Minneapolis franchisee lawyer Ron Gardner discusses possible remedies for franchisees when the franchisor makes it too burdensome to make a profit.
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Not surprisingly, when franchisors make changes to either the relationship or frankly frequently the operations manual because that’s the way many franchisors incorporate changes into the system, most franchise agreements have a provision that say the franchisee agrees to follow the terms of the operation manual, which may change from time to time. Which basically means anytime we want to make a contractual change we’ll do in the operations manual and you’ve agreed that you’ll go along with that. And sometimes that change changes the economics of the franchise operation. Maybe you have to buy a piece of new equipment, maybe it’s a change in the ad fund, frequently these days it’s an increase in the technology cost that you’re having to pay for because the franchisor wants to set up a website or needs to develop proprietary software, which can be enormously expensive. Particularly in a franchise system where you’re talking about somebody who has 200 locations, at least if you view from the franchisors point of view. And so suddenly these charges or the economic effect of the changes that the franchisor is making makes it really hard, if not impossible, for the franchisees to make any money.
And so the question is well what can I do about that? I admitted or I acknowledged that I would follow the operations manual, they’ve made this change to the operations manual, what can I do? And so the tools that we bring to help a franchisee in that situation really have to do with are you in a state that has a provision that says you can’t substantially change the competitive circumstances of the agreement? Are you some place where the covenant of good faith and fair dealing has been interpreted in a way to say you can’t change the relationship in a way that I could not have expected or that it’s going to deny me the benefit of the bargain, the fruits of my bargain. And that’s a pretty standard interpretation of the covenant of good faith and fair dealing. So if the change truly is going to make it so that you can’t make money, the covenant is probably in play.
And the third and maybe most effective theory we have here is one we call de factor termination. That is if the franchisor has made change that over the long term is going to drive you out of business, it’s not going to make you close your doors today but you’re going to lose money for a while until you can’t lose it any more and you’ve really been terminated but the only thing that’s uncertain is what day your door is going to close. We can bring a case in advance for wrongful termination even while you’re still in business. If we can, in fact, establish that this is going to terminate you and you haven’t been given notice and you’re not in default and you haven’t get an opportunity to cure. We’ve won dozens of cases over the history of the life of our law firm arguing that franchisees have been de facto terminated even while the franchisee is still in business because the franchisor has made a change that economically imperils the franchisees continued existence.
And so there are lots of theories and some of them quite powerful that can help a franchisee if they’ve been given some sort of notice of some change that’s really going to put them in a bad way in terms of the economics of their business.