FRANCHISING 101:
FUNDAMENTALS BOOT CAMP FOR
THE BEGINNER
Presented by the
American Bar Association
Solo, Small Firm and General Practice Division,
Section of Intellectual Property Law,
Section of International Law,
Young Lawyers Division
Section of Litigation and
Center for Professional Development
American Bar Association
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The materials contained herein represent the opinions of the authors and editors and should not be
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Division, Section of Intellectual Property Law, Section of International Law, Young Lawyers Division,
Section of Litigation or Center for Professional Development unless adopted pursuant to the bylaws of
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readers are responsible for obtaining such advice from their own legal counsel. This book and any forms
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© 2016 American Bar Association. All rights reserved.
This publication accompanies the audio program entitled “Franchising 101: Fundamentals Boot Camp
for the Beginner” broadcast on May 31, 2016 (event code: CE1603FBC).
Franchising 101:
Fundamentals Boot Camp for the Beginner
Tuesday, May 31, 2016 | 1:00 PM Eastern
Sponsored by the ABA Solo, Small Firm and General Practice Division, Section of
Intellectual Property Law, Section of International Law, Young Lawyers Division, Section of
Litigation and the ABA Center for Professional Development
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Faculty
• Al Mohajerian, Attorney and Counselor at Law,
Mohajerian Law Corporation
• Mario L. Herman, Domestic and International
Franchising Attorney, The Law Office of Mario L.
Herman
• Moderator: Jeff W. Wheelock, Attorney at Law,
Dickinson & Wheelock, P.C.
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Franchising 101
Al Mohajerian
Mohajerian Law Corporation
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Franchise Business Model
What is a franchise business model in relation to
other business models?
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Franchise Business Model
The business owner creates a franchise by
offering its
(i) Trademark
(ii) business model to franchisees in exchange for
(iii) a percentage of the franchisee’s gross
revenue.
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Other Models
Alternatively, the business owner could
1.secure investment for expansion
2.take on partner who brings capital contribution
3.take bank loan to acquire additional real estate
and staffing
4.go public.
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Lawyers advising a client selling a franchise
A lawyer should be familiar with all aspects of:
1.Business Law
2.Real Estate
3.Labor Law
4.Contract Law
5.Intellectual Property
6.Trademark law, and
7.Franchise statutes and regulations.
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Legal Framework for Franchises
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FEDERAL FRANCHISE LAWS
On December 21, 1978, the Federal Trade
Commission (“FTC”) promulgated a Trade
Regulation Rule entitled ‘‘Disclosure Requirements
and Prohibitions Concerning Franchising and
Business Opportunity Ventures’’ (the “Original
Franchise Rule’’), to address deceptive and unfair
practices in the sale of franchises and business
opportunity ventures.
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FEDERAL FRANCHISE LAWS
• In July 2007, the FTC adopted the "Disclosure
Requirements and Prohibitions Concerning
Franchising," 16 C.F.R. § 436 (hereinafter, the
“FTC Rule”) to amend the Original Franchise
Rule. As of July 1, 2008, businesses are
required to comply with the FTC Rule, which
applies only to franchises, whereas the Original
Franchise Rule applied to both franchises and
business opportunities.
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FEDERAL FRANCHISE LAWS
• FTC Rule - Basic Elements
• The FTC Rule has three basic elements. A
business arrangement as a “franchise” under the
FTC Rule where:
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FEDERAL FRANCHISE LAWS
• the suppler provides significant control or
direction over the buyer’s method of operation or
it provides significant assistance to the buyer
with respect to that method of operation;
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FEDERAL FRANCHISE LAWS
• there is a trademark or brand identification
element by which the buyer acquires the right to
operate a business that is identified or
associated with the franchisor's trademark, or to
offer, sell, or distribute goods, services, or
commodities that are identified or associated
with the franchisor's trademark; and
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FEDERAL FRANCHISE LAWS
There is a “franchise fee” element by the buyer
must pay the fee within the first several months of
commencing operations. Note: In some cases, a
90-day inventory requirement, if not reasonably
necessary to the business, may constitute a
franchise fee, as may payments for rent, required
advertising, parts and repair manuals.
