Many franchisors are making major changes to their systems in 2021. While most view these changes as being necessary in light of the economic and cultural impacts of the COVID-19 pandemic, they often carry a hefty price tag, and it is franchisees who are being forced to foot the bill. If your franchisor is implementing major updates, do you have to comply? What if you cannot afford to do so? Franchisee lawyer Jeffrey M. Goldstein explains:
Franchisors Reserve Broad Rights to Mandate Updates at Franchisees’ Expense
As a general rule, franchisors reserve broad rights to mandate modifications (or “updates”) at their franchisees’ expense. They typically do so through a one-line provision in their franchise agreement that requires franchisees to comply with the Operations Manual and other system standards, “as they may be modified from time to time.”
As a general rule, when a franchisor implements a modification, franchisees must comply. This is true whether the modification involves substituting menu items, adopting new technology or overhauling the entire design of franchisees’ outlets.
Franchisees Who Fail to Comply Risk Default and Termination
For franchisees who fail to comply with mandatory updates, the consequences can be severe. Franchisors can declare non-compliant franchisees in default, and this can ultimately result in termination. Franchisees who have their rights terminated for non-compliance will typically be bound by all post-termination obligations in their franchise agreements—including obligations not to compete, not to solicit former customers, and to pay liquidated damages or “lost future royalties.”
What if You Don’t Agree with the Franchisor’s New Direction?
While some franchise system updates are necessary and appropriate—and will ultimately prove profitable for franchisees—this is not always the case. So, what if you have concerns about an impending “update”? Or, what if you cannot afford to pay for a mandatory modification out of your franchise’s operating revenue?
As an individual franchisee, in the end, you may have little choice. You are almost certainly bound to comply under the terms of your franchise agreement (although it is certainly worth having a franchisee lawyer take a look), and most franchisors vigorously enforce their system standards. If you have a legally enforceable obligation to comply, then you must comply—or risk termination of your franchise.
However, if other franchisees share your concerns, then joining together may give you a louder voice. In some cases, franchisors will be more willing to listen if multiple franchisees voice similar concerns. Whether you work as a group or as a more formal franchisee association, developing a unified message and delivering it through the appropriate channels will give you the best chance of opening a dialogue that eventually leads to a positive outcome.
Talk to Franchisee Lawyer Jeffrey M. Goldstein About Your Options
If you have concerns about a mandatory system modification or update in your franchise system, we encourage you to contact us for a free, no-obligation consultation. To speak with franchisee lawyer Jeffrey M. Goldstein in confidence, please call 202-293-3947 or get in touch online today.
