Franchise Relationship Management

• Author: Steven M. Goldman, H. Bret Lowell.
• Pages: 203-371

CHAPTER 5

Franchise Relationship Management

Raymond L. Miolla, Jr. and Andrew C. Selden

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Why Good In-System Relationships Matter . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Interests of System Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Public and Regulatory Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

Role and Responsibilities of Franchise Lawyers . . . . . . . . . . . . . . . . . . . 207

How to Go About Achieving Good Relationships . . . . . . . . . . . . . . . . . . . . . 208

Methods of Identifying Common Ground. . . . . . . . . . . . . . . . . . . . . . . . . 208

Methods of Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Methods of Communication between Franchisor and Franchisees . . 209

Communication Among Franchisees . . . . . . . . . . . . . . . . . . . . . . . . . 210

Methods of Communication with External Constituencies . . . . . . . . 211

Means of Interaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Councils and Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Special Function Bodies: Co-ops . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Purchasing Co-ops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Marketing Co-ops. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216

External Trade Associations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Use of Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Codes of Behavior and Training. . . . . . . . . . . . . . . . . . . . . . . 218

ADR/Conflict Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

Exhibit 5-A: Burger King Corporation Policy on Franchisee Web Sites . . . . 223

Exhibit 5-B: International Franchise Association Code of Principles and

Standards of Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

Exhibit 5-C: The Code of Business Ethics and Conduct . . . . . . . . . . . . . . . . 234

Exhibit 5-D: Burger King Corporation Pocket Guide to

Antitrust & Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

Exhibit 5-E: Burger King Corporation Pocket Guide on Trademarks . . . . . . . 246

Exhibit 5-F: Burger King Corporation Guide to Sexual Harassment . . . . . . . 249

Exhibit 5-G: Burger King Corporation Termination Checklist . . . . . . . . . . . . 250

Exhibit 5-H: Procedures for Resolving Development

Disputes (“JENNIFER”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Exhibit 5-I: A Dispute Resolution Process for Franchising . . . . . . . . . . . . . . 281

Appendix 5-A: A Retrospective on Franchisee Associations. . . . . . . . . . . . . 299

Appendix 5-B: Dynamics of Franchisee Associations . . . . . . . . . . . . . . . . . . 306

203

“We must indeed all hang together, or, most assuredly, we shall all

hang separately.”

Benjamin Franklin: remark to

John Hancock, at signing of the

Declaration of Independence,

4 July 1776

Introduction

A successful franchisor/franchisee relationship requires more than strict compli-

ance with laws and contracts. It also requires acknowledging that the franchisor/

franchisee relationship is a uniquely long-term relationship where the ultimate

success of both parties depends upon mutual cooperation and a shared sense of

responsibility. Accordingly, the goal of a corporate compliance program should not

be limited to ensuring that corporate employees follow the letter of all applicable

laws and contracts. It should also provide a framework for ensuring that corporate

employees are acting in accordance with the policies and values of the franchisor.

This chapter will explore the importance of good franchisor/franchisee relations

and examine ways to build into your corporate compliance program the institu-

tions, processes, and guidelines necessary to encourage corporate employees and

franchisees to value good relations and avoid unnecessary conflict.

Why Good In-System Relationships Matter

Interests of System Participants

Good in-system relations are much more than a moral objective. Business is, after

all, business, and the objective of a franchise-based business is no different from

any other: outrunning the competition to anticipate and serve customers’ needs,

and to make money doing it. Good relations within a franchise organization are

necessary, not simply desirable, because competing profitably in the marketplace

cannot be pursued successfully by a franchise organization riven by internal strife.

Although franchisors and franchisees share this general economic interest, the

structure of the traditional franchise relationship often sends them in different direc-

tions. Traditional franchisors and franchisees both benefit from sharing a strong,

competitive system, but they also make their profit in different ways. The franchisor

often runs its own outlets, but it may also be a licensor, a vendor, a service provider,

a lender, and/or a landlord. The franchisee is usually engaged in a retailing business

and, relative to the franchisor, may be a buyer, a tenant, a borrower, and/or a

licensee. These differing roles create an inherent divergence of interest in even the

best run and most benign franchise organizations. For a franchise-based business

to function up to its full potential, this divergence of interest must be reconciled

with the parties’ shared interest in the success of the system.

204 The Franchise Law Compliance Manual

Franchise organizations flourish when the participants recognize the signifi-

cant advantages to be derived by all of them from bridging (or occasionally even

just overlooking) the differences and exploiting the commonalities. Franchise

organizations that fail to reach that understanding will never realize their full

potential. In those cases, shareholders of the franchisor will be every bit as frus-

trated and disappointed as will the franchisee/investors in the system.

What are the investment objectives of parties to a franchise-based business?

From the perspective of the franchisee, the objectives include both capital lever-

age and information leverage: purchasing from the franchisor the know-how that

would otherwise be developed at presumably greater cost through trial and error,

combined with the (presumably favorable) goodwill associated with use of the

franchisor’s methods and trademarks. The franchisee expects to use this lever-

aged capital and information base to run a successful business, to earn a positive

return on investment in the business, and to achieve a level of personal satisfac-

tion in doing so. In pursuing these goals, franchisees certainly expect to have to

function in a competitive environment, but few, if any, genuinely expect their

own franchisor to be a significant competitive threat in terms of “encroaching”

locations it sponsors, or unnecessarily expensive equipment or supplies it sells.

This expectation exists empirically irrespective of the contents of the franchisor’s

UFOC. These are prime examples of areas where a franchise relationship can

become strained when the two parties pursue their own individual goals without

due regard for the interests of the other, or of the system as a whole.

The franchisor’s objectives in building a franchise-based business organiza-

tion also include capital leverage, but beyond that, particular objectives of

individual franchisors vary globally. The franchisor most often undertakes a

franchise-based form of business in order to recruit into the enterprise the capi-

tal, both financial and human, of the franchisee/investor. This leveraging allows

rapidity of expansion, facilitates penetration of distant or foreign markets, and in

some cases allows more rapid accretion of market share than would otherwise be

the case. The franchisor’s goals can be threatened, and the relationship strained,

however, when a franchisee deviates significantly from system requirements,

perhaps by refusing to contribute to or participate in system marketing initia-

tives, or perhaps cutting costs by purchasing substandard supplies or deferring

facility repairs.

The multiple roles that franchisors and franchisees take on within the ongoing

franchise are represented by a variety of more traditional common law relationship

models. These include landlord-tenant, licensor-licensee, lender-borrower, vendor-

vendee, and others. These component relationships usually do not include master-

servant (employer-employee) or fiduciary relations, but the franchise relationship

itself—representing an accumulation of component relationships set forth in the

franchise agreement and collateral contracts, and filtered through traditional

common law principles for interpreting and enforcing private contracts—certainly

is much more than the sum of those component relationships. The common law

has yet to evolve a fully satisfactory single legal model for the combination of tra-

ditional business relationships embraced by most business format franchises, so

Chapter 5 Franchise Relationship Management 205