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FEDERAL FRANCHISE LAWS
A principal consequence for a seller if its business
falls within the “franchise” definition is the
obligation of providing an extensive franchise
disclosure document (the “FDD”) to prospective
distributor-franchisees at the first personal meeting
or 14 days before any contract is signed or
payment made.
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FEDERAL FRANCHISE LAWS
(16 C.F.R. § §436.2 - “…it is an unfair or
deceptive act or practice …(a) [f]or any franchisor
to fail to furnish a prospective franchisee with a
copy of the franchisor's current disclosure
document, …, at least 14 calendar-days before the
prospective franchisee signs a binding agreement
with, or makes any payment to, the franchisor or
an affiliate in connection with the proposed
franchise sale.
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FEDERAL FRANCHISE LAWS
(b) [f]or any franchisor to alter … the terms and
conditions of the basic franchise agreement or any
related agreements attached to the disclosure
document without furnishing the prospective
franchisee with a copy of each revised agreement
at least seven calendar-days before the
prospective franchisee signs the revised
agreement.”)
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FEDERAL FRANCHISE LAWS
Among the information that must be provided are
the franchisor’s audited financial statements,
information about the franchisor’s history, including
litigation and bankruptcy history and operating
experience, a description of the franchisor’s
termination rights, and restrictions on the business
that the franchisee may conduct. The supplier’s
failure to comply can lead to serious penalties.
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FEDERAL FRANCHISE LAWS
The specific restrictions on earnings claims or
projections – including a requirement that there be
a reasonable basis for all claims, an explicit
statement of all assumptions, and a report of the
franchisees who have done as well in the same
market, often means that such earnings claims or
projections are generally not made.
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FEDERAL FRANCHISE LAWS
Failure to comply with the registration and
disclosure laws often constitutes a criminal
offense. Civil penalties are often available in
actions by the state attorney general.
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FEDERAL FRANCHISE LAWS
In addition, while no private right of action is
available under the FTC Rule, state laws generally
give the franchisee a right of rescission and a
claim for damages, not only against a franchisor
that fails to comply, but against its parent, and its
officers, directors and employees in their individual
capacities. Approximately half of the states specify
that the parties cannot waive business opportunity
laws.
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FTC Rule Exemptions and Exclusions
The FTC Rule contains a number of exemptions.
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Fractional Franchises
The most important are for “fractional franchises”
(i.e., both parties have a reasonable basis to
anticipate that the sales arising from the
relationship with experienced franchisees will not
exceed 20% of the franchisee’s total dollar volume
in sales during the first year of operation)
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FTC Rule Exemptions and Exclusions
•
•
•
•
for employer-employee relationships
departments of department stores
for purely oral arrangements.
Additional exemptions include the Minimum
Payment Exemption; Large Franchise
Investment Exemption; The “Insiders”
Exemption; General Partner Relationship
Exclusion; Single Trademark License Exclusion,
among others.
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FTC Business Opportunity Rule
FTC Business Opportunity Rule
What is it?
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FTC Business Opportunity Rule
Effective March 1, 2012, the FTC enacted a new
Business Opportunity Rule, 16 CFR Part 437
(“FTC Biz Op Rule”), which applies to commercial
arrangements where: (1) a seller solicits a
prospective buyer to enter into a new business, (2)
the prospective purchaser makes a required
payment, and (3) the seller – expressly or by
implication – makes certain kinds of claims. The
rule also applies to opportunities where a seller
agrees to help the buyer set up or run the
business.
