Video Transcription

My name’s Jeff Goldstein of the Goldstein Law Group in Washington, D.C. We represent franchisees, dealers, and distributors in disputes against franchisors and manufacturers around the country. We discussed in the first part of this series, the level of competence of franchisors required under the law and whether there are new laws that would prevent a franchisor from acting incompetently. Today, what I’d like to do is move on to some legal theories that would address some of these incompetent decisions that franchisors might make. The legal framework is somewhat straight and forward. However, there are a quite a few pitfalls has one might imagine. One way of attacking franchisor incompetence is to examine it conceptually as a negligence just as you would a doctor for malpractice, franchisor failing to meet its duty of care which is to be a franchisor. Unfortunately, courts have entirely rejected that doctrine except in very, very small cases, and those are usually not even an alternative for a franchisee bringing suit and they certainly have no impact on the franchisor meeting minimum level of competency.

This is…leads to another two possible causes of action, and these focused on the franchise agreement or in the cracks of a franchise agreement known as the covenant of good faith and fair dealing. And the last would be state specific-laws for franchisees that it might address some of the competency issues. However, being out in courts on the front lines many times, I can tell you that the state statues are more active and more…offer more protection to franchisees in the termination context, requiring that the franchisor have good faith and also act with a good cause for a termination over various monikers and types of language that would address that issue. Primarily, those laws to the extent they exist, and there are a very few of those across the country that you might call relationship laws, are not those that would prevent or require a minimum level of competency on a franchisor.

So what are you left with? You’re left with cases on the contract and cases that are in the cracks of the contract by the covenant of good faith and fair dealing. The covenant of good faith and fair dealing, over time, every year that goes by, it’s eaten up more and more by courts who are very hostile to the concept. It had its heyday maybe 10 or 15 years ago when franchisees took advantage of it. And each year that went by, franchisors figured out how to put in their franchise agreement’s language that would render useless franchisee’s attempts to use the covenant of good faith and fair dealing. So you’ve lost a very important tool that would require franchisors to act competently.

Now you’re down to the franchise agreement itself. And if you take a look almost any franchise agreement, you’ll see duties of franchisor. And honestly, I’ve looked at several agreements over the last three weeks where there might be two or three paragraphs, half a page in the franchise disclosure document. And if you juxtaposed that with the obligations imposed on a franchisee, you’ll be shocked because the pages could be six, seven, eight, nine, then you can go into the franchise agreement versus half a page for the franchisor. And the franchisor is supposed to be bringing its knowledge and experience regarding a franchise system to the franchisee. That’s what the franchisee is allegedly paying for.

Now, when you get to the franchise agreement, as I said, you’re gonna be tethered to the exact language of the franchise agreement. So where franchisors will say to a franchisee, “Don’t worry. We really provide a lotta training, a lotta marketing even though it’s not even in the franchise agreement.” One case will illustrate this quickly, and this is a case where in the franchise agreement, it actually did address a site location requirement by a franchisor. However, even that coulda been useless in the franchisee’s arguing that the franchisor failed to meet that requirement.

I wanted to thank you for taking your time today to listen to this video and the other two in this 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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