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
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.

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