As a franchisee, you have the right to expect your franchisor to comply with the terms of your franchise agreement. You also have the right to expect your franchisor to comply with applicable law. But what does this mean, exactly? National franchisee attorney Jeffrey M. Goldstein explains.
Understanding Franchisors’ Limited Obligations Within the Franchise Relationship
The franchisee-franchisor relationship is not equal. Franchisees typically have far more obligations than their franchisors—because franchisors largely have the power to dictate the terms of the relationship. While most franchisors will provide at least some level of support, they will also make it clear that franchisees’ initial franchise fees and royalties are compensation for having access to the franchisor’s systems and benefiting from the franchisor’s brand recognition.
In fact, many franchisors take the position that they do not technically have many affirmative legal obligations at all.
If your franchisor has committed to providing any support in its Franchise Disclosure Document (FDD) or franchise agreement, then it must generally provide this support in order to avoid liability for fraud or breach of contract. But, otherwise, franchisors’ obligations are much more focused on what they must not do within the context of the franchise relationship. With this in mind, generally speaking, franchisors’ obligations to their franchisees include things like:
Comply with the Franchise Agreement
To the extent that franchisors have obligations under their franchise agreements, they must comply with these obligations throughout the term of the franchise relationship. While different franchisors include different provisions in their franchise agreements, franchisors will often accept responsibility for general obligations such as:
- Enforcing system standards
- Enforcing the franchisor’s trademark rights
- Providing system-related support
- Handling renewals and transfer requests in good faith
- Only pursuing termination for cause and after providing the requisite notice
But, even here, franchisors will often reserve broad discretion to only take action as they deem necessary. For example, franchisors will typically reserve the right to selectively enforce system standards as they see fit, and they will almost always reserve the right to modify their system standards over time.
Respect Franchisees’ Territorial Rights (if Any)
In many cases, franchisors’ most explicit and non-discretionary contractual obligations will involve respecting franchisees’ territorial rights. If a franchise agreement provides the franchisee with a protected or exclusive territory, the franchisor must generally comply with the protections or exclusivity provided.
With that said, even “exclusive” territories will often be subject to exceptions. As a result, it is imperative that franchisees (and prospective franchisees) have an accurate understanding of the territorial rights they are receiving. It is also important for franchisees to be proactive about monitoring for territorial encroachment—and to be prepared to take legal action when necessary.
Avoid Illegal Pricing and Supplier Restraints
Along with any contractual obligations to which they have agreed, franchisors must comply with applicable statutory obligations as well. As noted above, these obligations are largely focused on what not to do as a franchisor.
For example, under federal antitrust laws, franchisors are prohibited from implementing various types of pricing and supplier restraints. If you are being forced to pay (or charge) more than the market demands, or if you are being forced to buy inventory or supplies from a vendor that pays kickbacks to your franchisor, these are two examples of issues that could potentially warrant legal action as well.
Make Truthful Statements and Provide Reasonable Projections
Both prior to and during the franchise relationship, franchisors have a general obligation to make truthful statements and provide reasonable projections. If franchisors make misrepresentations, artificially deflate costs, or make unsubstantiated claims about potential financial performance or future franchise openings, these are all issues that can potentially give rise to claims for franchisor fraud. In these cases, franchisees may have claims under common law, under a general anti-fraud statute or under their state’s franchise disclosure law (if their state has one).
Franchisors have an obligation to avoid making fraudulent misrepresentations and omissions during the franchise relationship as well. If you have detrimentally relied on any misrepresentation or omission by your franchisor, it will be worth talking to a franchisee attorney about your legal rights.
What if Your Franchisor Isn’t Meeting Its Legal Obligations?
Taking into account everything we’ve discussed so far, what can (and should) you do if your franchisor isn’t meeting its legal obligations?
Given the comparatively limited nature of franchisors’ legal obligations, a key first step in this scenario is to assess whether the action, statement or omission in question constitutes a breach that justifies legal action. The unfortunate reality is that, in many cases, franchisors’ practices that seem like they should justify legal action do not.
But, if you have grounds to take legal action, you will want to act quickly and decisively. Taking action promptly in response to a franchisor’s fraud, misconduct or breach will often be essential for both protecting franchisees’ legal rights and preserving the remedies they have available.
What does taking legal action entail? The answer to this question will depend on the specific circumstances involved.
In some cases, it will make sense to engage a franchisee attorney to attempt to work out an informal resolution with your franchisor (or its attorneys) on your behalf. In others, it may be necessary to immediately initiate alternative dispute resolution (ADR) proceedings. In other still, it may be necessary to rely on an exception to your franchise agreement’s mandatory ADR clause in order to seek injunctive relief in court. An experienced franchisee attorney will be able to help you make informed and strategic decisions based on the circumstances at hand.
Request a Call with National Franchisee Attorney Jeffrey M. Goldstein
If you need to know more about holding your franchisor accountable for failing to meet its legal obligations, we invite you to get in touch. National franchisee attorney Jeffrey M. Goldstein has decades of experience helping franchisees protect their rights in negotiations, ADR and litigation. To schedule a call with Mr. Goldstein as soon as possible, give us a call at 202-293-3947 or request a free consultation online today.
