Franchise Relationship Laws

AuthorBarkoff, Rupert M., Selden, Andrew C.
Pages171-212
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-

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