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FTC Business Opportunity Rule
Under the FTC Biz Op Rule, a seller is required to
use a one-page “Disclosure of Important
Information About Business Opportunity”
(“Disclosure Document”) before entering into any
business opportunity arrangement, disclosing the
following info to the prospective buyer. The seller
must deliver the Disclosure Document at least 7
days before a prospective purchaser signs any
documents with, or pays any money to, the seller
(16 CFR § 437.2) indicating
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FTC Business Opportunity Rule
(a) Identifying Information.
The seller’s identifying information, including
name, business address, telephone number, the
name of the salesperson offering the business
opportunity (16 CFR § 437.3(a)(1))
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FTC Business Opportunity Rule
(b) Earnings.
Whether or not the seller makes an earnings claim.
While the seller is not required to make an
earnings claim, where the seller checks the “yes”
box, it must provide the prospective purchaser with
a separate earnings claim statement titled
“EARNINGS CLAIM STATEMENT REQUIRED BY
LAW” (16 CFR § 437.3(a)(2); § 437.4), which
includes a specific financial claim and the number
(and percentage) of other buyers to earned at least
that result.
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(c) Legal Actions.
Whether the seller or any of its affiliates or prior
businesses, or key personnel has been the subject
of any civil or criminal “legal action” within the past
10 years that involved "misrepresentation, fraud,
securities law violations, or unfair or deceptive
practices, including violations of any FTC Rule.”
(16 CFR § 437.3(a)(3).)
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FTC Business Opportunity Rule
(d) Cancellation or Refund Policy. The seller’s
cancellation policy, if any. (16 CFR § 437.3(a)(4).)
(e) References. A list of the 10 purchasers of the
business opportunity closest to the prospective
purchaser’s home or, in the alternative, a list of all
purchasers during the last three years. The list
must include only each prior purchaser’s name,
state (not address) and telephone number. (16
CFR § 437.3(a)(5).)
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FTC Business Opportunity Rule
• Thereafter, a seller is required to update the
Disclosure Document quarterly. However,
where the seller has less than 10 purchasers,
update monthly. (16 CFR § 437.3(b).)
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STATE FRANCHISE LAWS
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STATE FRANCHISE LAWS
Franchise Register States
In addition to compliance with the FTC Rule,
Franchisors must register, and generally receive
approval before they can sell their franchises in the
following 14 states: California, Hawaii, Illinois,
Indiana, Maryland, Michigan, Minnesota, New
York, North Dakota, Rhode Island, South Dakota,
Virginia, Washington, and Wisconsin.
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• Oregon regulates the sale of franchises in
Oregon, however Oregon law does not require
that franchises be registered with the State.
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STATE FRANCHISE LAWS
Before offering to sell or selling franchises in these
states, a franchisor must apply to the appropriate
state agency to register the franchise and,
typically, submit the FDD (along with any required
forms and fees) to the state administrator for
approval. Generally, until the state administrator
has approved the FDD, the franchisor cannot offer
to sell franchises that will be located within that
state or to a resident of that state.
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STATE FRANCHISE LAWS
• As with the FTC Rule, the various state law
definitions of “franchise” usually include a
trademark element, a “control” element (either a
marketing plan prescribed in substantial part by
the supplier or a “community of interest”
between supplier and distributor in the marketing
of the product) and a franchise fee element. Ex:
California’s definition of “franchise” is typical with
respect to its “marketing plan” approach which is
shared in Illinois, Indiana, Maryland, Michigan,
New York and North Dakota).
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STATE FRANCHISE LAWS
“‘Franchise’ means a contract or agreement, either expressed or
implied, whether oral or written, between two or more persons by
which:
(1) A franchisee is granted the right to engage in the business of
offering, selling or distributing goods or services under a marketing
plan or system prescribed in substantial part by a franchisor;
(2) The operation of the franchisee’s business pursuant to such plan or
system is substantially associated with the franchisor’s trademark,
service mark, trade name, logotype, advertising or other
commercial symbol designating the franchisor or its affiliate; and
(3) The franchisee is required to pay, directly or indirectly, a franchise
fee.” (California Corporations Code § 31005(a). Emphasis added.)
