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Protection After You Purchase: State Franchise Relationship Laws
By Mario Herman
After performing competent due diligence and buying a franchise, the
franchisee may discover that the franchisor is not doing what they are
obligated to do. However, there is recourse available to the aggrieved
franchisee in certain States.
Sixteen states have laws that protect franchisees from certain unfair and
capricious acts by a franchisor during its relationship with its
franchisees. These laws are generally known as franchise relationship
acts, and usually govern such matters as the parties’ rights regarding
termination and non-renewal. The following states have such statutes:
Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana,
Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey,
Washington, and Wisconsin. Other states have similar but less inclusive
laws, including the District of Columbia, Puerto Rico and the Virgin
Islands, which have statutes that govern the termination of franchises, and
South Dakota and Virginia, which have statutes that may restrict a
franchisor’s discretion in refusing to renew a franchise.
Relationship laws seek to balance the playing field between
business-savvy franchisors which often have a league of lawyers drafting the
franchise agreements, and the inexperienced franchisees, which often are
unrepresented by counsel when signing a franchise agreement on a
take-it-or-leave-it basis. Such statutes may override some provisions
contained in franchise agreements regarding termination and non-renewal, by
providing that franchisors must give certain “notice” periods and must have
“good cause” for terminating and/or not renewing a franchise agreement.
For example, the California Franchise Relations Act (CFRA) provides: “…
no franchisor may terminate a franchise prior to the expiration of its term,
except for good cause. Good cause shall include… the failure of the
franchisee to comply with any lawful requirement of the franchise agreement
after being given notice thereof and a reasonable opportunity….to cure the
failure.” (Cal. Bus & Prof Code, § 20020.) With respect to
non-renewal, the CFRA provides that the franchisor must provide the
franchisee with 180 days prior notice of its intention not to renew, and
must meet certain other requirements and restrictions. (Cal. Bus &
Prof Code, § 20025.)
Many of the state franchise relationship acts contain anti-waiver
provisions and provisions which allow a franchisee to litigate in their home
state rather than in the franchisor’s state, even when the franchise
agreement contains a venue/jurisdiction clause.
Depending on the state, the various remedies available to franchisees who
have been wrongfully terminated, or whose franchisor wrongfully refused to
renew the franchise, may include: (a) an order compelling the repurchase of
inventory, payment for goodwill; (b) injunctive relief against termination;
c) damages in the form of lost profits, expenses and punitive damages; and,
(d) attorney’s fees. Available remedies vary from state to state, and
an experienced franchise law attorney will be able to advise you of your
rights given the facts of your case and the applicable laws. Even if
your state does not have a franchise relationship act, you may have common
law causes of action which could protect your rights against wrongful
termination or failure to renew, including breach of contract, breach of the
covenant of good faith and fair dealing, unfair business practices, and
negligent and intentional misrepresentation.
Mr. Herman, licensed in Washington, D.C., represents franchisees
domestically and internationally in negotiation, mediation, arbitration, and
litigation with their franchisors.
mherman@franchise-law.com
www.franchise-law.com
www.internationalfranchiselaw.com
202-686-2886 (ph)
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