For franchisees, holding franchisors accountable often means pursuing franchise arbitration. The substantial majority of franchise agreements include mandatory alternative dispute resolution (ADR) provisions, and most of these require franchisees to pursue arbitration rather than going to court. For franchisees who are considering legal action against their franchisors, consulting with an experienced franchise lawyer is generally the first step toward determining whether arbitration is warranted.
While franchisees can (and do) pursue arbitration on various grounds, certain types of franchisee-franchisor disputes are more common than others. This is due to the nature of the franchising model and the inherent imbalance of power in the franchisee-franchisor relationship.
7 Common Reasons for Franchisees to Pursue Arbitration Against Their Franchisors
What are some of the most common reasons for franchisees to pursue arbitration against their franchisors? Here are seven examples:
1. Franchisor Overreach
In many cases, franchisees’ discontent can be attributed to overreaching by their franchisors. While franchisors can (and do) reserve broad authority over their systems and standards in their franchise agreements, these contractual protections only allow franchisors to go so far.
If your franchisor is overreaching—whether by imposing unnecessary and onerous standards or interfering in your franchise’s day-to-day operations—engaging a franchise lawyer may enable you to reach an amicable resolution that preserves the relationship and provides additional certainty and stability for the future. However, if your franchisor is unwilling to concede that it is overreaching, then pursuing franchise arbitration may be necessary.
2. Questionable Interpretation of Key Franchise Agreement Terms
Franchise arbitration can also be necessary when franchisors make questionable interpretations of key franchise agreement terms. Oftentimes, key terms in franchise agreements are not as clear as they should be. If an ambiguity leaves room for interpretation, this can leave both sides room to argue for an interpretation that favors their business objectives and needs.
In all cases, however, the parties’ interpretations need to be reasonable. If a franchisor seeks to exploit an ambiguity to its benefit, or if a franchisor attempts to misconstrue the intent of a key term that is reasonably clear, both of these are issues that may ultimately require franchisees to take legal action in order to protect themselves.
3. Selective Enforcement Against Franchisees
Selective enforcement is an issue that will often require franchisees to take legal action in order to protect themselves as well. While franchisors do not necessarily have to treat all of their franchisees equally, they cannot enforce compliance on a discriminatory basis or with the intent of harassing a franchisee into exiting the system. If you have reason to believe that you are being treated differently from similarly situated franchisees, this is a scenario in which pursuing franchise arbitration may prove necessary as well.
4. Direct or Indirect Territorial Encroachment
If you have a protected or exclusive territory under the terms of your franchise agreement, your franchisor cannot directly or indirectly interfere with your territorial rights. In franchising, this is referred to as territorial encroachment, and it is a common issue that often forces franchisees to pursue franchise arbitration.
Direct encroachment refers to a franchisor opening or advertising a company-owned location in a franchisee’s territory, while indirect encroachment refers to a franchisor allowing one franchisee to conduct business in another franchisee’s protected or exclusive territory. Both forms of encroachment can have similar consequences for franchisees whose contractual rights have been infringed, and both can provide clear grounds for franchisees to pursue claims against their franchisors.
5. Substantial and Unfair (or Unnecessary) Additional Costs
Mandatory purchases and requirements to use designated suppliers can both add to the costs of franchise ownership. While franchisors can establish mandatory purchasing requirements and establish designated suppliers within limits, franchisees have the right to a reasonable chance of success.
If you do not have a reasonable chance of success because your costs are greater than necessary, this could also provide you with grounds to pursue franchise arbitration against your franchisor. As we recently discussed, many franchisees are seeing their costs rise, and in many cases, franchisees are being forced to incur costs that are far greater than what they anticipated when they signed their franchise agreements.
6. Illegal Price Fixing and Other Unfair or Anticompetitive Practices
A similar issue involves franchisors engaging in illegal price fixing arrangements and other unfair or anticompetitive practices. Federal and state laws protect franchisees against these kinds of practices, and they provide grounds for franchisees to pursue legal action in many cases.
Here too, if your costs are higher than necessary, pursuing arbitration may be a viable (and necessary) step if you cannot work out an amicable resolution with your franchisor. In some cases, franchisors don’t realize they are violating the law. In others, however, franchisors know what they are doing, and they will try to get away with it unless and until their franchisees fight to hold them accountable.
7. Failure to Protect the Franchise System or Brand
While franchisors often have relatively few obligations within the franchisee-franchisor relationship, one obligation that all franchisors have is to protect the value of the franchise system and brand. If franchisors don’t step in to enforce system standards, stop infringement and take other necessary steps to preserve the value of franchisees’ investments, franchisees may have little choice but to pursue arbitration in this scenario as well.
Many franchisors will vigorously enforce their system standards and trademark rights—often to a fault. But this is not universal. If your franchisor is standing by while the value of your investment erodes, this is a scenario in which you will want to consult with an experienced franchise lawyer about your rights as soon as possible.
Schedule a Free Initial Consultation with National Franchise Lawyer Jeffrey M. Goldstein
Do you need to know more about pursuing arbitration against your franchisor? If so, we invite you to get in touch. To schedule a free initial consultation with national franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or tell us how we can reach you online today.