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STATE FRANCHISE LAWS
Three other states, Hawaii, Minnesota and South
Dakota, utilize the “community of interest”
element, rather than the “marketing plan”
approach, to determining whether a franchise
exists.
However, in Delaware, like Arkansas and Florida,
has a unique definition of franchise systems, and
not like any other state. (See, e.g., Delaware Title
6 Code § 2551, et seq.)
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CA FRANCHISE LAWS
•
For example, California has two tier franchise system. First, the
California Franchise Investment Law deals with the prospective
franchise prior to a purchase decision, generally requiring
franchisors to register with the Department before offering and
selling franchises in California and mandating that final franchise
agreements must be provided to prospective franchisees at least 14
days before the sale of a franchise. (California Corporations Code §
31000 et seq.; see also California Civil Code § 1812.200 et seq.
•
(California’s "Seller Assisted Marketing Plan Act", which requires
Seller Assisted Marketing Plans (“SAMP”s) to register with the
Attorney General's Office, to provide significant disclosure
statements to potential buyers prior to signing any contracts, and to
provide the buyer specific contractual rights after a purchase has
been made.)
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CA FRANCHISE LAWS
Second, the California Franchise Relations Act
covers the relationship between franchisors and
franchisees, including renewals, transfers, offers to
repurchase inventory, arbitration and venue as
well as termination. (California Business &
Professions Code § 20000 et seq.)
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State Exclusions
Like the FTC Rule, most state franchise laws
provide exemptions or exclusions from registration
and/or disclosure requirements for franchise
systems.
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STATE BUSINESS OPPORTUNITY LAWS
In addition to the FTC Rule, and the FTC Biz Op
Rule and applicable state franchise laws, the sale
of an interest in a business may also be subject to
a business opportunity law and seller-assisted
marketing plan. Franchisors should be aware of
these business opportunity laws, although many
franchisors are exempt or excluded from such
laws.
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STATE BUSINESS OPPORTUNITY LAWS
Twenty four states now have one or a variety of
business opportunity statutes namely:
Alabama, Alaska, California, Connecticut, Florida,
Georgia, Illinois, Indiana, Iowa, Kentucky,
Louisiana, Main, Maryland, Michigan, Nebraska,
New Hampshire, North Carolina, Ohio, South
Carolina, South Dakota, Texas, Utah, Virginia and
Washington.
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STATE BUSINESS OPPORTUNITY LAWS
The function of these statutes is to extend disclosure
protections to purchasers of franchise type business
opportunities. While the statutory definitions of a business
opportunity vary significantly, each statute generally has
the following common elements: (a) an oral or written
contract for a seller to provide products [or] services … to
enable the buyer to commence a previously nonexistent
business; and (b) representations made by the seller as to
the nature of the business investment, generally in the form
of some sort of guarantee or buy back provision and a
promise that the buyer will not lose the cost of the
investment.
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STATE BUSINESS OPPORTUNITY LAWS
• The initial investment sufficient to trigger
application of a business opportunity law can
range from $200.00 to no dollar limit. As a result,
the reach of these statutes can be broad and, as
such, a trap for sellers unaware of
them.
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Challenges of Franchise Arrangements
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Franchising Challenges
– For Franchisor
• Earn Percent of Franchisees’ Gross
• Termination Restrictions
– Cure provisions
– Good Cause Terminations
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Franchising Challenges For Franchisor
• Litigation
– Earnings Claims;
– Breach of Franchise Agreements – generally ruling favor
franchisor;
– Franchisor may be named in litigation involving the
franchisee.
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Franchising Challenges For Franchisor
• Patterson v. Domino’s Pizza, LLC, (2014) 60 Cal, 4th
474, 476 (“The imposition and enforcement of a uniform
marketing and operational plan cannot automatically
saddle the franchisor with responsibility for employees of
the franchisee who injure each other on the job.” Rather,
a franchisor “becomes potentially liable for actions of the
franchisee’s employees only if it has retained or
assumed a general right to control other factors such as
hiring, direction, supervision, discipline, discharge, and
relevant day-to-day aspects of the workplace behavior of
the franchisee’s employees.”)
