You have been operating your franchise for some time now but your relationship with your franchisor has recently deteriorated and your franchisor is now threatening termination.  Perhaps you operate in compliance with the system requirements of the franchise and are financially in good standing and your franchisor’s threats are baseless and motivated by some pretextual reason of the franchisor, such as freeing up the territory to give it to a preferred franchisee.  Or, perhaps, there is some basis to your franchisor’s concerns.  In either case, you need to fully know and understand your legal rights in order to navigate through this difficult time to the best possible resolution.

One of the most powerful legal rights you can have is protection under a state franchise statute.  Currently, there are 17 states that have franchise statutes that regulate the relationship between franchisors and franchisees.

The first question to ask is what state’s franchise statute may apply?  While the specific statutes vary slightly in applicability, a state franchise statute will usually apply if:

1. The franchisee is a resident of the state,
2. The franchisor is a resident of the state, or
3. The franchised business is located within the state.

Because of this, it is not always obvious which state’s franchise statute may apply.  Indeed, there are certain situations in which more than one state’s franchise statute may apply.

There is variance in the particulars of what each state’s franchise statute requires in relation to termination.  However, most of these state franchise statutes require a franchisor to provide a written notice of the termination and an opportunity to cure (the period of time in which the franchisee can cure the alleged default in order to avoid termination).  Most of the state franchise statutes also only allow a franchisor to terminate for “good cause,” which is typically limited to a breach of the franchise agreement or other highly significant issue such as the franchisee filing for bankruptcy or being convicted of fraud or a crime related to the franchise.

Much of the variance in these statutes relates to the time frames required for the notice of termination and opportunity to cure.  For example, Minnesota and Wisconsin require the notice of termination to be provided at least 90 days before the termination and an opportunity to cure period of at least 60 days.  In comparison, California, Michigan, Illinois, and Washington require a notice of termination and a reasonable opportunity to cure that need not exceed 30 days.  Additionally, some state’s franchise statutes do not require any opportunity to cure and only require a certain period of notice of termination such as Connecticut (60 days), Delaware (90 days), New Jersey (60 days), Indiana (90 days), Mississippi (90 days), Missouri (90 days), and Nebraska (60 days).  Further variance is found in Virginia where there is no expressly required period for the notice of termination or opportunity to cure and a franchisor can terminate for “reasonable cause.”

In addition to these varying applicable time periods many of these statutes have been construed by the court to protect franchisees against de facto terminations, which are situations where the franchisor does not expressly terminate the franchise but takes actions to create a situation where the franchisee cannot continue the business.  There are a select few states that term this a substantial change to the competitive circumstances in their statutes, and, in these situations, the protection can apply to something less than a termination.

In addition to protections regarding the termination of a franchise some state franchise statutes provide additional protections to franchisees in relation to the franchise relationship.  For example, Minnesota, Wisconsin, Iowa, Illinois, Indiana, and Washington prohibit a franchisor from discriminating between franchisees, while other state franchise statutes expressly guaranty a franchisee’s right to freely associate with other franchisees.

Overall, it is important to note that these statutes typically provide greater protection to the franchisee than the franchise agreement.

As should be plainly evident, franchisees can have substantial protections under state franchise statutes but the determination of whether a specific franchisee has those protections and what those protections can be is complex.  Because of this, it is best to engage an experienced franchise attorney as soon as you think there may be an issue in your relationship with your franchisor.

If you are having difficulty in your relationship with your franchisor, contact one of our experienced franchise law and distribution law attorneys to discuss how we can assist you.