Franchise Law

Franchising offers entrepreneurs a method of expansion into a chain operation without the capital requirements necessary for the ownership of an integrated system. GLG provides comprehensive franchise legal services to franchisors and start-up companies looking to take advantage of the opportunity to grow their businesses.

Only a minority of states have enacted a full set of franchise laws. Franchise attorneys generally view these state laws as fitting into one of three categories: general franchise relationship laws, franchise disclosure/registration laws, and industry-specific franchise laws. The federal government has never enacted a franchise relationship law of general application, although it has enacted the Franchise Disclosure Rule.

Although the myriad of state franchise relationship laws have significant differences, their thrust is directed toward the ongoing relationship between franchisors and franchisees after the parties have signed a franchise agreement. These laws provide guidance to issues such as terminations, renewals, and buy-backs. In contrast, franchise disclosure/registration laws concern matters between franchisors and franchisees before a franchise agreement has been executed. Franchise disclosure/registration laws require franchisors to make specific disclosures to potential franchisees before permitting the franchisee to sign an agreement.

One of the most heavily litigated issues under state franchise relationship laws is whether the franchisor had “good cause” to terminate a franchise agreement. The “good cause” standard differs from state to state. For example, Minnesota, Nebraska, New Jersey and Wisconsin bar bad faith terminations or terminations not made in “good faith.” Others, such as Delaware, proscribe franchise terminations that are “unjust.” Still other states do not define a specific permissible standard and instead rely upon definitions of “good faith” found in common law.

In addition to the general provisions regarding termination, another significant issue addressed in state relationship laws concerns franchisee transfers. Some states restrain the franchisor's ability to prolong the transfer process by imposing a set period of time in which the franchisor may reject or approve the proposed transfer. Other states do not specify a time limitation. Although the varying state statutes establish differing standards to evaluate the legality of a refused transfer request, each of them includes many escape routes for franchisors who wish to deny a transfer. The most common is the franchise agreement itself. Almost every franchise agreement includes an explicit delineation of the "prerequisites" that the franchisee must meet in order to obtain approval from the franchisor for a transfer. So long as the criteria included by the franchisor in the franchise agreement have some apparent legitimacy, the franchisor's application of these criteria will almost always be held to meet the "good cause" standard for the denial of a requested transfer.

Refusals to Renew
In addition to the termination provisions discussed above, provisions prohibiting unreasonable refusals to renew are frequently found in general state relationship laws. These statutes prohibit non-renewals by franchisors when they are not made in “good faith.” However, unlike the termination proscriptions above, the nonrenewal provisions uniformly have gaping analytical and practical holes that almost always favor the franchisor’s nonrenewal.
In essence, these provisions sanction non-renewals so long as the franchise agreements explicitly state the standards for nonrenewal. Even where the statutory provisions appear to bar non-renewals until the franchisee has been permitted a full opportunity to obtain a fair return on his investment in the franchise, courts have manipulated the language to the extent that it no longer provides the anticipated protection to the franchisee. Moreover, the franchisor will be protected by a statute for a wrongful nonrenewal so long as he repurchases the franchise, which, incredibly, includes only the franchisee’s inventory. The goodwill of the business, the value of the business built up by the franchisee’s blood, sweat and tears, is shockingly and unjustifiably uncompensated.

Remedies for violations by franchisors of state franchise relationship laws of the termination or nonrenewal provisions are inconsistent from state to state. The most prevalent provision merely requires the franchisor to repurchase the franchisee’s inventory. Others require the franchisor to purchase goodwill, as well as remunerate the franchisee for damages, lost profits, un-recouped expenses and other legal costs and fees.

GLG routinely advise franchisors on the preparation of their offering circulars, applications for state registration, and licensing agreements. We will also assist in the development of strategic plans for domestic and international expansion, funding, and distribution, and on a host of other legal issues affecting the preservation and growth of their franchise.

GLG works with franchisees as well. The federal law provides no protection to franchisees in general and the common law provides almost no protection to franchisees. At the state level, franchise laws may vary, and your rights may be complicated and subject to different interpretations. This is why you should have a franchise attorney review your agreement before you sign it. GLG can spot many of the pitfalls before you enter into a franchise purchase agreement. If you've already signed a franchise agreement, and you are experiencing difficulty in dealing with your franchisor on a day-to-day basis, you need to take immediate action. Corporate franchise attorneys will tell you the rules are set in stone, but this isn't always the case. With a good franchise law firm at your back, you can often negotiate for a better outcome.

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