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Franchising Challenges For Franchisor
• FDDs
– Initial Preparation of FDD;
– Annual Updates in franchise registration states require.
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Challenges For Franchisee
– For Franchisee
• Established Brand/Reduced Business Risk;
• Franchisor Support (Manual, Advertising
Campaigns);
• Franchisor Monitoring (Audits);
– Suppliers
– Training
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Challenges For Franchisee
• Assessing Likely Revenues After Initial Investment
–
–
–
–
–
Lease Obligations – Rents and Upkeep;
Fees and Royalties;
Reimaging Costs;
Marketing Costs;
Traffic.
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Contact
AL MOHAJERIAN
MOHAJERIAN APLC
1901 AVE OF THE STARS, SUITE 1100
LOS ANGELES, CA 90067
TELEPHONE: (310) 556-3800
FACSIMILE: (310) 556-3817
E-MAIL: al@mohajerian.com
WEB: www.mohajerian.com
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Representing Franchisees
Mario L. Herman
The Law Office of Mario L. Herman
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Faculty
Mario L. Herman, Esq.
5335 Wisconsin Avenue N.W., Suite 440
Washington, D.C. 20015
Telephone: 202-686-2886
Email: mherman@franchise-law.com
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Objectives
• Become familiar problems that arise in the franchise
relationship between franchisor and franchisees, due to:
– “Disguised Franchises”
– Lack of proper disclosure;
– Fraud in the inducement, including illegal Financial Performance
Representations;
– Franchisor’s breach of covenant of good faith and fair dealing;
• Become aware of laws which may form the basis for
available remedies to franchisees, including:
– Federal Franchise Rule, State Baby FTC Acts, and State
Franchise and Business Opportunities Acts, and common law.
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DISGUISED FRANCHISES
Federal: Definition of a Franchise
• Federal Franchise Rule, 16 C.F.R. 436:
– Definition of “franchise”: any continuing
commercial relationship or arrangement,
whatever it may be called, in which the terms
of the offer or contract specify, or the
franchise seller promises or represents, orally
or in writing, that:
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DISGUISED FRANCHISES
Federal: Definition of a “Franchise”
• The franchisee will obtain the right to operate a business
identified or associated with the franchisor’s trademark;
• The franchisor will exert or has the authority to exert a
significant degree of control over the franchisee’s
method of operation, or provide significant assistance in
the franchisee’s method of operation; and,
• As a condition of obtaining or commencing operation of
the franchise, the franchisee makes a required payment
or commits to make a required payment to the franchisor
or its affiliate of $500 or more at any time before, to
within six months after commencing operation of the
franchisee’s business.
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DISGUISED FRANCHISES
States: Definition of a Franchise
• 15 States have disclosure, registration and/or
notice laws regulating franchise sales:
California, Hawaii, Illinois, Indiana, Maryland,
Michigan, Minnesota, New York, North Dakota,
Oregon, Rhode Island, South Dakota, Virginia,
Washington and Wisconsin.
• The state laws vary somewhat in how they
define “franchise.”
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DISGUISED FRANCHISES
States: Definition of a Franchise
• The California Franchise Investment Law
definition is typical of the statutes in may other
states, and defines a franchise as:
• A written or oral contract by which:
– the franchise is granted the right to engage in the business of
offering, selling or distributing goods or services under a
marketing plan or system prescribed in substantial part by the
franchisor;
– The operation of the franchisee’s business pursuant to such plan
or system is substantially associated with the franchisor’s
trademark, service mark, trade name, etc., or other commercial
symbol; and
– The franchisee is required to pay, directly or indirectly, a
franchise fee.
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DISGUISED FRANCHISES
States: Definition of a Franchise
• Variances from California law:
– In Illinois, Rhode Island, Washington and Wisconsin, the
marketing plan can be prescribed or suggested.
