Video Transcription

Hi. My name’s Jeff Goldstein at the Goldstein Law Group in Washington DC. We represent only franchisees, and dealers and distributors in cases against franchisors and manufacturers in cases around the country. Today I’d like to take a few minutes to discuss with you the concept of franchisor competence or incompetence. The question whether a franchisor is gonna be held to a higher standard, or any standard, in terms of exercising competence in the franchise relationship. Some people say this is a very easy question in that a franchisor obviously should be required to maintain a minimum level of competence, such as doctors and other professionals.

When you look at a franchise relationship, it’s possible to look at the program as a team, whereby each of the members of the team is required to put in their all and contribute to the overall success of the venture or the spur. Most cases, however, involve cases of a franchisor suing a franchisee for not meeting minimal levels of competency or minimum levels as set forth in the franchise agreement. These cases usually run in favor of the franchisor, and almost every time, other than a failure to pay royalties, these are the basis of the franchisors claims. Where a franchisee sues a franchisor for failure to meet a minimum level of competence, the franchisee most times loses. You need a franchise lawyer to be able to move within and out of the cracks of the franchise agreement, as well as the common law in any state statutes that might exist.

As you can imagine, the franchisee is gonna be highly impacted and almost held the hostage to the franchisor’s level of competence. The franchisor controls the methods of operation, the judgment and discretion of the types of products that are sold to the franchisee. Any miscalculation by the franchisor could bring the entire system down, as well as a franchisee losing their entire investment in the franchise. And this can include going into IRAs per people’s houses, cars, etc. There are very few theories that are actually going to allow a franchisee to attack a franchisor’s incompetence. And this might be surprising, but this translates into 90% to 95% win rate of franchisors versus franchisee in courts around the country, and that includes both state, federal and arbitrations. Arbitrations franchisors have a harder time in that the arbitrator is allowed to pull off the contract the franchise agreement, to some extent, so he can push and embrace the concept of fairness and equity more than a court would be permitted to do.

A franchisor’s obligations, in general, if you were sitting down and making a list, might include some the following. Site location, training, opening location, ongoing advice and consultation, ongoing training, a specification of approved supplies and suppliers. Now, examples of problems that arise that create and bring into issue the lack of competence or the incompetence of a franchisor would include, for instance, and these are things that have developed in my cases, for instance, over the last six months. A layout dysfunction in a coffee house where the architectural plans, and where the kitchen is, and how the kitchen is laid out and those dysfunctions that can translate into real dollars. And the layout, obviously, is within the control and part of the franchisor’s system. Designation of suppliers, certain suppliers are designated and franchisees are permitted to purchase only from those suppliers. Those suppliers could have defective goods, not deliver goods time on time, failure to give rebates.

In addition to looking at suppliers and the problems with those suppliers designated by franchisors, as we just did, there are also other elements showing dysfunction by the franchisor or failure to meet a minimum level of competence. Those might involve assistance in setting up a location, equipment failures where equipment is sold to franchisees by the franchisor, where the equipment is defective. Non-existant advertisement and marketing, this arises many, many times in almost all franchise agreement. No effort to improve menu offerings, say, in a fast food restaurant. Getting lower prices from suppliers, where a franchisor is complacent or receiving rebates from supplier number one, has no incentive to look around and price shop the pricing and the quality of goods from other suppliers.

New remodeling requirements imposed by franchisors and franchisees that would imposed hundreds of thousands of dollars of infrastructure, new infrastructure on franchisees who have been in the system for many, many years. This new remodeling is of such a substantial nature, financially, that it would require many franchisees to simply go out of business and lose their entire investment. Franchisors requiring franchisees to put new products, to sell new products that weren’t necessarily around when the franchisee first began and bought into the concept. Those can be very costly and also attract a different customer base, and losing the old customer base and perhaps getting a new customer base, and the question whether they balance off is left to the franchisees’ bottom line. There could be pricing decisions that a franchisor makes that it imposes on franchisees. A dollar menu, for instance, things where the franchisor put a maximum price on certain items that, again, prevent a franchisee from obtaining any reasonable rate or return.

I wanted to thank you for taking your time today to listen to this video, and the other two in these series regarding franchisor competency. If you have any questions regarding this issue, issues raised by those videos or other franchise relationship matters, please give me a ring. My name’s Jeff Goldstein at the Goldstein Law Group in Washington D.C. Thank you.

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