Franchise Terminations

The day that all franchisees fear has come. You receive a termination notice from your franchisor. Perhaps this comes out of the blue, or perhaps there were previous indications. Regardless, now is not the time to sit back and wait for the termination to become effective.  Early consideration of the following steps and engagement of an experienced franchisee lawyer will provide your best chance for success.

After reading the termination notice, determine all of the announced and arguable reasons for termination by conducting a thorough investigation. In this investigation look for the franchisor’s actual, including bad faith and unmentioned, reasons for termination and consider who benefits from the termination. If all of the reasons you discover are not listed in the notice of termination, they may have been waived. Watch for and object to, these unasserted reasons if and when they are raised.

After determining the reasons for termination, examine your franchise agreement, paying special attention to the provisions governing termination, dispute resolution and post-termination competition.

Termination provisions fall into one of two categories. Termination-at-will provisions allow the franchisor to terminate on a certain number of days’ notice. Termination-for-good-cause provisions generally spell out situations where the franchisor is allowed to terminate the agreement if a deficiency remains uncured, and often include situations that allow for immediate termination. Compare the termination notice against the termination provisions to determine your contractual rights and the time you have to correct any legitimate deficiencies.

Next, consider contractual dispute resolution provisions. This includes a review of any negotiation, mediation and arbitration provisions. Review any provisions setting a time limit to assert a claim, limiting franchisor liability or waiving a jury trial. Also, consider the effect of any choice of law provision (stating which state’s law applies) or choice of forum provision (where dispute resolution occurs). These provisions affect the allotted time and manner in which you may assert your rights.

Finally, review the agreement’s non-compete clause to determine what restrictions on your activity may apply after termination.

Now consider available statutory protection. Many states have franchise statutes providing franchisees protection against termination without good cause (and requiring notice and opportunity to cure); franchisor discrimination and unreasonable conduct; and the unreasonable withholding of consent to transfer. Additionally, these statutes often have broad applicability and contain anti-waiver language. You should look for franchise statutes in the state(s) where your business is located, where you reside, where your franchisor is located, and the state selected in the choice of law provision.

Once you have found the potentially applicable statutory protection, determine whether you are a franchisee. The statute will almost definitely apply to the traditional franchises (KFC, Supercuts, etc.). Additionally, franchise statutes generally apply when the franchisee pays the franchisor a fee, has the right to use the marks or sell the system’s products, and is required to follow a marketing plan or there is a “community of interest” between the franchisee and franchisor (depending on the state).

The most important statutory provision for you to review is the termination provision. Under most state statutes, “good cause” is required for termination unless certain limited exceptions apply (bankruptcy, abandonment, etc.). “Good cause” typically includes failure to meet reasonable performance criteria, violations of the agreement or law, and sometimes systemwide changes and market withdrawal. Most statutes require notice of any defaults and a reasonable time period to cure. Franchisor non-compliance with these statutes can be used to negate a termination or as a negotiating tool.

In addition to the state franchise relationship statutes, many states also regulate the “deceptive” sales of franchises through unfair trade practices acts and “Little FTC” acts patterned after the Federal Trade Commission Act. Franchisor violation of these statutes may also provide negotiation power to the wronged franchisee.

Finally, consider whether you have common law contract or tort claims. Common claims include: breach of any provision (did the franchisor breach any provision, whether written or as amended by discussion or course of dealing between the parties?); breach of the covenant of good faith and fair dealing (did the franchisor exercise contractual discretion unreasonably or in bad faith?); fraudulent inducement or misrepresentation (did the franchisor make a false statement that you relied upon?); and tortious interference (did the franchisor wrongfully interfere with a potential or actual contractual relation ship you had with a third party?). These claims could directly negate a termination or provide you with leverage for negotiation.

If that dreaded day comes and you receive a termination notice from your franchisor reach out to our franchise and distribution team to help guide you through these steps to determine your rights and maximize your opportunity to prevent your termination from becoming effective.