franchisee - Duell

May 01

Disclaimer, Waiver and Integration Clauses

By Richard Duell lll Newsletter

Disclaimer, waiver and integration clauses are quite common provisions in franchise agreements, but the manner of how they are used and the way they are incorporated into the agreement determine their enforceability and consequently, their effectiveness.

Generally, when referring to a disclaimer we mean, the repudiation or renunciation of a claim or power vested in a person. A corollary provision to the disclaimer clause is the waiver, commonly thought of as the intentional or voluntary relinquishment of a known right. Disclaimer and waiver clauses are normally used in conjunction with an integration clause, which merges all prior understandings between the parties and all contemporaneous agreements into the franchise agreement as a final expression of the parties’ intent.

When not properly incorporated into your franchise agreements, these clauses can open up a can of worms by allowing franchisees to look at other ancillary documents for their interpretation of what the franchise agreement is meant to say. Rather than protecting the Franchisor, these clauses can be a sledge hammer for the franchisee to use against you. As the Franchisor, you do not want any opening for your franchisees to use against you. The language in your franchise agreement must be specific and negate any potential opening for your franchisees.

Whether your disclaimer, waiver and integration clauses are enforceable in court usually starts with the state’s public policy. As you might expect, public policy does not normally favor permitting a Franchisor to contract out of obligations, but good news – courts do recognize the legal implications of a contract, even in the face of statutory anti-waiver provisions, because they are reluctant to ignore the intentions of the parties which are evidenced by the written contract. When courts do give effect to disclaimer, waiver and integration provisions in the face of allegations like fraud, they do so based upon the initial finding that the franchisee could not have relied on the supposed misrepresentation because of the express language of the contract itself.

CONCLUSION

So, are disclaimer, waiver and integration clauses effective? The answer lies in how they are drafted and incorporated into your franchise agreement, as well as how each state accepts them. Are disclaimer, waiver and integration clauses and provisions important? Absolutely, they can be critical if you are sued by a franchisee. Without incorporating such provisions correctly in your franchise agreement you have nothing in writing to refute a franchisee’s allegations.

If you are a franchisor who has any questions about disclaimer, waiver and integration clauses, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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Nov 02

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2016 Annual Legal Checkup

By Richard Duell lll Newsletter

We all acknowledge the importance of seeing our doctor annually for a physical checkup. Unfortunately, when it comes to the well-being of your franchise business, many companies never consider the importance of an annual legal checkup. If you are not reviewing documents or systems yearly, then new technology, new legislation or changing case law among other factors, may put your franchise business at risk.

Statistics show that most franchise systems which fail, do so within the first five years, principally for one or more of the following: undercapitalization; poor operations; lack of training and support; selling franchises for survival; lack of the skills required to be a successful Franchisor; or, looking only at the short term rather than building for the long-term. All of these failure precepts are likely to result in litigation against the franchise entity and against the principals and franchise sellers of the Franchisor, who are likely to be sued individually by the disgruntled franchisees. Without question, such litigation can be avoided by the company regularly consulting with its franchise attorney to provide advice and guidance in advance of any legal entanglements.

The need for a legal checkup is not just for the new Franchisor. For the mature Franchisor to be successful, there must be constant innovation and change. Change facilitates resistance from franchisees and requires close legal support from the planning stage through the implementation of the change.

A clear example of change occurred when McDonald’s added breakfast to its franchise system. Suddenly franchisees were faced with increased cost, not just for additional equipment, but new labor cost and having to manage a whole new process.

Without legal input prior to implementing the modification, McDonalds would have been in court for years from suits by their own franchisees.

In a field so seemingly narrow as franchising, it is always interesting to me that few law students and law professors have ever heard of and many, perhaps the majority of practicing lawyers, likewise have no awareness of and do not recognize the field of franchise law and the fact that there are so many subcategories of the law to consider. Franchising is filled with numerous subfields starting with the law of contracts and includes the core of franchising, trademarks, trade secrets and copyrights. Always present in franchising are antitrust issues, changing laws, litigation and the rapidly developing areas of joint liability and ostensible agency. From the initial prospect package through the termination of a dissident franchisee, a Franchisor’s records, information and processes should be reviewed no less than annually and, when necessary, updated, modified or changed to meet legal requirements.

CONCLUSION

Does your company conduct an annual legal checkup? Will you be one of the casualties when the list of former franchise companies is posted? How successful do you want to be?

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Apr 03

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New Channels of Distribution – Is A Potential Lawsuit Waiting?

By Richard Duell lll Newsletter

Do you have a dynamite new idea for distribution that will allow you to become the next “Super Franchisor”? You may be the entrepreneur who started the company. Or perhaps your company is larger and has a marketing department that comes up with new ways of getting your goods and services to market. Whether small or large, a franchisor’s ability to open new channels of distribution will depend upon how well they negotiate the legal minefield that awaits.

Before implementing a new distribution channel, you must first consider whether your franchise agreement permits you to do so. Begin by looking at the express terms of your agreement in order to determine what rights are granted to franchisees. Provisions restricting your right to compete will usually be enforced against you. If your agreement preserves your right to distribute goods and services, courts will respect your contract but will look closely at your agreement to ensure you have not overstepped your contractual rights. Contracts which are silent leave the door open for courts and franchisees to contest implementation.

Some courts will look at your motive for opening a new distribution channel. The more business a new distribution channel takes away from your franchisees, the greater the likelihood courts will side with your franchisees. If you are concerned that there may be express or implied restrictions on your ability to implement a new distribution method, consider working with your franchisees. Usually before a franchise system can be successful, the franchisor and franchisees must be on the same team, working together.

