When a new franchisee opens their new franchised business, one of the primary factors that drove the franchisee’s decision to select that franchise is often because of particular aspect that is unique to that franchise, whether it is a particular product or an efficient method of business.  However, franchise systems frequently go through changes.

A reasonable system changes need to occur in every franchise system over time.  If a franchise system fails to make system changes, the system could become completely irrelevant and fail.  If you are old enough, you may remember the Howard Johnson’s restaurant chain and their iconic orange roof and cupola.  But think, when was the last time you saw one? It was likely long ago, as the system, which at one point had over 1,000 restaurants around the country, had the final restaurant close several years ago.  Howard Johnson’s problem was that it failed to make any significant changes to its menu or look for decades.  Meineke is an example of a system changing to remain viable.  Meineke was originally a car muffler repair shop.  A couple of decades ago, a car muffler would only last a couple of years, especially in parts of the country that experience winter weather.  Now, because of advancements in materials and design, replacing your muffler is rare.  Meineke changed with the times and is no longer just a muffler shop but now does general auto repair.  This is a prime example of a franchise system changing with the times to keep relevant.

System changes are a fact of operating within a franchise system and, with the length of franchise agreements, you are likely to go through at least a minor system change as a franchisee.  However, this still leaves the issue of the change being reasonable and the development and roll out the change being done in a reasonable manner.  As franchise agreements are written by the franchisor, the vast majority of them reserve broad latitude for the franchisor to make changes to the franchise system.

An example of how not make a system change is found in relation to a recent change by an international pizza franchise.  The franchisor decided that the POS system needed to be updated even though the current POS was fully functional and meeting the needs of the franchisees.  Rather than consulting with the franchisees, the franchisor pushed forward with developing the new POS, at significant cost, and required the franchisees to purchase the new POS system, which it turned out did not function as well as the prior POS.  The franchisor even went so far as to require all franchisees to immediately convert to the new POS, even those who had been in the system less than a year and had just purchased the previous POS system.  Ultimately, the franchisor was sued by multiple franchisees for its failures in developing and rolling out the system change.

This franchisor made several mistakes.  Overall, franchisors should have had franchisees, or the independent franchisee association, involved in the process from the beginning.  This provides a real-world check to the franchisor on what system change may be needed from those on the front line of the business.  If there is truly a need for the change, the next step of the process is the franchisor and franchisees working together to develop a budget and likely cost for the planned change so that the change can be accomplished to create a good return on investment for the franchisee.  Next, the system change should be tested with a small group of franchisees or in a limited geographic area because even when franchisor and franchisees work together with the best of intentions some system changes will not work in the real world.  Finally, the system change can be rolled out to the entire system on a reasonable schedule.

Unfortunately, because of the wide latitude franchisors have in most franchise agreements, not all franchisors will follow this process and may force what they think is best, or in some cases what is most beneficial to them, on their franchisees.  Even in the face of franchise provisions providing franchisor significant leeway, there are arguments that can potentially stop the enforcement of a system change by the franchisor.

If you are in a franchise relationship and need assistance with a system change, or any other aspect of your relationship with your franchisor, contact one of our experienced franchise and distribution law attorneys for assistance.