Do franchisors have an obligation to their franchisees to act competently?

In theory, it’s possible that a franchise attorney could prove that a franchisor violated a franchise agreement by poorly managing the franchise system. Inadequately capitalizing the franchise system or poorly managing advertising campaigns could potentially violate a franchise agreement.

However, there are few if any recent case findings in which a franchisor has violated the terms of a franchise agreement. And if the franchise agreement hasn’t been violated, the courts almost never support a free-standing claim of negligence against the franchisor.

In other words, courts have held that franchisors do not owe a duty of competence to their franchisees.

It’s interesting to note, however, that many franchise law firms stay busy addressing the flip side of this issue–whether the franchisee has acted negligently in operating his or her franchise

Do franchisors have a duty to provide support to their franchisees?

On paper franchisors have this duty to some degree. Most franchise agreements explicitly set forth the respective duties owed by both the franchisors and franchisees.

However, the provisions outlining those duties owed by franchisors are few and normally too ambiguous to enforce. Most franchise agreements include contractual language stating to the effect that “the franchisor doesn’t guarantee the success of the franchisee.”

In practice, this means that franchisors really don’t have a compelling duty to provide support to their franchisees.

Also, most franchise agreements require franchisees to state in their agreements that their business venture involves risks, one of the most prominent being the business knowledge of the franchisee.

This results in a double standard: The franchisor has only a few ephemeral obligations to the franchisor. But in contrast, the “whereas” provisions in the introduction of most franchise agreements indicate that the franchisor is the undisputed guru in operating franchises in that particular industry.

What are some of the most common duties imposed on franchisors under franchise agreements?

It’s important to recognize that these duties are incredibly limited in scope. That said, they include, among other things: (1) locating appropriate sites for stores, (2) managerial assistance, (3) advertising assistance, (4) providing operating manuals, (5) training, and (6) identifying third party vendors from whom necessary products and services may be sourced.

Keep in mind, these areas are so broadly defined that even the best trial attorney would have difficulty in trying to identify – never mind proving – the contours of such duties unless he or she had extensive experience within a franchise law firm.

Are franchisors permitted to modify their requirements or system standards during the term of the franchise?

Believe it or not, they usually can make these changes. Almost all courts confronted with this question have readily permitted franchisors to change the obligations owed to their franchisees during the term of the franchise.

Franchisors gain this fluidity by lacing their franchise agreements with language that “the franchisor is permitted to modify or change the Operations Manual.” They can then “incorporate by reference” the Operations Manual into the franchise agreement.

The franchisor’s unbridled discretion is further bolstered by language in the franchise agreement that “the franchisor may modify the Operations Manual in its ‘sole discretion.'”

Everybody knows that people and businesses are subject to liability for “negligence.” Can't franchisors be held liable for negligence to their franchisees as well?

The short answer is no, not under the common law of almost every state.

When the franchisee is only claiming economic loss – which is almost always the case -the franchisee must seek its damages through a breach of contract action.

The franchisee would have to prove that the franchisor violated the franchise agreement. This is very difficult to prove, as the franchisor’s duties are usually few, ephemeral, and deliberately vague.

It’s possible a franchisor could be found liable if he or she failed to work in good faith and with fair dealing, but this is a long shot.

Note, however, that courts have found franchisors liable for negligence in certain
cases where personal injuries were involved.

Are franchisors liable to franchisees for the negligent or otherwise improper conduct of suppliers recommended by the franchisor?

Depending on the language and requirements in the franchise agreement, franchisors may be liable for the conduct of suppliers in certain cases.

It depends on whether the franchisor has required that its franchisees purchase from that specific supplier, and whether the product or service is significant to the operations of the franchise in some quantifiable way.

If the answer to these two questions is yes, there’s a greater chance that inadequate or defective business conduct of the supplier could form a basis for liability against the franchisor.

The theory behind such a case rests on the franchisor’s prolific claims that it is uniquely qualified to develop and enforce vendor standards required for the successful operation of its franchisees. Given these claims, the franchisor’s failure to identify and prevent the unreasonable conduct of vendors would fly in the face of the franchisees’ reasonable expectations in this regard.

