Under a typical franchise agreement, the franchisor’s and franchisee’s relationship can end in one of two ways: (i) the franchise agreement can expire at the end of an initial or renewal term, or (ii) one party (most likely the franchisor) can terminate the agreement before it expires.
Franchisors routinely reserve the contractual right to terminate their franchisees “for cause.” A for-cause termination involves ending the relationship based upon a default under the franchise agreement, most commonly the franchisee’s failure to pay royalties. However, even in a situation where the franchisor has reserved broad rights to terminate, there are a variety of circumstances under which the franchisee will be able to seek legal remedies for a wrongful termination.
Understanding Wrongful Termination of a Franchise Agreement
What makes a franchise termination “wrongful”? A termination is considered wrongful any time a franchisor terminates a franchisee in without the legal right to do so. This includes terminations in bad faith, terminations in violation of the terms of a franchise agreement, and terminations in violation of state law. Some of the most-common examples of franchisees’ claims in wrongful termination litigation include:
- The franchisor terminated on grounds not provided for in the franchise agreement;
- The franchisor falsely alleged a material default or failure to cure;
- The franchisor violated the franchisee’s rights under a state franchise relationship law;
- The franchisor refused to renew the franchise agreement in bad faith; and,
- The franchisor manufactured an alleged default in order to justify a termination pursued for other reasons (i.e. to open up a territory for a strong franchise candidate).
In many cases, franchisors will go to great lengths to “paper” supposed grounds for termination when they want a franchisee out of their system. This typically includes sending emails detailing alleged violations of the franchise agreement or operations manual, sending an initial default letter, sending follow-up letters warning of potential termination, and notifying franchisees that they have failed to cure the alleged defaults (regardless of whether there was ever actually a default, and regardless of whether the franchisee took the necessary steps to cure). Once the franchisor (and its defense team) believes that there is sufficient evidence to substantiate a default-based termination, then it will send a formal notice of termination.
Franchisees Should Take Legal Action Prior to Wrongful Termination
If any of this sounds familiar, it is important that you speak with a franchise attorney. The best way to fight back against a wrongful termination is to take legal action prior to receiving a formal notice of termination. Most franchisors will want to avoid defending against allegations of wrongful termination in court, and there are more legal remedies (and options for settlement) available pre-termination as opposed to once the process of de-identifying and closing your business has begun.
Contact Franchise Litigation Attorney Jeffrey M. Goldstein
If you are concerned that your franchisor may be preparing to terminate your franchise, we encourage you to contact us promptly for a free, no-obligation consultation. With decades of experience exclusively representing franchisees and dealers, we have assisted clients nationwide in fending off wrongful terminations. To speak with attorney Jeffrey M. Goldstein in confidence, please call (202) 293-3947, or send us your information online and we will be in touch as soon as possible.