“FRANCHISE AGREEMENTS: What Prospective Franchisees Should Know About In-Term Support and Assistance” is the fifth part in the UnhappyFranchisee.Com series “Ten Things Every Prospective Franchisee Should Know About Franchise Agreements” by Dan Davis, Attorney, Ichter Thomas LLC
Topic Four: In-Term Support and Assistance
By and large, your franchise agreement will determine your rights and duties if you decide to enter into a franchise relationship. Unfortunately, many franchisees fail to appreciate the significance of what is actually in their contracts until well after they have signed them and, often years later, wind up in litigation. My goal is to help prospective franchisees understand what they are agreeing to before entering into a franchise relationship.
In a typical franchise relationship, a franchisee is paying ongoing royalties not only for the right to use the franchisor’s trademarks and business system but also for support and assistance (both initial and on-going) in operating the franchised business successfully. Indeed, a franchisor’s expertise with a particular business system—and the perceived risk in starting something analogous from scratch in the marketplace—is a big part of the value of a franchise. It is important to understand, however, that the franchisor’s duty to provide support and assistance such as operational inspections and assessments and consulting and advisory services is governed by the franchise agreement, and the exact language of that agreement is highly material.
Unsuccessful franchisees who find themselves in litigation often assert tort claims alleging they were defrauded because their franchisors represented they could and/or would provide a certain type and/or quality of support and assistance that was never forthcoming. See Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities, 72 Fed. Reg. 15,489 n.477 (Mar. 30, 2007) (“Our law enforcement experience demonstrates that misrepresentation about the level of support and assistance is one of the most common problems in franchise cases”).
Unless the franchisor made the representation at issue in the franchise agreement, however, the merger clause could bar the franchisee’s fraud claim. [See “What Prospective Franchisees Should Know About Merger & Non-Reliance Clauses,” ] Furthermore, Item 11 of the Franchise Disclosure Document often states the franchisor is not obligated to provide any non-enumerated support or assistance. As a result, the franchisor will contend the franchisee’s reliance on any contrary oral representation was unreasonable as a matter of law. See Carlock v. Pillsbury Co., 719 F. Supp. 791, 829 (D. Minn. 1989) (“A party cannot reasonably rely upon allegedly fraudulent promises which are directly contradicted by the terms of an applicable offering statement …”), superseded in part, Minn. Laws § 80C.21.
Similarly, a franchisee’s claim that its franchisor breached their franchise agreement based on a failure to provide in-term support and assistance can have similar problems. We often see language such as “Franchisor may …,” “Franchisor shall … as Franchisor deems appropriate” or “Franchisor shall … in its sole discretion.” This language does not obligate the Franchisor to do much of anything. See, e.g., America’s Favorite Chicken Co. v. Cajun Enters., Inc., 130 F.3d 180, 182 (5th Cir. 1997) (affirming franchisor’s motion for summary judgment against franchisee on breach of contract claim where franchise agreement provided that franchisor would provide continuing advisory assistance as it “deem[ed] appropriate”); Am. Casual Dining, L.P. v. Moe’s Sw. Grill, LLC, 426 F. Supp. 2d 1356, 1368-69 (N.D. Ga. 2006) (dismissing franchisee’s breach of contract claim based on alleged failure to use skill, experience, knowledge and expertise to provide assistance where franchisees “cannot point to any [specific] contractual provision that [franchisor] breached”); Burger King Corp. v. Hinton, Inc., 203 F. Supp. 2d 1357, 1362 (S.D. Fla. 2002) (entering summary judgment against franchisee on breach of contract claim; “The clear and unambiguous language of the Franchise Agreements does not provide [franchisees] with generalized support and assistance” and franchisor’s duty to provide specific support and assistance was “within [franchisor’s] sole reasonable discretion”).
This language may well be non-negotiable. If you are still in the due diligence phase, however, be aware that you will be paying significant amounts of money for in-term support and assistance running your business. Make sure you are getting your money’s worth before signing any agreement. Ask other franchisees about what support and assistance, exactly, they get. Are QSC inspections focused primarily on training or compliance? How responsive and helpful is corporate in responding to requests and inquiries from individual franchisees? Are discretionary consulting and advisory services only available at an additional cost?
If you would like some assistance with the due diligence process or you are already in a franchise relationship and headed to or already in a dispute, I’d be happy to help. Give me a call at 404-869-5261.
5. FRANCHISE AGREEMENTS: What Prospective Franchisees Should Know About In-term Support & Assistance
This blog includes information about legal issues. Such information is for informational purposes only and is not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. If you want advice or guidance on a specific legal problem, you should contact an attorney. Receipt of this information, use of the same or both is not intended, and should not be construed so as, to create an attorney-client relationship between you and Ichter Thomas, LLC or any of its lawyers.
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