Jan 17, 2020 - Blog, Franchise Articles by |

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Franchising Am., Inc. (WD New York June 20, 2017), JDS Group challenged its franchisor’s requirement to replace outdated point-of-sale (POS) software with a new application it intended to implement system-wide.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.

Lawyer International

Lawyer International
Legal 100
2018

Lawyer International

Lawyer International
Legal 100
2019

ACQ5 LAW AWARDS 2019

US (New York)
Franchise Lawyer
of the Year
ACQ5 GLOBAL AWARDS 2019, JEFF GOLDSTEIN, GOLDSTEIN LAW FIRM, PLLC

ACQ5 LAW AWARDS 2019

US (New York)
Franchise Law Firm
of the Year
ACQ5 GLOBAL AWARDS 2019, GOLDSTEIN LAW FIRM, PLLC

Lawyers of Distinction logo

2019 Power Lawyers

Esteemed Lawyers of America Logo

Esteemed Law Firm Complex Litigation

Global Law Experts Logo

Recommended Firm in Franchise Litigation

Who's Who Attorney Logo

Top Attorney USA – Litigation

Avvo Franchise Lawyer Symbol

Superior Attorney in Franchising

Avvo Franchise Lawyer Symbol

Superior Attorney in Antitrust

Finance Monthly Global Award Winner Logo

Franchise Law Firm of the Year

Lead Counsel logo

Chosen Law Firm for Commercial Litigation

BBB of Washington DC

A+ Rated

Washington DC Chamber of Commerce

Verified Member

Lawyers of Distinction logo

Franchise Law Firm of the Year

ISSUU

Best Law Firm for Franchise Disputes in 2017

Law Awards Finanace Monthly

Franchise Law Firm of the Year - 2017

Top Franchise Litigator for Franchisees and Dealers

Top Franchise Litigator for Franchisees and Dealers

2017 Finance Monthly Award

2017 Finance Monthly Award

ACQ5 LAW AWARDS 2018

Franchise Law Firm
of the Year
ACQ5 LAW AWARDS 2018

ACQ5 LAW AWARDS 2019

Franchise Law Firm
of the Year
ACQ5 LAW AWARDS 2019

Franchise Law Firm of the Year

Franchise Law Firm of the Year

Franchise Law Firm of the Year
Global Awards 2017

Global Law Experts

Franchise Law Firm
of the Year
in New York – 2019

Finance Monthly Law Awards - 2018

Finance Monthly Law Awards - 2018

Franchise Law Firm of the Year

Franchise Law Firm
of the Year
Global Awards 2018

Contact Us

Goldstein Law Firm, PLLC

1629 K St. NW, Suite 300,
Washington, DC 20006

Phone: 202-293-3947
Fax: 202-315-2514

Free Consultation

Free Consultation