– Other states, including Hawaii and Minnesota, substitute the
requirement that there be a “community of interest” in the
marketing of the seller’s goods or services for the marketing plan
element.
– New York Franchises Law has two alternative definitions of
“franchise” and does not require both a marketing plan and
trademark association. If either element is present, along with a
franchise fee payment, a franchise will exist for purposes of the
New York law.
– South Dakota adopted the Amended FTC Franchise Rule
definition of “franchise” as of July 1, 2008.
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DISGUISED FRANCHISES
States: Definition of Franchise Fee
• A franchise fee generally is any fee or charge, including
up-front payments or subsequent royalties, required
purchases, advertising fees or other fees, that the
franchisee is required to pay directly or indirectly for the
right to enter into the business. It includes hidden
charges, such as equipment which the franchisee may
be required to purchase.
• However, the purchase of goods (not services) at a bona
fide wholesale price in a quantity which a reasonable
businessman normally would purchase by way of
starting, and for ongoing inventory, is usually exempted
from the franchise fee definition.
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DISGUISED FRANCHISES
“Marketing Plan” or “System”
• In general, to have a prescribed or suggested marketing
plan or system, the franchisor must direct or suggest to
the franchisee how to sell the goods or services to the
public.
• A prescribed or suggested marketing plan or system can
be found even in the absence of a manual, if a
combination of the following elements exist: prescribing
exclusive territories, requiring mandatory training,
retaining or exercising approval over sales personnel,
providing product information and sales strategies,
promising support in marketing, training, advertising and
promotion, and prescribing sales quotas.
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DISGUISED FRANCHISE
“Community of Interest”
•
There is a lack of a uniform test or set of factors universally applied by the
courts in addressing whether a sufficient “community of interest” exists in a
given context.
–
In Cooper Distrib. Co. v. Amana Refrigeration, Inc., 63 F.3d 262, 269, (3d Cir.
1995), the court distilled the "community of interest" requirement down to a twopart test: "(1) the distributor’s investment must have been substantially franchisespecific, and (2) the distributor must have been required to make these
investments by the parties’ agreement or the nature of the business.”
– In Frieburg Farm Equip., Inc. v. Van Dale Inc., 978 F.2d 395 (7th Cir. 1992), the
court found that a "community of interest" may exist under one of two
circumstances: "(1) when a large proportion of an alleged dealer’s revenues are
derived from the dealership, or (2) when the alleged dealer has made sizeable
investments (in, for example, fixed assets, inventory, advertising, training)
specialized in some way to the grantor’s goods or services and hence not fully
recoverable upon termination."
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DISGUISED FRANCHISE
Why Is This An Issue?
• The Federal Franchise Rule, 16 C.F.R. 436, et seq.,
requires franchisors to disclose information to prospects
in 23 separate categories of information.
• State Franchise laws also have similar disclosure
requirements.
• Both Federal and State franchise laws were developed
after a recognition that there has been a history of
deception in the sale of franchises and business
opportunities. For example, in its Statement of Basis
and Purpose, to the Amended Federal Franchise Rule,
the FTC stated:
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DISGUISED FRANCHISES
Why Is This An Issue?
•
The Commission promulgated the original Franchise Rule on December 21,
2978. Based upon the original rulemaking record, the Commission going
widespread deception in the sale of franchises and business opportunities
through both material misrepresentations and nondisclosures of
material facts. Specifically the Commission found that franchisors and
business opportunity sellers often made material misrepresentations about:
the nature of the seller and its business operations, the costs to
purchase a franchise or business opportunity and other contractual terms
and conditions under which the business would operate, and the
seller’s financial viability. The Commission also found other unfair or
deceptive practices pervasive: franchisors’ and business opportunity sellers’
use of false or unsubstantiated earnings claims to lure prospective
purchasers into buying a franchise or business opportunity, and
franchisors’ and business opportunity sellers’ failure to honor promised
refund requests. The Commission concluded that all of these practice led
to serious economic harm to consumers. (Emphasis added.)
