Franchise Litigation

Franchise lawsuits can be quite complex. When a franchisee purchases a franchise they are required to receive a Franchise Disclosure Document (FDD). The franchisee must receive the FDD usually 14 days before signing the franchise agreement to allow the franchisee an opportunity to “cool off” and not jump into the signing of an agreement that can affect their livelihood. The FDD is governed by the FTC. In 14 States the Franchisor must register the FDD before they can offer the franchise for sale. Other States have laws that can also effect the sale. In California you must register the FDD with the Department of Business Oversight (www.dbo.ca.gov) and renew the FDD annually.

Typical of Lawsuit involving Franchises

Franchise Disclosure Document was either not registered or not provided with sufficient time.

If the FDD was not registered, was registered after it was provide to the franchisee, the FDD changed significantly and was not amended/filed with the State regulator (Department of Business Oversight) or the franchisee did not have the required time to review the agreement may be rescinded and voidable.

Franchisor committed fraud by not performing as stated

The FDD may state that the franchisee will receive various items and they are not provided to the franchisee. These items may be relied upon by a franchisee in purchasing the franchise.

Franchisor failed to adequately support the franchisee

One of the most common allegations or complaints of a franchisee is they were not supported properly by the franchisor. The franchisee purchased the franchise as they needed guidance to operate a business and relied upon the franchisee to help them learn the business.

Franchisor made an earnings claim

The FDD does allow earnings claims but only under strict compliance. Most FDD’s exclude an earnings claim. The franchisee usually wants to know how much they will earn. The sales staff of many franchisees may be untrained or commissioned based and want to conclude the sale by telling the franchisee they can make $X. When the claim is not met the Franchisee has a claim against the franchisor and/or salesperson.

Franchisor will not allow Franchisee to transfer their franchise to another buyer

The Franchisor wants to maintain well qualified franchises. The franchisor typically charges $5000 to $10,000 for a transfer. The franchisee may be financially qualified or operationally qualified or even own another franchise. The Franchisor may want multi owner franchisees or managerial candidates. If the transfer doesn’t get approved there are inflection points that may result in a lawsuit (Business & Professions Code sections 20027-20029)

Franchisor will not allow Franchisee to renew their franchise

Similar to a transfer situation. After investing time, money and effort sometimes the Franchisor will not renew the franchisee for another term. The franchisee will be disappointed and will look at their options. This too could result in a claim against the Franchisor. California passed a statute effective January 1, 2016 that provides remedies to a franchisee who is terminated or not renewed (Business & Professions Code sections 20025-20026, 20035)

Franchisor terminates Franchisee

Similar to a nonrenewal case. After investing time, money and effort sometimes the Franchisor terminates the franchisee before the term expires. The franchisee will be disappointed and will look at their options. This too could result in a claim against the Franchisor. California passed a statute effective January 1, 2016 that provides remedies to a franchisee who is terminated or not renewed (Business & Professions Code sections 20020-20022, 20035)

Franchisee is no longer a franchisee but is using franchisor’s marks or trade secrets

Once a franchisee is terminated, not renewed or otherwise leaves the franchise system the Franchisor will require the franchisee to take down all marks, logos, trade dress and other intellectual property of the Franchisor. In many instances the franchisee and franchisor may dispute what trade dress is or owned by Franchisor and what is not owned by Franchisor

Franchisor has placed a franchise within another franchisees exclusive territory

When purchasing a franchise the franchisee typically receives a defined territory such as within 2 miles of the Franchisee’s store. Franchisors in selling many units may sell a franchisee with a territory within or too close to franchisee. This is known as encroachment. If the Franchisor places a franchise within your territory then the franchisor should be liable.

Franchisor did not properly train franchisees

Franchisees need to learn the culture of the business and the operational aspects of each franchise. In order for the franchisee to learn what needs to be accomplished the Franchisee needs the training of the Franchisor. When the Franchisee is not trained they will not follow protocols of the franchise system and may harm the franchise. The Franchisee is less likely to succeed without training.

Franchisee will not update their location as required by franchisor

Every franchise system requires a modern format. KFC used to have a bucket outside their stores and be called Kentucky Fried Chicken. Today they are called KFRC and the new stores no longer have a bucket. Franchisors often require franchisees to modernize. The costs can be quite high and it’s difficult to get a return on investment.

Brand or Advertising issues

It is important for a franchise system to be consistent. Advertising must be followed and having renegade marketing reflects upon the entire franchise network. Franchisees can be harmed as well by not being consistent through the system.

Royalties

Royalties are the lifeblood of the franchisor. Franchisees pay royalties for the continued support of the franchisor. Nothing is static and the Franchisor will add products and services. The Franchisee deals with issues constantly. If the Franchisee believes they are not being properly supported or running low on funds then royalties may not be paid.

The franchisor does not want to disclose lawsuits in their FDD as it may affect future sales. The franchisor also doesn’t want a group of franchisees filing a lawsuit together.