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How to Avoid Franchise Litigation

By AFA on 05/10/2010

The sad fact of life is that we live in a litigious society. Many Americans believe lawsuits are the ideal way to solve business disputes. Most attorneys would probably acknowledge that litigation should be a last resort to conflict resolution. Even though one party may prevail in litigation, the cost, economic and otherwise, is usually much higher than either party anticipates. 

There are two common reasons litigation occurs in franchising

1. The franchisor/franchisee believes the other is not operating in accordance with the terms of the agreement.

For example, the franchisor may initiate litigation for failure to pay ongoing fees, such as royalties specified in the agreement, or for violating the territorial operating provisions of the agreement or for violating non-compete provisions.

A franchisee might initiate litigation alleging that the franchisor has failed to provide the agreed upon support in relation to an aspect of the initial business setup, or failing to live up to the terms of the agreement in relation to ongoing commitments. Franchisee lawsuits generally allege that the franchisor promised something during the investigation of the franchise that later did not materialize.

2. When either party believes the other is conducting itself in some unanticipated manner that is injurious to its business.

For example, the franchisee might initiate litigation if the franchisor is opening additional units so close to their unit that the additional unit is draining the franchisee’s business.

A franchise company may initiate litigation to stop an unanticipated action of franchisees that is considered injurious to its brand, such as hiring topless employees to help draw more customers into the business.

How To Avoid Litigation!

A franchisor can unintentionally violate franchise laws in many ways. A franchisor may make unauthorized financial performance representations (earning claims). A franchisor may provide inconsistent information differing from what is told to potential buyers and what is actually in the Franchise Disclosure Document. A franchisor may advertise in a manner which is inconsistent with its Franchise Disclosure Document or franchise agreement. And a franchisor may fail to comply with delivery requirements and waiting (cooling-off) periods. The potential errors are numerous, and can be difficult to avoid without proper training. 

Your exposure to litigation can be minimized by initiating a compliance program. If your company has not started a compliance program it should do so immediately, stop wasting time making your company vulnerable to tremendous legal cost. You can save a lot of money over time by spending a little money on an effective compliance program up front.

  1. Michael Thomas  on  06/16  at  04:37 PM wrote:

    What does a franchisee need to do in order to secure a market radius so that later franchises do not harm business or growth?  What options are available?

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