KNOW YOUR FRANCHISE AGREEMENT: Step One to Resolving a Dispute
2018 Issue 1 | GearedUp
40
In the most basic sense, a franchise is a business model wherein a trademark holder licenses the use of its intellectual property, along with its method of business operation, to a licensee for a fee. In that relationship, the owner of the mark is the“ franchisor,” while the licensee is a“ franchisee.” The relationship between the two is typically memorialized in a contract known as a franchise agreement. Not all trademark licensing agreements establish a franchisor / franchisee relationship, but those that do must comply with both federal and state law, as applicable. However, in the franchise relationship there is an inherent reliance by franchisee and franchisor on one another – the franchisor to control and manage the system as whole, and the franchisee to operate in accordance with the rules and guidelines of the system. Sometimes, this does not work as planned.
The question focused on here, then, is what a franchisee should do when its franchisor violates the franchise agreement. In determining the legal rights and obligations of the respective parties, the first place to look is, of course, the franchise agreement. A well-drafted franchise agreement will contain the appropriate dispute resolution procedures, of which the franchisee should be aware. For example, the agreement should define the procedure of how a notice of a default must be given and how much time either party may have to cure that default. For example, Section 15.1( Termination of Agreement) of the most recent franchise agreement states if:
( 1) you and your Owners are in compliance with this Agreement and we materially fail to comply with this Agreement and do not correct such failure within sixty( 60) days after written notice of such material failure is delivered to us, you may terminate this Agreement effective thirty( 30) days after delivery to us of written notice of termination, or
Short of involving a formal process, however, the parties should first communicate with one another about the perceived default, why it has occurred and how the default can be rectified.
In practice, it is often the best option for all involved if the franchisor and franchisee can work together to resolve any disagreements that may arise. Generally, cooperation and communication can be the path of least resistance. More, determining how to deal with the default can be a crucial consideration because not only will the relationship between the franchisor and franchisee be affected, but also, communication can help avoid undue business disruptions – or worse, damage to your network or the brand. Moreover, an informal resolution achieved through open, productive communication can keep costs down for everyone involved. For example, a franchisor may learn of some of the struggles a particular franchisee is facing or even identify a larger systemic problem that, if approached correctly, can benefit not only that franchisee but the system at large.
If open communication does not resolve the problem, the parties must follow the procedure outlined in the franchise agreement. Typically, the first step is to issue a Notice of Default, which will set forth the by Justin Klein breaching conduct and the time in which the franchisor may cure the defect( i. e., 60 days). Often,“ formalizing” the process is sufficient to resolve the issue. However, if the franchisor fails to act timely, or at all, what can be done? Certainly, issuing a termination notice is a last resort for a franchisee who, in all likelihood, wants to continue to operate the business. Indeed, once a Notice of Termination is issued, the franchise agreement will typically set forth post-termination obligations on the franchisee, such as ceasing operations, returning operations manuals and other branded materials and removing all signage(“ debranding”), non-compete provisions, final accounting and other measures designed to protect the franchise system. The reality of this is enough to encourage, if not force, compliance.
In practice, an attempt to terminate a franchise before the franchise agreement expires may well lead to a legal dispute. Therefore, it is critical to know the limitations imposed by the franchise agreement on the parties’ respective remedies. Typically, a franchise agreement may include a covenant to use a chosen, alternative dispute method to litigation, like mediation or arbitration, and set forth a roadmap the parties mutually agree to follow. So, if a Notice of Default falls flat, what is the next best option? Mediation.
Mandatory mediation provisions now appear in most every franchise agreement. Most mediation provisions are carefully crafted to maximize the parties’ understanding of the roadmap to and during mediation. As a result, mediation has become more and more utilized in franchise disputes for obvious reasons. Mediation is an“ informal” meeting of the parties with a neutral third party that is hired to help the parties work through a dispute. Mediation can help limit costs, time and the public exposure that litigation may invite. Also, mediation is confidential by its nature, permitting the parties to speak more openly and freely than they might if they are trying to work through a dispute on their own. Section 19.12 of the most recent Planet Fitness ® franchise agreement includes a mandatory mediation provision as follows( in part):
( 1) Mediation. Except as provided in Article 19.12.3, prior to filing any demand for arbitration, the parties agree to mediate