Outside the franchise agreement, (including the FDD, your website and advertising materials, etc.) the minefield continues for franchisors. Check your FDD to see what is said about territorial rights. Misleading disclosures or non-disclosure of material facts in your FDD could expose you to liability via little “FTC Acts,” which allow private lawsuits and provide for attorney fees and treble damages (a statute that permits a court to triple the amount of the actual/compensatory damages to be awarded to a prevailing plaintiff).

And don’t forget the old Plaintiff Lawyer’s ally – “Fraud.” Even when no statute is applicable, if you make a representation or indication that you will not compete, a smart franchisee lawyer may use this against you and assert a fraud claim.

“State Relationship Laws” can be another bomb in your liability minefield. These laws are designed to prevent franchisors from engaging in certain competitive activities, to the detriment of their franchisees. In addition, franchisees may assert claims such as Section 1 and 2 of the Sherman Act Anti-Trust actions allowing your new plan to be construed as a conspiracy to restrain trade by eliminating competition, i.e., eliminating your franchisees. Alternatively, your plan might be considered an attempt to monopolize. If favorable terms are offered to alternate distributors, your company may also be subject to a Robinson-Patman action.

The list of obstacles goes on, and the minefield can become more dangerous. The journey is certainly not for the novice. But the minefields can be avoided by paying close attention to the wording in your agreements and even considering at the beginning of your journey how to make both you and your franchisees winners. By taking these steps, your company may truly become the next Super Franchisor!

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Jan 04

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Personal Liability in Franchising

By Richard Duell lll Newsletter

In the traditional corporate environment, the corporate umbrella shelters individuals from personal liability while conducting business. Franchising, however, is not your traditional corporate setting. With the abuses that once occurred in franchising, the federal government and many states determined that the unsophisticated purchaser required additional protection. As a result, franchise law evolved from an amalgamation of common law principles, federal and state statues and judicial decisions. Blended together, these legal precepts override the traditional corporate umbrella protection and make individual liability a very real concern for everyone involved in the Franchise process.

At the Federal level, individuals within the Franchise Company face personal liability from Section 5 of the Amended FTC Act, which makes unlawful any unfair method of competition or deceptive act or practice in or affecting commerce.

While the FTC Act sets minimum standards, most states have enacted their own legislation affecting Franchising and at the same time, exposed individuals in franchising to personal liability. These state statutes also provide for both governmental enforcement and private action.

If an unsatisfied franchisee files suit, their claims usually appear in multi-count complaints which not only include statutory claims, but also common law remedies against both the franchisor and individuals employed by the franchisor in the area in which the franchisee’s claims arose. Examples of areas where individuals could be exposed to personal liability occur in the sales process, real estate, inspection, build-out, training and support. Suits also normally include the officers and/or directors overseeing the area where the claims arose. Because the claims are intentional in nature, many states allow punitive or exemplary damages which can far exceed the actual out-of-pocket loss claimed. How can Franchisors and their employees protect themselves? Skilled drafting of every franchise document can help shield officers, directors and employees from personal liability. At risk individuals can further obtain protection by entering into indemnity agreements with their Franchise company. Franchise companies should also consider initiating programs to obtain written acknowledgements from Franchisees at every step of the franchise process. Additionally, all franchise companies should consider “D&O” insurance to protect officers and directors.

Perhaps the best safeguard to prevent individual liability is the implementation of a personal liability analysis as part of each franchise company’s annual legal checkup. For clients we work with in completing annual renewals, we incorporate this liability analysis into our clients annual renewal review.

The rapid growth of franchising has contemporaneously produced greater Franchise litigation and with it, personal exposure of individuals involved with the franchise process. Make sure you have initiated your annual legal check-up to protect those individuals who might be at risk.

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Nov 04

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Before You Terminate

By Richard Duell lll Newsletter

Your patience is exhausted. You have done everything in your power to help your unappreciative franchisee. You may have even suggested the best course might be to sell the franchise and you would be willing to refer your franchisee leads for his/her territory. The franchisee still will not comply with his or her franchise agreement. Perhaps the franchisee is the type that believes their way is better than yours and their conduct is starting to have a detrimental effect on your franchise system. Whatever the reason, you have reached a point of no return for this particular franchisee and believe he or she must be expunged from the franchise system.

What should you know and do before making the decision to terminate? The starting point for termination is to look at your Franchise Agreement and determine the conduct of your franchisee that constitutes a default and grounds for termination. Next, determine if you have adequate documentation to prove the violation. If you are terminating for a reason other than a standard violation (for example, failure to meet sales requirements) consult us; there are special rules which apply and careful contract drafting is essential. Review all of your contractual obligations to make sure you have fully complied with your side of the bargain; for example, if you are providing a product, has it always been timely supplied? Also, review what your prior course of dealing has been with other similarly situated franchisees. You may have modified your contractual rights. Believe it or not, there are states that permit written agreements to be modified without a subsequent writing even if the contract provides otherwise. Be prepared for your franchisee’s argument that the covenant of good faith and fair dealing requires uniform treatment and he or she is being singled out.

Make sure you are familiar with applicable state franchise protection statutes. There are at least 17 states that require a type of good cause for termination and/or an opportunity to cure. Keep in mind that many states ignore contractual choice of law provisions if that state franchise law would otherwise be circumvented. Some states, like Texas, have a Deceptive Trade Practices Act holding the franchisor liable for certain business conduct.

Make sure you have not given your franchisee any arguments that assist him or her in claiming you have caused a defacto termination because you are in violation of the agreement or that you are actually terminating the franchisee as a penalty for his or her refusal to participate in illegal activity; for example, an unlawful tying or price fixing scheme in violation of antitrust law and “little FTC Acts.”

The main point I want to stress is the importance of knowing how to build your file before termination. Correctly done, the integrity of your franchise system will be preserved.