Such a case is even stronger if the franchisor accepts rebates or kickbacks from the supplier.

Are franchisors permitted to enforce quality assurance standards in a discriminatory manner such that they are rigorously enforced against one franchisee but not another?

Most franchise law firms that deal with this issue are retained by franchisees who complain about the former. (“Why am I being singled out for discriminatory treatment?”)

But the question rests on whether a franchisee can force a franchisor to enforce its standards against other franchisees.

There are not many reported cases on this issue, but in the few that exist, courts have held that there is no contractual requirement in any of the franchise agreements that obligates a franchisor to enforce its contract or standards against other franchisees.

There are, however, a very few states that prohibit franchisee discrimination. Unfortunately these cases are incredibly difficult to prove.

How much support are franchisors required to provide to their franchisees?

This is dependent upon many factors including: (1) specific contractual obligations in the franchise agreement, (2) whether the case is being heard by a judge or a jury, and (3) the business complexities of the industry in question.

Contractual obligations are couched in very general obligatory language, without any explicit training or support requirements. Because of this, the ultimate liability will probably depend upon whether a judge or a jury is hearing the franchisee’s case. It’s much more likely that a jury will take into account the franchisor’s inadequacies in this regard.

A judge, on the other hand, is more likely to follow the clear and unmistakable trend of case law in this area. The trend is to require franchisees to basically “fend for themselves,” beginning with the execution of the franchise agreement.

There are a few other factors that could cut either way on this issue: (1) whether the franchisee promptly and effectively complained of the lack of support at the time the problem arose, and (2) whether the franchisee made a profit during the period of the alleged lack-of-support.

These last two factors will often bear directly on the question of whether a violation of the franchise agreement exists, especially when a court and not a jury decides the case.

The bottom line here is that unless the franchisor has failed to provide any support, even token efforts will be found to be sufficient by the court.

If a franchise salesman makes promises to entice me into entering a franchise agreement, and I rely on those promises in signing a franchise agreement, may I later sue the franchisor if it fails or refuses to meet those promises?

Probably not, in most cases. By law, only the final written contract is legally binding. Courts will not require a party to live up to any prior agreements-whether oral or written -that they made before execution of the franchise agreement.

This circumstance falls under the “parole evidence rule”, which bars the introduction into evidence of any promises or representations that weren’t explicitly set forth in the franchise agreement.

Franchise agreements explicitly include “integration clauses” in their franchise agreements. In practice, these clauses have the same general legal effect as application of the parole evidence rule.

There are certainly exceptions to the “rule”, but courts almost always rule against the applicability of any of the exceptions.

The main exception to the rule includes the “collateral document” exception. A “collateral document” is an agreement made after – not before – the franchise agreement.

However, even in the case of a collateral document, only written agreements – not oral – will be recognized. A franchise agreement almost always requires that any subsequent agreements associated with the franchise agreement be in writing.

Another exception is where the franchisor’s comments are shown to be fraudulent in some way. This exception may be deemed appropriate because the franchisee would be using the “promises” or representations” to show not an “obligation”, but rather a fraudulent inducement to justify voiding the franchise agreement.

Unfortunately, the clear trend of courts has been to significantly limit – if not entirely eradicate – the use of the fraud exception to the parole evidence rule.

The last exception to the parole evidence rule is to permit prior promises, representations and negotiations of the parties to be used to explain or interpret – but not contradict or supplement – the franchise  agreement.

In other words, the courts will only permit prior negotiations or promises to be used in a trial if the franchise agreement is in some way ambiguous. And in this case, the evidence will be used by the court only to interpret the written franchise agreement.

Ultimately, the only real rights a franchisee has are those spelled out in the franchise agreement. This alone is a compelling reason to retain a franchise law firm or a franchise attorney to review your franchise agreement before you enter into a business relationship with a franchisor.

