Preparation And Review

• Pages: 19-34

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CHAPTER II

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

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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

statutes.

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.