Preparation And Review

This chapter examines preparing for termination from the
perspectives of the different parties to the franchise or distribution
agreement. The first half of the chapter suggests practical steps for the
franchisor or distributor and its counsel to take when considering
whether and how to terminate a franchisee or dealer. Most of these steps
apply, as well, to the franchisee or dealer who foresees the need to exit
the franchise system or who faces the threat of termination. The second
half of the chapter focuses on matters of special concern to the franchisee
or dealer.
From the perspective of the franchisor, the objective is to accomplish
a lawful and unambiguous termination with minimal disruption to the
franchise system. The franchisor will want to identify and document the
grounds on which termination can be accomplished and comply with all
statutory and contractual requirements to complete the process. Finally,
it will want to identify and evaluate any risks of franchisee claims that
may be posed by termination. The franchisee will want to identify the
rights afforded to it by contract and applicable state or federal law,
preserve any rights or claims that may exist, and, where appropriate,
identify opportunities to cure any defaults in the franchisee’s
performance or discover any defects in the franchisor’s notice. Both
parties will want to identify and preserve evidence while, at the same
time, preserving attorney-client, work-product and other privileges that
may be applicable.
A. Find and Read the Contract
The first step is to find and read the franchise or dealership
agreement. In the absence of applicable statutory restrictions, the
agreement controls the relationship between the parties and specifies the
grounds and procedures for ending the relationship. The agreement
typically sets forth any limitations on termination, the permissible
grounds for termination, whether and when an opportunity to cure must
be provided, and how much notice the terminating party must provide.
Franchise and Dealership Termination Handbook
Even in regulated states, the agreement may impose additional
termination restrictions not set forth in the statute.
Since many franchisors and suppliers periodically update and revise
their standard agreements, it is necessary to ensure that one is reviewing
the latest agreement between the parties, including all addenda and
amendments thereto. Unfortunately, it is more common than it should be
for a party to undertake or defend against termination by reference to an
outdated, unsigned, or incomplete agreement.
B. Read the Relevant Statutes
Keep in mind that state and federal laws may modify or supplant
terms of the franchise agreement. Before even warning a franchisee or
dealer of the possibility of termination, therefore, the franchisor or
supplier should also consult the relevant state and federal relationship
Many states, as well as Puerto Rico and the Virgin Islands, have
enacted laws of general application that limit termination of franchise or
dealer relationships. These statutes may require longer notice than
specified in the contract as well as “good cause” for termination, and, in
addition, may require that the dealer be given the opportunity to cure its
deficiencies before termination. Some of these statutes, or the case law
interpreting them, may provide specific rights and remedies for a
franchisee on termination, such as the repurchase of inventory or other
supplies, or payment for goodwill. They may also impose procedural
requirements on how and where to initiate and litigate or arbitrate a
termination dispute.
All fifty states have specific statutes governing termination of
franchises and dealerships in a least one specific industry.1 The
industries that are regulated vary from state to state but frequently
include gas stations, alcoholic beverage distributorships, and automobile
dealerships. Like their generally applicable counterparts, these industry-
specific statutes may prescribe a notice period and/or require “good
cause” for termination.2
At the federal level, there are statutes that protect certain franchises
and dealers from unfair practices by franchisors and suppliers. For
example, gasoline dealers are protected from unjustified termination by
1. See Chapter III and Appendices A and B for a discussion of statutory
limits on termination.
2. See Chapter III.C for a discussion of “good cause” requirements.

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