the fees within the “cure period” contained in the notice of default, Burger King filed suit seeking to terminate the franchisee.

Although Hinton acknowledged that it had withheld franchise fees, it argued that its actions were justified by several factors, including Burger King’s failure to provide support to the franchisee.  First, Hinton argued that Burger King had failed to comply with its “general” obligation to provide support to Hinton’s businesses.  Second, Hinton argued that Burger King breached specific franchise agreement provisions that required Burger King to provide training, advertising, and marketing support to Hinton.  According to Hinton, Burger King’s failure to honor its commitments under the franchise agreement made it impossible for Hinton to comply with its own financial obligations.

The court rejected Hinton’s contention that Burger King had breached a general duty to provide support.  The court reasoned that Burger King’s obligation to provide support to Hinton was limited only to those services that were specifically delineated in the franchise agreement.  Although the franchise agreement required Burger King to “periodically advise and consult” with Hinton and honor certain enumerated duties, the court found that the franchise agreement simply did not state that Burger King owed Hinton a more “general” duty of support.  Moreover, the court would not allow Hinton to “imply” a general duty of support into the franchise agreement.

The court also rejected Hinton’s argument that Burger King breached the franchise agreement by failing to adequately perform several duties explicitly delineated in the franchise agreement.  As the court noted, the franchise agreement stated that these specific obligations, including certain types of operational support, training, marketing, and advertising, were left to Burger King’s “sole reasonable discretion.”  According to the court, the “sole discretion” clause meant that it was solely up to Burger King to decide whether and when to provide such support, and Hinton therefore could not make a claim based on Burger King’s decision to withhold support.  In so ruling, the court incorrectly ignored the franchise agreement’s requirement that Burger King exercise “reasonable” discretion.

Unfortunately, franchisees are often misled into believing that their franchise agreements will guarantee them substantial franchisor support throughout their franchise relationships.  As demonstrated in Burger King v. Hinton, Inc., however, franchisors rarely explicitly include in franchise agreements more than a few very ambiguous obligations requiring them to provide support and assistance to franchisees.  Further, even when such obligations are set forth in franchise agreements, they often are left to the franchisor’s “sole discretion,” making these obligations easier for the franchisor to ignore.  Therefore, it is highly recommended that any potential franchisee first consult with an experienced franchise attorney and become well-informed as to his rights and duties under the franchise agreement before signing it.

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