Franchise Relationship Laws

• Author: Barkoff, Rupert M., Selden, Andrew C.
• Pages: 171-212

171

Franchise Relationship Laws

CHAPTER 5

Thomas M. Pitegoff and W. Michael Garner

Contents

I. Brief History and Overview of Franchise Relationship Laws . . . 173

A. Abuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

B. Federal Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

C. State Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

II. Definition of “Franchise” Under State Relationship Laws . . . . . 176

A. Breadth of Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

B. A Closer Look at the Elements of a Franchise . . . . . . . . . . . . . . 177

III. “Good Cause” for Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

A. Statutory “Good Cause” Requirements . . . . . . . . . . . . . . . . . . . 182

B. Cases Interpreting Good Cause . . . . . . . . . . . . . . . . . . . . . . . . . 182

IV. Procedural Requirements for Termination . . . . . . . . . . . . . . . . . . 186

A. Statutory Procedural Requirements . . . . . . . . . . . . . . . . . . . . . . 186

B. Cases Interpreting Procedural Requirements . . . . . . . . . . . . . . . 187

V. Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

A. Statutory Renewal Requirements . . . . . . . . . . . . . . . . . . . . . . . . 189

B. Cases Dealing with Nonrenewal . . . . . . . . . . . . . . . . . . . . . . . . 190

VI. The Perpetual Agreement Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

A. The Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

B. Types of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192

C. The Franchisor’s Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

D. Judicial Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

172 Fundamentals of Franchising

This chapter provides an overview of the laws governing the franchise relationship

after the franchise agreement has been signed.1 Franchise regulation relating 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 examples

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).

VII. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

A. Types of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

B. Repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

C. Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

D. Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

VIII. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

A. Grounds for Withholding Consent to Transfers . . . . . . . . . . . . . 200

B. Procedural Requirements for Transfer . . . . . . . . . . . . . . . . . . . . 201

C. Stock Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201

D. Transfer upon the Death of a Franchisee . . . . . . . . . . . . . . . . . . 202

IX. Common Law Theories Affecting the Franchise Relationship . . 203

A. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

B. Promissory Estoppel and Recoupment . . . . . . . . . . . . . . . . . . . . 204

C. Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

D. Noncompete Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

E. Consent to Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

F. Encroachment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

G. Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

H. Fiduciary Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

I. Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

J. Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

X. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

Chapter 5 Franchise Relationship Laws 173

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 ver-

tical integration in the motor vehicle fuel industry following the OPEC oil embargo

in 1973. Franchisees argued that these abuses were not adequately addressed by

common law or antitrust remedies. The result was the passage of both franchise

registration and relationship laws, mostly in the 1970s. The abuses at which rela-

tionship 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 opportunities 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, depriving the

franchisee of the opportunity to liquidate the equity in the franchised

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 unreasonable

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-