Don't franchisees have the right to sell or transfer their franchises if they wish? If not, isn't the right to sell or transfer a business the exclusive right of the owner of the business?

Franchisees don’t necessarily have the right to sell or transfer their franchises, because the premise of this question is not entirely accurate.

The franchisee certainly owns “something”, but in most cases this “something” is only the franchise – not the business.

At the end or expiration of a franchise agreement, the franchisor has the unbridled right to discontinue doing business with the franchisee. The franchisor can refuse to renew the franchise agreement, unless it specifically and explicitly grants the franchisee the right to renew.

There are certainly limited exceptions to this rule, but they are few and far between.

Regarding the right to sell or transfer the franchise, the franchise agreement almost always gives the franchisor a “right to consent” to a sale or transfer by the franchisee.

Some franchise agreements include the “right of first refusal.” This right permits the franchisor to match a third party’s offer to purchase the franchisee’s business. Franchisees frequently challenge the franchisor’s refusal to consent to a sale or transfer proposed by the franchisee. However, most courts have rebuffed these challenges and upheld the franchisor’s right to grant or refuse this consent.

In those few cases where the court struggled with the issue, it was only because the agreement language was ambiguous on the “right to consent” clause.

Courts have even upheld a franchisor’s right to restrict a sale of a franchise on the ground that the franchise price is too high. The theory here is that the franchisor has a legitimate interest in making sure that the new buyer has the financial wherewithal to successfully operate the franchise after his purchase.

More obviously, courts recognize the franchisor’s right to withhold its consent unless it believes the buyer has sufficient business acumen to operate the purchased franchise.

It’s worth noting that there are a few state franchise relationship laws that address the sale and transfer issue. These provisions restrict the circumstances under which a franchisor can refuse to permit the sale of a franchise.

For instance, a franchisor might be able to deny approval of a sale if the prospective franchisee fails to meet the franchisor’s qualifications for owning a franchise, but not to deny approval based on the price being too high.

Is it legal for a franchisor to refuse to renew a franchise agreement unless and until the franchisee signs the 'then-current' form of franchise agreement and makes significant and broad-sweeping structural modifications to the franchised location?

Yes, in most circumstances this is legal. Even though some franchise agreements include an “option” to renew, the option has the potential to be an incredibly expensive one.

Also, in those circumstances where a franchisee chooses to sell the franchise rather than incurring these significant upgrade costs, franchisors can sometimes require that the buyer of the franchise himself make the capital improvements as a condition for the franchisor’s approval to the sale.

This, of course, puts downward pressure on the sale price of the franchise.

How do franchisors protect themselves from competition from franchisees who leave their systems?

In general, there are two different ways that franchisors protect their goodwill at the franchised location after its franchisees leave its systems.

First, some franchisors have legal control of the franchised location, either as owners or primary tenants of the premises. Second, almost all franchise agreements include “post-term covenants not to compete.” This precludes the franchisee from operating a similar business at the location where he previously operated the franchise.

Is it permissible for franchisors to restrict or limit the other businesses in which their franchisees might participate?

Yes, in most states under certain circumstances this is permissible.

There are two general types of restrictions included in most franchise agreements. (1) in-term covenants not to compete, and (2) post-term covenants not to compete.

The former type of covenant restricts a franchisee’s participation in certain non-franchise – but similar – businesses during the term of the franchise. The latter type of covenant restricts a franchisee’s participation in certain non-franchise – but similar – businesses after the franchise is terminated or otherwise expires.

In a few states these covenants are arguably void. But in most cases the non-compete covenant has to be worded in a way that is considered “reasonable.”

“Reasonableness” will generally be satisfied if the restriction is narrowly tailored substantively to prohibit participation in “like-kinds” of businesses, to prohibit competition in a contiguous franchise area, and to prohibit competition to a limited number of years.

However, if franchisors overreach and draft the covenant too broadly, they run the risk of a court voiding the entire covenant.

I live in a state different that where your office is located; can you represent me?

Yes. Franchise law is highly specialized and I have represented clients in virtually every state in the United States.
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