Video Transcription
Hi, my name’s Jeff Goldstein, thanks for visiting our website. If you’re here, you’re probably a franchisee experiencing some trouble with your franchisor or you’re considering purchasing a franchise. Today I’d like to run through three issues with you. The first are the types of matters that a franchisee lawyer handles on a daily basis. The second is the type of services that our firm would be capable of providing to you. And the third is how to choose a franchise lawyer.
Now, with regard to the first question, the types of matters that I handle on a daily basis, the best way to deal with that is to look over the last 30 days and see what types of issues that I’ve had. The first issue deals with [inaudible 00:00:43] covenants not to compete. These are clauses in a franchise agreement that will restrict the franchisee once his franchisee agreement has expired, from selling or marketing certain services and goods that he provided as a franchisee. Conceptually these are fully permissible under almost every law. There are certain states, California, that are a little bit more restrictive on a franchiser’s ability to use these agreements, those types of clauses. The standard…the legal standard is one of reasonableness, and courts will look as to how the reasonable in time duration scope your particular provision is, how restrictive it is.
Second are antitrust issues. These regard whether the franchisor can restrict a franchise ability to sell at a particular price, or if the franchisor would require a franchisee to purchase service or good B if he purchases service or good A from either a third party or a the franchisor himself. Over time, the antitrust laws have become very permissive and they permit a franchisor, for the most part, to engage in almost every practice: pricing, restrictions tying, things of that nature that in the past they would not have been able to use.
The next issue is encroachment. This involves a franchisee having an exclusive territory or not having an exclusive territory such that he’s impacted by a franchisor’s decision to himself compete with the existing franchisee or sell a new franchise that would compete with the existing franchisee. In the old days, there was an implied covenant of good faith in fair dealing that was imposed on the franchise agreement as a whole, and it would prohibit the franchiser from acting, in some sense, unfairly. Today, almost every one of these agreements regarding exclusive territories favors the franchisor. And the franchisors are able to win on these cases because they explicitly reserve to themself, in a franchise agreement, the sole discretion to determine where a new franchise is opened or where they can sell. Given that type of specific and explicit language in a franchise agreement, a franchisee is gonna loose almost every time. That’s why there are times where you’re negotiating a franchise agreement and it’s very important to carve out some type of exclusive territory for yourself as a franchisee.
Another issue deals with remodeling or renovating. And this occurs most frequently where a franchise is paid perhaps $100,000 in initial fees and build-out money to construct his franchise. And within 2 or 3 years, the franchisor decides he wants to have a face lift, so that the whole structure and look of the building that the franchisee built now looks very, very different, and it will cost an additional 100,000, 200,000, 300,000 to comply. Franchisee many times can’t meet that particular cost and he loses his franchise because the franchise agreement would require him to meet that remodeling. Now you might say, “Well the franchise agreement doesn’t say that a franchisor can change the agreement and put in this type of modelling.” Most franchisors get around this by going through the back door and modifying what’s called the Systems Standards Manual, which is incorporated directly into a franchise agreement. And that would allow the franchisor to change a system and standard’s provision that would require all stores to meet a certain look or a certain framework, certain signage, certain colors. And by doing it through the back door, they can impose it on a franchisee, and courts have held that even changes that are $100,000, $200,000, $300,000 would be permitted. However, franchisee lawyers are able to get around provisions like this. Takes a little effort, but there are still ways to get around it. My point at a lot of these is that over time, franchisees are loosing many, many rights that they had 10, 5 years ago. So having a franchisee lawyer is more important now than it was 5, 10 years ago.
Another issue deals with liquidated damages. These are damages that are set in stone or set as a fixed amount in a franchise agreement before the franchisee gets into any trouble or is terminated. Such that in a hotel agreement, for instance, it would say if the franchisee is terminated during the term of the franchise agreement, the franchisee agrees to pay to the franchisor as damages, $2,000 a room. So if you’ve got 100 rooms, it’s $200,000 damages. And in this way, the franchisor doesn’t have to spend time and money in court in proving that some [inaudible 00:05:55] damages did suffered. Courts have held that these liquidated damages provisions are 95% of the time permissible and lawful. And again, there are certain ways that you can attack these, sometimes based on particular state laws that would have prohibited liquidated damages. But these are few and far between and you’d need to really work with a franchisee lawyer to be able to get around those.
Another issue deals with a personal guarantee of your franchise agreement. And by this, people think if they incorporate and they use the corporation as the franchisee, if something goes wrong, they could not be hounded by the franchisor after that for any damages, personally. And almost every franchisee now is required to sign a personal guarantee. Meaning that if the corporate franchisee were to go bankrupt or be terminated, that the personal individual who owns that franchise could be held personally responsible for any types of termination damages or past royalties that that corporate franchisee owed to the franchiser. The guarantee is deadly, it’s very, very difficult to break one, and again, your way around that is to hit it at the beginning before you sign a franchise agreement, and try and get that out of the agreement. Now, most franchisors will not do it, and then there’s different ways to approach it at that point, whether you wanna restrict the guarantee to a number of years, such that after two or three years of good behavior, that the personal guarantee would expire. But legally if you’ve signed one of those, it’s very, very difficult to get out.
