Franchisees often become so frustrated with the lack of success of their franchises that they choose to abandon or “walk away” from their franchises. Under most state laws, however, a franchisee who walks away from his franchise may be successfully sued by his franchisor for abandonment. Further, under many state laws, a franchisee who walks away from his franchise may forfeit some or all of the claims that he may have had against his franchisor.
A recent federal court case in Illinois ( Zeidler v. A&W Restaurants, Inc.) is an example of how a franchisee’s abandonment of his franchise resulted in the franchisee’s loss of his claims against his franchisor. Zeidler involved an A&W restaurant franchisee, Zeidler, who had signed a franchise agreement with A&W Restaurants, Inc. (“A&W”) in 1993. Approximately four years after Zeidler signed the franchise agreement, his relationship with A&W began to deteriorate. A&W suddenly started alleging that Zeidler was not operating his franchise in compliance with A&W’s health and sanitation standards and was not maintaining the minimum amounts of insurance required by the parties’ franchise agreement. A&W sent letters to Zeidler threatening to terminate Zeidler’s agreement.
Believing that A&W was acting in bad faith and trying to “drive him out of business” in order to take back and then resell his franchise to another franchisee, Zeidler closed his restaurant and removed all of his equipment. Shortly after learning that Zeidler had abandoned his restaurant, A&W sent a letter to Zeidler formally terminating the franchise.
In rejecting the franchisee’s claims and granting judgment in favor of A&W, the court stated that in order to prove his claims for breach of contract and violation of the IFDA, Zeidler was required to show that A&W wrongfully terminated his franchise agreement. However, the court found that Zeidler could not make this showing. According to the court, “a franchisee who abandons his or her franchise by closing it before the end of a license agreement’s term may not bring a wrongful termination action against the franchisor who later terminates the agreement.”
The court held that because Zeidler had abandoned his franchise, A&W was justified in terminating the franchise agreement; therefore, the court found that Zeidler could not demonstrate that the franchisor’s termination of the franchise was wrongful – – a necessary element of Zeidler’s breach of contract claim. Furthermore, the court stated that Zeidler’s claim under the IFDA, an Indiana statute governing many aspects of the relationship between franchisors and franchisees, was doomed. In this regard, the Court pointed out that the IFDA states that a franchisee’s voluntary abandonment of his franchise provides the franchisor with “good cause” to terminate the abandoning franchisee.
It should be noted, however, that before reaching its decision, the Zeidler court recognized that if Zeidler had been able to demonstrate that his abandonment was a result of A&W’s bad faith, Zeidler may have been permitted to proceed with his claims against A&W. The court concluded that Zeidler failed to adequately demonstrate that A&W had acted in “bad faith” since there was no evidence that A&W’s threats of termination caused Zeidler’s abandonment. According to the court, “there [was] no evidence that A&W supported its termination threats with action that made the restaurant impossible to run, such as refusing to supply [Zeidler].”
Abandoning A Franchise Is Rarely A Good Idea
As demonstrated by this case, abandoning a franchise is rarely a good idea, especially if the franchisee has valid claims against his franchisor. By abandoning his franchise and providing the franchisor with “justification” for terminating him, the franchisee might severely harm his chances of prevailing in any future legal action against the franchisor. Accordingly, any franchisee whose business is jeopardized by his franchisor’s conduct should consult with an experienced franchise lawyer before taking action; even if franchisee abandonment is the only remaining choice, it is best carried out under a strategy prepared by an expert franchisee lawyer.
Get Guidance from a Franchise Lawyer
Franchise lawyer Jeff Goldstein at the Goldstein Law Firm is available to provide guidance, insight, and information if you are considering leaving your franchise. Before you make nay big decisions call our law firm at (202) 293-3947 to explore your legal options.