My name is Jeff Goldstein from the Goldstein Law Firm. We’re a firm that represents only franchisees nationally and we’re based out of Washington D.C. Today I and want to speak to you about an issue that arises on somewhat of a frequent basis. It has to do with duration of a franchise agreement or a distribution agreement. The question being, how long is a particular agreement for? Most people will say, “If you need to go to a lawyer for that, then you shouldn’t be signing the agreement.” But believe it or not, there are quite a few agreements that do not include a specific date or a period of years under which the parties are to operate under that agreement.
The real question is why is that all that significant? The issue arises most frequently when a franchisee gets to my office and has been terminated by the franchisor. Many times, they’ve operated for 10, 15, 20 years and relationship has gone south and the franchisor has sent the termination notice to the franchisee saying, “You’re terminated.” The franchisee is saying, “You can’t do that. We have an agreement that goes on in perpetuity. For as long as I want, I get to keep the franchise.” At that point it’s important to look at the language of the franchise agreement to determine whether it’s actually a franchise agreement with a…that is gonna be looked at as a definite agreement, one with a duration or one that is going to be looked at as impermissibly perpetual and therefore would allow the franchise ordered terminated at will.
There are many different tricks that courts have come up with in terms of… I call them “analytical tricks,” in terms of trying to impart an intent to the parties in an agreement like that, to see whether they in fact intended that agreement to go on forever until certain events occur or not. Some court cases have looked at the issue as whether the agreement is an impermissibly long perpetual agreement, an agreement in perpetuity. Courts over the common law and over history have not been very favorable to franchisees who have come in and argued that agreements were intended to be perpetual, to go on forever. And we’ll take a look at one of those cases in a bit.
But going back to when an agreement comes into my office, and the first thing is there’s no end date on it and the second is there’s no period of years, a five-year term or ten-year term and the franchisee has been terminated. Then the question is whether the franchisor was permitted to terminate that franchisee at will. And the normal rule under the common law is that where there’s no duration to a contract that either party is permitted to terminate it for any reasons. It could even be reasons of malice. However, over time franchisees have been able to convince courts that based on certain other provisions in a franchise agreement, it is possible to find that the agreement was limited and did limit the franchisor’s ability to terminate that franchisee at will.
One common way of doing that is to look at the termination provisions under franchise agreement. If the termination provisions are objective, they’re reasonable, they’re specifically set forth, they’re exclusive, they’re comprehensive, courts are more likely to say these termination provisions themselves, although they are not a duration clause, although they don’t say in five years it expires or they don’t give a date, that those particular provisions to the extent they have those characteristics I just described, would be sufficient to find that the agreement was definite, sufficiently definite to prevent a franchisor from terminating a franchisee.
Once the franchisee gets over that hurdle, in other words, once the franchisee is able to say, “Hey, judge, they had no right. The franchisor had no right to terminate us at will with no good reason even though there was no date or term of period in this agreement.” Then the franchisee is onto its normal battle which is to show that it was a wrongful termination based on a failure to provide support for a trumped up alleged default of the franchisee.
However, the fact that franchisee is able to convince the court to look at an agreement as not at will, certain times based on termination provisions doesn’t mean that’s an easy trip. Most courts still have a significant aversion to finding agreements to be perpetual or ongoing without a specific date or period of time specifically in the agreement. It’s a common law principle that courts will interpret as a matter of construction, all agreements against being a perpetual agreement.
There’s a recent case where the franchisee, an H&R Block franchisee Jerry Franklin was terminated by a H&R Block franchisor that… And this franchise had gone on for 20-some like years I believe. It was a long period of time and there was no specific date certain for termination. And there was an automatic provision that said that the franchise agreement would continue to renew every five years and in some sense, perpetual or it would be ongoing in practice. And the only way out of it was if the franchisee were to decide he wanted out or if both parties were to agree. Otherwise it was to terminate…it was to renew automatically every five years.
The court looked at that and rejected Franklin’s argument, that it was clear that he hadn’t given his approval to the termination and H&R Block had terminated him or wanted to terminate him saying that the contract was at will. And the court said, “We see the language here, Mr. Franklin.” We see that in practice this could be a perpetual agreement into the future, but we’re limited by our common law roots in this particular state in Missouri that we’re not sure how specific it’s gonna require the agreement to be perpetual. But it’s gonna be very specific. It might require the words “everlasting.” It might require the words “forever,” and your agreement doesn’t have that. All it says is that it’s going to automatically renew.
Now I think 90% of the legal profession would have thought that this was going to be viewed to be an agreement that if not term to perpetual would be one that H&R Block would not be able to terminate at will. So, when agreements come in that don’t have a date on them, an expiration date or a date that is coincident with a number of months or years, it’s not gonna be a simple process to find a few termination provisions in your agreement or to look at the impact of certain other performance provisions for instance and be able to say that the franchisor has acted wrongfully in terminating that franchisee.
Thanks for watching part one of Duration on Franchise Agreements. My name is Jeff Goldstein of the Goldstein Law Firm. You can reach me at 202-293-3947. We’re in Washington D.C. Look forward to speaking to you soon.