As we recently discussed, franchisors typically reserve broad rights to require franchisees to adopt system changes at their own expense. A case filed in federal district court last year confirms that franchisors who include the necessary protections in their franchise agreements can mandate expensive system changes – even if the changes are undesirable to franchisees.
JDS Group v. Metal Supermarkets Franchising Am., Inc.
In the case of JDS Group v. Metal Supermarkets Franchising Am., Inc. (WD New York June 20, 2017), JDS Group challenged its franchisor’s requirement to replace outdated point-of-sale (POS) software with a new application it intended to implement system-wide. Despite three years of development and a total cost in excess of $1 million, JDS Group alleged that the new POS software did not function as it should. It also submitted declarations from six other franchisees complaining of serious issues with the software.
Although JDS Group’s franchise agreement gave Metal Supermarkets Franchising Am., Inc. the right to mandate use of specific POS software applications, it alleged that the mandate to adopt ineffective software constituted a breach of the implied covenant of good faith and fair dealing and violated the Washington Franchise Investment Protection Act (FIPA). Under FIPA, franchisors have an obligation to deal with their franchisees in good faith, and they cannot require franchisees to adopt system changes unless the changes are justified on business grounds. The franchisor countered that the vast majority of its franchisees, “had not been forced to close their stores,” as a result of adopting the software, and it presented evidence indicating that stores operating the new POS system had seen their sales increase by 7.4 percent.
Based on the evidence presented, the court denied JDS Group’s request for a preliminary injunction and temporary restraining order to prevent installation of the software. As stated by the court:
“Here, the express terms of the franchise agreement permit [the franchisor] to develop or designate computer software programs . . . and require JDS to use them. Plaintiff has identified no evidence whatsoever that [the franchisor’s] development or implementation of [the new software] were undertaken in bad faith or that [the franchisor] had any improper purpose or motivation. To the contrary, the evidence . . . shows that [the franchisor] has devoted significant time and resources to [the software], including efforts to resolve the flaws identified by its franchisees.”
This holding is consistent with prior decisions addressing franchisees’ contractual obligations to adopt changes at their expense regardless of whether they see the changes as beneficial or worthwhile. While franchisees may be able to challenge these types of mandates under appropriate circumstances (for example, when they have negotiated adequate protections into their franchise agreements), in a typical scenario, mandatory “upgrades” will indeed be mandatory.
Speak With an Experienced Franchise Attorney in Confidence
If you are concerned about the cost or negative effects of adopting mandatory system changes, you can contact a franchise attorney for a free and confidential consultation. Our firm represents franchisees and dealers nationwide. To speak with an attorney about your case, call (202) 293-3947 or contact the firm online today.