Another issue arises where a franchisee decides that the franchisor has violated the agreement, and the franchisee says, “Because the franchiser has violated the agreement, I am not going to pay my royalties.” Worse yet, the franchisee says, “I’m going to continue to operate as a franchisee of the system,” and continue to sell it’s products and services. The problem here is that the courts have unanimously said, if a franchisee wants to continue to operate as a particular franchise, it must pay the royalties, regardless of whether the franchisor has or has not violated the agreement. That would come up later at a trial. But in terms of a franchisees being able to stop paying royalties and continue to operate as a franchisee, that’s impermissible under the law, even though it makes some sense from a fairness perspective. And that is a…one of the most dangerous aspects of a franchisee in trouble who takes the common sense way of addressing the problem, which turns out to be an absolute disaster.
Another issue that arises frequently is the cooperative advertising idea, whether a franchisee has to participate in cooperative advertising or has to get his fair share of whatever type of benefit would arise from particular advertising. And this also comes up with national advertising by a franchisor. Many franchisees will argue that too much of the advertising and marketing was focused on a different market and not their market, and therefore they shouldn’t have to pay the advertising or marketing fee. And under the law, that’s incorrect. And again, there’re certain ways around it depending on the language of a particular franchise agreement that a franchisee lawyer would be able to find.
These are issues that I’ve dealt with for the last month or so. There’re a couple more. But this gives you an idea of the broad range of issues that arise in a franchise practice.
The second major issue that I promised to discuss with you has to do with how to chose a franchise lawyer. If you’re a franchisee lawyer, you’re gonna look for expertise, experience, focus, and the most important is going to be whether that franchise lawyer represents only franchisees or franchisees and franchisors. From my point of view, it’s impossible for a franchise lawyer to represent and litigate on behalf of both franchisees and franchisors. The problem is with franchisees, the law, over time, has gotten more and more oppressive from the franchisee’s perspective, and if you’re litigating on behalf of a franchisor, it’s somewhat of a slam dunk in many cases. And a franchisee lawyer who then works on the side of the franchisor actually hurts the precedent of a franchisee’s jurisdiction or it could be nationally. And having a franchise counsel that has the week before, pushed to have a very broad concept of reasonableness in a post-term covenanting case, represent you on a post-term covenanting case, it just doesn’t work, in my opinion. There are some people who believe it does mostly the lawyers who practice on both sides of the fence, and some of ’em can do a pretty good job. But as a franchisee, you’re gonna wanna ask at the beginning whether that particular lawyer represents both franchisors and franchisees, or only franchisees.
The third issue I noted above was what types of services our firm provides. There’s a broad array of services with different levels of costed [SP] efforts. The first has to do with counselling, where we would look at the relevant law, and facts, and advise a franchisee on the various options he or she would have in those circumstances. Once the franchisee chooses one of more of those options, he might instruct us to proceed to negotiate on his or her behalf with the franchisor. So we would also provide negotiating services. Here we would deal directly with the franchisor, letters, calls, or meetings, and attempt to resolve the dispute short of litigation.
The third option is where counselling and negotiations have failed, the franchisee has the next option of litigating the case. And that could be in court through an arbitration or mediation. That’s a very difficult decision for a franchisee to make, it’s very costly financially and emotionally. Many times a franchisee either has to drop the dispute and not pursue the dispute through litigation because of financing, or because they’re experiencing some personal trauma or problem at home or with the family, and they’re unable to devote sufficient time to a litigation, which is necessary.
The fourth type of service that our firm provides is a franchise review. And by providing this services, we assist clients who are considering purchasing a franchise with a review of their franchise disclosure document known as an FDD, as well as their franchise agreement. This process involves two major components. One is analyzing the franchise agreement and the information provided to look for any points that would create very high risk for the franchisee and explain what that risk is, and the franchisee then can determine for himself or herself, whether they’re willing to incur that risk. The second aspect of the franchise review has to do with negotiating with a franchisor and attempting to modify certain aspects of the franchise agreement or the franchise relationship. Many times franchisors will tell franchisees that we’re not gonna change anything in that franchise agreement, and the franchisee will then say, “Well, what’s the point of hiring a lawyer? It’s just gonna be a waste of money because the franchisor has already said he won’t modify any aspects of the franchise agreement.” Even if that were true, again, one of the most important aspects of a franchise review is to point out for a franchisee the areas of risk, of high risk, moderate risk, that could result in that franchisee losing his entire investment and his entire franchise.
Last, I wanted to remind you that our firm provides complementary consultations. If you send us an inquiry through our website, we’ll get back to you within a day or so, set up a call with you, review your franchise agreement and relevant correspondence, be able to set forth your general possible ways of proceeding. I wanted to thank you for taking the time to watch this video today, and I look forward to meeting you.
