Representing Franchisees

• Author: Ronald K. Gardner, Jr. and Julianne Lusthaus
• Pages: 329-362

329

Representing Franchisees

CHAPTER 8

Ronald K. Gardner, Jr. and Julianne Lusthaus

Contents

I. Counseling the Prospective Franchisee . . . . . . . . . . . . . . . . . . . . . . . 331

A. The Role of the Lawyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 1

B. The Counseling Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331

C. Deconstructing the Franchise Disclosure Document (FDD) . . . 33 5

D. Alternatives: Nobody Has to Buy a Franchise . . . . . . . . . . . . . . 34 1

II. The Negotiability of Franchise Agreements . . . . . . . . . . . . . . . . . . . 34 2

III. What to Consider Negotiating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 43

IV. Special Considerations for Clients Buying Existing Units . . . . . . . . 345

V. Representing Area Developers (Multi-Unit Operators) . . . . . . . . . . 345

VI. Representing Master Franchisees (AKA: Subfranchisors) and

Area Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 6

VII. Franchisee Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347

A. The Evolution of Franchisee Associations . . . . . . . . . . . . . . . . . 347

B. Structuring an Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348

C. The Lawyer’s Role in Counseling Franchisee Associations . . . 350

VIII. Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

B. Settling Franchise Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 53

C. Mediating Franchise Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . 3 53

D. Litigation and Arbitration: When All Else Fails . . . . . . . . . . . . . 354

1. Procedural Issues Unique to Franchising . . . . . . . . . . . . . . . 354

a. Choice of Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 3 54

b. Venue Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355

c. Dispute Resolution Clauses . . . . . . . . . . . . . . . . . . . . . 356

d. The Prevalence of Arbitration . . . . . . . . . . . . . . . . . . . . 357

e. The Pros and Cons of Franchise Arbitration . . . . . . . . . 357

2. Substantive Issues Unique to Franchising . . . . . . . . . . . . . . 35 8

a. Consider Franchise Statutes and Regulations as Well as

Common Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358

330 Fundamentals of Franchising

b. Disclosure Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9

c. Fraud—Statutory and Common Law . . . . . . . . . . . . . . . 35 9

d. Termination Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360

e. Trademark and Non-compete Claims . . . . . . . . . . . . . . 361

f. Other Claims Frequently Asserted . . . . . . . . . . . . . . . . . 361

IX. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362

Chapter 8 Representing Franchisees 331

I. Counseling the Prospective Franchisee

A. The Role of the Lawyer

Many prospective franchisees who consider buying a franchise never consult a

lawyer, let alone one with experience in franchising. Sometimes these prospects

have already decided to proceed and therefore do not want to spend the money

to retain a lawyer. Others believe or are told that the franchise agreement is not

negotiable, so there is no point incurring the costs of retaining counsel. Some-

times the client wants to proceed regardless of the deal’s terms and just wants

the attorney to “bless the deal.” Occasionally, a client will seek counsel to advise

her on the details of the offering and to ensure that the franchise opportunity is

right for her.

Whatever the clients’ initial motivations, franchisee counsel serve an im-

portant role in educating clients to ensure that they fully understand their rights

and obligations as franchisees as well as those of the franchisor. Counsel can

also be helpful in advising clients as to which terms of the franchise agreement

can or should be negotiated and advising on ancillary issues relating to entity

formation, real estate and equipment leases, and other issues that normally arise

in connection with the establishment of a new business. The lawyer should care-

fully record the advice given to the client, while also noting any constraints put

on the representation (e.g., the franchisee has already decided to buy a particu-

lar franchise, the franchisee is not interested in negotiation strategies, the deal

“must be signed by tomorrow”). A franchisee lawyer may also be consulted by

an owner (or group of owners) of a franchised business concerning problems in

the ongoing franchise relationship or in connection with a dispute with the

franchisor.

B. The Counseling Process

Ideally, the lawyer is brought into the franchise acquisition at an early stage, when

his or her advice can be of some value. The lawyer should be prepared to offer

both ordinary advice with respect to establishing or acquiring the business oper-

ated under the franchise (such as forming and using a corporation or other entity;

tax advice, if requested; and other contracting issues) and the more challenging

counseling on the peculiarities franchising and the franchise relationship present,

as well as the risks associated with the particular franchise or franchises in which

the client is interested. The authors’ focus is on the franchise dimension. Because

a franchise is not a suitable investment vehicle for everyone, counseling a pro-

spective franchisee must begin with screening and education.