As a franchisee, encroachment by the franchisor or another franchisee can be among the greatest risks to long-term sustainability. If would-be customers (most of whom do not understand independent franchise ownership) have access to your brand at a more-convenient location, they will have little incentive to visit your store or restaurant. As a result, territorial protections are among the most-important protections available to franchisees, and state franchise relationship laws often provide critical protections when disputes regarding encroachment arise.
A recent successful lawsuit filed by El Pollo Loco franchisees in California state court illustrates the types of protections that are available to franchisees in cases of encroachment:
California Jury Rules in Favor of Husband-and-Wife Franchisee
The case involved a dispute between husband-and-wife franchisees Michael and Janice Bryman and restaurant franchisor El Pollo Loco Inc. According to news reports, the Brymans sued after their franchisor opened two new locations within their territory. El Pollo Loco Inc. apparently did so in reliance on a standard provision in their franchise agreement which stated that it had the right to place company-owned locations “in the immediate vicinity of or adjacent to” its franchisees’ outlets, the franchisee’s territorial rights notwithstanding.
Critically, prior to the jury verdict on damages, the trial judge ruled that this provision of the franchise agreement was unconscionable as a matter of law. As such, it was unenforceable, and could not be used to justify the opening of two company-owned outlets that competed directly with the franchisees’ restaurants. Subsequently, the jury also found that the franchisor had violated the implied covenant of good faith and fair dealing by using the franchisees’ financial data to select the locations for its two new restaurants.
Based on these findings, the jury issued a total damages award of approximately $8.8 million. As summarized on Law360:
“Impact damages suffered by the Brymans totaled $2.63 million due to El Pollo Loco Inc.’s breach of the implied covenant of good faith and fair dealing when the company built the corporate restaurant at the Costco Center, and lost opportunity damages totaled $2.78 million after the franchisor did not offer the location to the Brymans when it became available, the jury said. Impact damages totaled $1.72 million, and lost opportunity damages totaled $1.70 million for the restaurant at Avenue J, according to the verdict.”
While the case obviously represents a critical victory for the Brymans, it may provide guidance for other franchisees who are dealing with encroachment issues as well. When franchisors interfere with franchisees’ contractual rights and their ability to operate successfully, franchisees can – and should – take legal action to protect their investments. Whether a franchisee has the right to pursue litigation or is subject to mandatory arbitration, the guiding legal principles are the same, and taking legal action quickly is typically the best way to mitigate any actual or potential harm.
Do You Have a Claim Against Your Franchisor?
If you believe that your franchisor has encroached on your territory, you should discuss your case with an attorney promptly. To schedule an appointment with national franchise lawyer Jeffrey M. Goldstein, founder of the Goldstein Law Firm, please call (202) 293-3947 or request a free consultation online today.
