Although indemnification clauses are ubiquitous in the franchise industry, indemnification is a legal concept that few franchisees, franchisors and even franchise attorneys truly understand. This is unfortunate, because it leads many franchisees to assume legal responsibility for liabilities that are far beyond their control, and it prevents many franchisors from negotiating reasonable concessions that would be no-brainers if they understood the terms of their own franchise agreements.
What is Indemnification?
So, what is indemnification? In its most basic form, indemnification is the oblation for one party to assume liability for a claim against another party. So, if Joe sues Jane and John has an obligation to indemnify Jane, if Joe wins, John is the one who is ultimately responsible.
In a typical franchise agreement, the indemnification clause will look something like this:
“Franchisee will fully indemnify and hold harmless Franchisor from and against any and all claims arising out of or relating to the Franchise, whether asserted during the term of the Franchise Agreement or after the Franchise Agreement expires.”
This sounds reasonable enough, right? If a customer sues your franchisor for something that you did, doesn’t it make sense for you to be held liable? While a duty to indemnify may make sense in this particular scenario (although, even this may not necessarily be the case), there are plenty of other scenarios where the franchisor should be the one to indemnify.
Most Franchise Agreement Indemnification Clauses are Overly Broad
While you will be the face of your franchise and, as a franchisee, will be the owner of your own independent business, there are still numerous circumstances under which your franchisor should hold responsibility for lawsuits against your franchise. Some of the most-common examples include:
- Claims by third-party trademark owners alleging infringement of their exclusive rights.
- Claims related to products or services provided by the franchisor or its designated suppliers.
- Claims related to the franchise system, operational standards or other franchisor-imposed requirements.
However, under the type of indemnification language quoted above, not only would the franchisee be directly liable in a third-party lawsuit; but, if someone sued the franchisor, the franchisee would have a duty to indemnify the franchisor as well.
Negotiating the Indemnification Clause in Your Franchise Agreement
When negotiating your franchise agreement, it is critical not to overlook the indemnification clause. Although this clause is typically buried somewhere in the “boilerplate” at the back of the agreement, it truly has the potential to be one of the most-important provisions of your entire contract. While each negotiation requires careful consideration of the specific indemnification language at play, some potential negotiation options include:
- Specifying that the franchisee’s indemnification obligation is limited to claims based on the franchisee’s own acts and omissions.
- Carving out (and requiring the franchisor to indemnify for) third-party infringement claims relating to the franchisor’s intellectual property.
- Carving out (and requiring the franchisor to indemnify for) claims based on the franchisor’s negligence.
Speak With National Franchise Attorney Jeffrey M. Goldstein
If you are thinking about buying a franchise and would like help understanding the legal risks associated with the franchise agreement, we encourage you to inquire about our firm’s flat-fee franchise reviews for prospective franchisees. For more information, please call 202-293-3947 or send us your contact information online today.