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DISGUISED FRANCHISES
Lack of Proper Disclosure
• Under the Federal Franchise Rule, franchisors must
disclose with a Franchise Disclosure Document (“FDD”)
(containing 23 categories of information) 14 calendardays prior to the prospect signing any agreement or
paying any consideration.
• Franchisors must give execution copies of the franchise
agreement to the prospect 7 calendar-days prior to
signing where the franchisor has made changes in the
document not initiated by the prospect.
• State laws have similar disclosure timing requirements.
• These laws exist so that a prospect has adequate time to
review the disclosures and/or have them reviewed by
their attorneys or other advisors.
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DISGUISED FRANCHISES
Lack of Proper Disclosure
• Victims of Disguised Franchises fail to receive
proper disclosure, including disclosures on:
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FINANCIAL STATEMENTS
WHICH LAW GOVERNS
WHICH FORUM GOVERNS
HISTORY OF PRINCIPALS
LITIGATION HISTORY
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• BANKRUPTCY
• ATTRITION RATE / CLOSURES
• LIST OF CURRENT AND FORMER FRANCHISEES
• REQUIRED PURCHASES
• REBATES PROVIDED TO FRANCHISOR
• UPFRONT INVESTMENT
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• FINANCIAL PERFORMANCE REPRESENTATIONS
(AKA “EARNINGS CLAIMS”)
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BASES FOR REMEDIES TO FRANCHISEES
Lack of Proper Disclosure
• There is no private right of action to a franchisee
under the Federal Franchise Rule.
• However, in several states, franchisees have
successfully sued franchisors for rescission and
restitution or damages under the state’s “Little
FTC Act” (deceptive trade practices act) based
upon a franchisor’s violation of the Federal
Franchise Rule.
• Common Law – fraud (affirmative
misrepresentation or omission), negligent
misrepresentation.
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BREACH OF CONTRACT
Franchisor’s Failure to Support
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Most often the franchisor’s obligations under the franchise
agreement are specifically and strictly limited to those spelled out in
the contract.
Franchisees often want to complain of “lack of support.” A careful
review of the franchise agreement is required to determine if such a
claim can be maintained.
Encroachment: Franchise Agreements typically provide an exclusive
territory to their franchisees, but sometimes carve out exemptions
for kiosks, etc. A review of the franchise agreement is required to
determine how the territory is defined, i.e., a geographic radius, by
zip codes, etc. If a franchisor violates this provision then a breach of
contract claim may be available.
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BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING
Where the Franchisor Has Discretion Under the Franchise Agreement
• Most Franchise Agreements provide that the franchisor
has sole discretion regarding certain of its obligations
under the Franchise Agreement, i.e., ongoing training,
ongoing support, etc.
• The covenant of good faith and fair dealing requires that
when a contract grants one party discretion, that party is
required to exercise that discretion in a fair and
reasonable manner, consistent with the reasonable
expectations of the parties. Franchisees may use the
covenant to combat unreasonable exercises of discretion
by franchisors.
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Summary of Objectives
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Representing Franchisees can be complicated, and where there is a
national practice, necessitates familiarity with numerous state and
federal laws and regulations.
A lawyer representing franchisees should start with a careful review
of the Franchise Agreement. As an initial matter, you will need to
determine whether there is a choice of law in the contract, and then
review where the franchise is located to determine if any state
franchise laws may be applicable. Even in the face of a choice of
law provision, many state franchise laws contain an “anti-waiver”
provision, so the franchisor could still be required to comply with the
state law. Some state franchise laws only apply if the franchise was
sold or offered in the applicable state, or if the franchise is located in
the state.
Remember, although there is no private right of action under the
Federal Franchise Rule, there may be remedies available under
“Baby FTC Acts,” and/or common law.
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Questions?
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