The circus comes to town

Franchisee attorneys and other advocates looking to level the playing field between franchisors and franchisees have attempted to expand the rights of franchisees by undertaking to negate the importance of the written bargain between the parties. They have also attempted to limit the options of the franchisor in the way they manage their systems or license their property.

Their theory is that there are obligations owed by any franchisor regardless of what is contained in the written agreement between the parties. They seek expanded rights or to impose implied obligations based upon a concept of industry standards of conduct or fairness. This thesis is an assault on two basic tenets of American business: First – The written contract agreed to by the parties defines the relationship and second, franchisors as owners of their marks have certain inherent property rights, one of which is to determine how they wish to license those rights. The perfection of the American system of business is that market factors are allowed to operate, and third-party impositions are limited.

I believe that this parody of a business relationship, which franchisee advocates are attempting to create, is the leading cause for litigation in franchising today and is responsible for the lessening competitiveness of certain franchisors. It has caused some companies to eliminate franchising as an expansion option, or for existing franchisors to buy back locations or become more cautious about whom they select to join their systems. Franchisors are also compromising on the placement and number of locations they believe are necessary to create critical mass and brand presence. In other systems, the mere possibility that their actions in managing or evolving the business may trigger litigation has caused them to avoid opportunities.

What a price to pay to avoid the likelihood of litigation.

Case in point: Last month I participated in what is unfortunately becoming a routine part of the circus that some franchisee advocates are creating.

A multi-unit franchisee, with a significant history of litigation against their franchisor and their fellow franchisees, filed another suit against their franchisor. The franchisor is a large service franchise system with a low individual unit investment.

The undisputed facts in the case are that attached to the franchise agreement was a map defining the market in which the franchisee could advertise. The map had been in use in the system for over a decade and was the same map used for all other franchise agreements signed by this franchisee.

In each of the prior lawsuits brought by this franchisee, rather than incur the cost of litigation and under the advice of their attorney, the franchisor settled by making a payment to the franchisee. The franchisor so easily settled the prior cases that the franchisee boasted that litigation against the franchisor had proven to be a profitable portion of their business. The franchisee was surprised and then outraged that the franchisor in this latest case chose to have the dispute settled by the court rather than do what they did in the past – pay for peace in the system.

What was the basis for the latest dispute? The franchisee claimed that the franchise agreement was unclear because the franchisor used a medium-width felt pen to draw the boundary rather than define the market by listing the street boundaries. Why? Because the width of the pen marks, in the mind of the franchisee, resulted in a swath of undefined territory. The franchisee wanted the court to redefine the market in such a way as to give them an exclusive territory – even though no exclusive territory was ever envisioned.

The complaint drafted by the franchisee’s attorney claimed that the franchisor had implied obligations, regardless of the language of the agreement, regardless of the clarity of disclosure, simply because franchisees of other systems had those rights. They tried to impose an overriding industry standard.

The case was tried in front of a judge who almost immediately ruled for the franchisor, stating that the case was a simple contract matter and the franchisor had met the terms of the agreement. The court felt that had the franchisee not understood the map, or wished to have an exclusive territory, the franchisee should have dealt with these issues prior to signing the agreement. The court did not have the right to change the agreement merely because one party now did not like the bargain they entered into. Simply because one party wishes to change the relationship does not impose an obligation upon the other party to do so.

Another example is a retail franchisor that contractually provides their franchisees with limited initial and ongoing support services and charges less than ½ of one- percent royalty. It is intended to be a minimal relationship and is defined as such in the contract.

A multi-unit franchisee with over $100 million in combined gross sales filed suit against the franchisor, claiming that they did not get services they wanted.

There was no factual dispute that the franchisor had provided the full measure of services stipulated in the agreement. The franchisee had been in the system for over ten years, had signed or renewed many franchise agreements, and needed little support from the franchisor. Even with a low royalty rate, the dollar amount paid to the franchisor was considerable.

In an attempt to force the franchisor to reduce their royalty, the franchisee brought suit against the franchisor, claiming that the franchisor had an implied obligation to provide them additional and undefined services. Their suit was based principally on the fact that other franchisors provided additional services to their franchisees.

The franchisee had an expert who advocated that the level of services provided by McDonald’s and other franchisors should be considered the industry standard for service, regardless of the specifics or the economics of the individual contracts.

During discovery, and after considerable expense, the franchisor filed for a summary judgement based on the merits of their contract. Again, the court in this case found for the franchisor and the underlying fact that the contract does matter.

The result of all of this? The franchisor is no longer offering franchises.

Some attorneys and franchisee advocates have lost touch with the reality that franchising is a business first. Franchisors as owners of their systems have the right, subject to certain restrictions of law, to offer franchises under the terms they choose. Franchisees have the obligation to understand their rights prior to entering into the relationship. Both parties prior to signing the franchise agreement should consider the underlying relationship and the terms upon which they are entering into the agreement. They should sign the agreement only if they think it is fair or beneficial.

The only parties who will continue to benefit from this circus will be the attorneys. Franchisee advocates, in their quest to expand franchisee rights and ignore the contractual agreement, weaken franchising and serve to lessen the opportunities for the people they claim to serve. It will be impossible for franchising, as a method of distribution, to remain competitive without the understanding that the contract defines the relationship and that market factors should govern its evolution.