Franchise Relationship Laws

AuthorRupert M. Barkoff, Andrew C. Selden
Pages183-225
183
Franchise Relationship Laws
CHAPTER 5
Thomas M. Pitegoff and W. Michael Garner
Contents
I. Brief History and Overview of Franchise Relationship Laws . . . 185
A. Abuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
B. Federal Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
C. State Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 86
II. Definition of “Franchise” Under State Relationship Laws . . . . . . 188
A. Breadth of Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8
B. A Closer Look at the Elements of a Franchise . . . . . . . . . . . . . 189
III. “Good Cause” for Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
A. Statutory “Good Cause” Requirements . . . . . . . . . . . . . . . . . . . 1 94
B. Cases Interpreting Good Cause . . . . . . . . . . . . . . . . . . . . . . . . . 195
IV. Procedural Requirements for Termination . . . . . . . . . . . . . . . . . . 200
A. Statutory Procedural Requirements . . . . . . . . . . . . . . . . . . . . . . 200
B. Cases Interpreting Procedural Requirements . . . . . . . . . . . . . . 201
V. Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
A. Statutory Renewal Requirements . . . . . . . . . . . . . . . . . . . . . . . 203
B. Cases Dealing with Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . 204
VI. The Perpetual Agreement Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 05
A. The Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 05
B. Types of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
C. The Franchisor’s Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
D. Judicial Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
VII. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
A. Types of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 09
B. Repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
184 Fundamentals of Franchising
This chapter provides an overview of the laws governing the franchise relation-
ship after the franchise agreement has been signed.1 Franchise regulation relat-
ing to the sale of franchises is covered in Chapters 3 and 4.
The appendices to this chapter provide more specific information regarding
state franchise relationship laws, including statutory examples of good cause for
termination, procedural requirements for termination and nonrenewal, and ex-
amples of unlawful practices not covered in the body of this chapter.
1. This chapter is based on the article by Thomas M. Pitegoff, Franchise Relationship
Laws: A Minefield for Franchisors, 45 BUS. LAW. 289 (1989).
C. Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
D. Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
VIII. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
A. Grounds for Withholding Consent to Transfers . . . . . . . . . . . . 214
B. Procedural Requirements for Transfer . . . . . . . . . . . . . . . . . . . . 215
C. Stock Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
D. Transfer upon the Death of a Franchisee . . . . . . . . . . . . . . . . . 216
IX. Common Law Theories Affecting the Franchise Relationship . . . 2 17
A. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7
B. Promissory Estoppel and Recoupment . . . . . . . . . . . . . . . . . . . 217
C. Noncompete Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8
D. Consent to Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
E. Encroachment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
F. Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
G. Fiduciary Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
H. Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
I. Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
X. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Chapter 5 Franchise Relationship Laws 185
I. Brief History and Overview of Franchise
Relationship Laws
A. Abuses
In the 1950s and 1960s, the early period of modern business format franchising,
abuses were common. These abuses were exacerbated by the retrenchment and
vertical integration in the motor vehicle fuel industry following the OPEC oil em-
bargo in 1973. Franchisees argued that these abuses were not adequately addressed
by common law or antitrust remedies. The result was the passage of both fran-
chise registration and relationship laws, mostly in the 1970s. The abuses at which
relationship laws are aimed include:
Unjust Terminations: Either by contract or by economic or other pres-
sures, the franchisor would attempt to terminate the franchise relation-
ship, thereby depriving the franchisee of the fruits of his labor and
investment.
No Renewal Rights: The franchise agreement typically was short-
term, with no renewal opportunity, or, contractual renewal opportuni-
ties would be unjustly frustrated, allowing the franchisor to capture
the benefits of the business that the franchisee had developed once the
stated term of the agreement had expired.
No Right to Assign: The franchisor would prohibit the franchisee from
transferring all or a portion of his interest in the franchise to a bona
fide purchaser, or perhaps to a qualified member of his family, depriv-
ing the franchisee of the opportunity to liquidate the equity in the fran-
chised business.
Other Abuses: The franchisor would place another unit (either com-
pany-owned or franchised) in close proximity to an existing franchised
unit. This placement, known as encroachment, would result in the
franchisee’s business being “cannibalized”—sales diverted to the new
location. Franchisors also engaged in other practices objectionable to
franchisees, such as restricting the right of free association among fran-
chisees, discriminating among franchisees, and imposing unreason-
able standards of performance on franchisees.
B. Federal Legislation
No franchise relationship law of general application exists at the federal level. While
a federal franchise relationship law of general application was proposed as early as
1971, no such law has ever been adopted. Instead, the FTC issued its Rule on Fran-

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