What Is Termination?

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CHAPTER I

WHAT IS TERMINATION?

Termination refers to the ending of a franchise or dealership

relationship. It has two distinct meanings, however: (1) the act or events

that end the relationship, and (2) the process that flows from such an act

or event.

Lawyers helping clients that distribute goods or services or offer

franchise opportunities must understand terminations well. Other than

entering a franchise or distribution relationship with another business, the

end of that relationship—whether by termination during its term or by its

natural expiration—is the most critical moment in the life of a franchise

or dealership, whether in human, business, or legal terms. Since the

world is an uncertain place, where nothing is forever, the prospect of

termination occurring at some point in the future ought to be

contemplated before the relationship is formed.

A. What Is At Stake?

For the franchisee or dealer, the prospect (to say nothing of the

event) of termination may be especially daunting. Termination can mean

that a business into which the franchisee operator or dealer principal has

invested savings, perhaps even mortgaged a home or otherwise borrowed

substantial amounts, will be lost. The franchise or dealership may be an

individual’s or a family’s sole livelihood and full-time employment—or

it may be a sophisticated multi-unit operation that dwarfs many smaller

franchisors or suppliers in size. If the franchise or dealership agreement

provides for liquidated damages upon premature termination, or if there

are unpaid loans that come due upon termination for which the

franchisee operator or dealer principal is obligated (as maker or

guarantor), there may be additional costs and losses. In addition, the

prospect of termination may raise other legal issues such as the

enforceability of post-termination covenants not to compete, and/or the

possibility of Lanham Act trademark infringement (or similar) claims for

the misappropriation of trade secrets. In light of the personal and

Franchise and Dealership Termination Handbook

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business stakes, the operator or principal may urgently seek to prevent

the termination from occurring.

For the franchisor or supplier, there are also important consequences.

Under what circumstances should it terminate a relationship? Do the

particular events occurring in this relationship justify termination? If the

franchisor or supplier does go ahead and terminate, who will represent its

products in the market? How can the franchisor or supplier get paid for

what was already shipped or for past due royalties? How can the

franchisor or supplier make sure that its trademarks and trade secrets will

not be misused? Having made the decision to terminate, and perhaps

even made commitments to a new franchisee or dealer, will the courts

allow the termination to go forward?

The concerns of these parties are natural and human. They will look

for ways to resolve their concerns in accordance with their interests.

Often their agreements, although written months or years before the

events they must actually address, will have anticipated many or all of

the business issues between them. In other instances, their agreements

will not be complete (e.g., because they worked on a handshake or, even

more likely in this age of e-transactions, through impersonal order

placement and fulfillment functions). Perhaps the parties prepared an

agreement that failed to anticipate the actual facts and circumstances.

Perhaps their agreements will be supplemented (or circumscribed or

superseded) by obligations imposed by statute or implied by common

law or principles of equity intended to help the parties bring their

relationship to an orderly conclusion, or even to prevent one party from

terminating the relationship at all.1

Having reviewed their agreements and in light of their circumstances

and applicable law, the parties may come to an amicable parting of the

ways or enter into a new, revised business deal. Maybe the parties will

be unable to agree on a resolution. In that case, either or both may resort

1. Statutes in eighteen states (and, in addition, Puerto Rico and the Virgin

Islands) require special notice and good cause before any “franchise” may

be terminated. In addition, the Automobile Dealers Day in Court Act

(ADDCA), 15 U.S.C. § 1221 et seq., bars “coercion” in the termination or

nonrenewal of automobile dealerships, and the vast majority of states

have statutes that impose special restrictions on a manufacturer’s or

distributor’s ability to terminate an automobile dealership. Several states

have similar statutes governing terminations of liquor wholesalers, farm

and industrial equipment dealers, and other types of dealerships. See

Appendix B.