Last month we discussed how franchise disputes can be resolved from the perspective of the franchisor. This month, we consider the options available to the franchisee.
BACKGROUND ON FRANCHISE LAW
The franchisor (ie. McDonald’s) is the owner of the brand and it permits the individual location owners, the franchisees, to market goods and services under that brand. The relationship between the franchisor and the franchisee is governed by a contract called the Franchise Agreement. Since franchisors tend to be large international companies with greater resources than franchisees, the law imposes special duties on the franchisor and requires it to act fairly toward the franchisees.
As a franchisee what options do you have in the event of a conflict with the franchisor? First, you should consult with a lawyer as soon as possible to assess the situation. Often the first step will be for your lawyer to send a letter to the franchisor demanding that it take action to resolve the dispute. If this is does not achieve the desired result, you may be required by the franchise agreement to participate in mediation or arbitration.
Mediation involves meeting with an independent third party mediator who will try to assist the franchisor and the franchisee to come to an agreement. Mediation is a voluntary process and the mediator cannot force the parties to agree. Arbitration is similar except that the third party arbitrator will make a decision which the parties must comply with. Mediation and arbitration are advantageous in that they can enable the dispute to be resolved quickly. However, they can also be expensive because the parties must pay the fees of the mediator/arbitrator themselves (as opposed to judges who are paid by the taxpayer).
Another alternative is to start a lawsuit. A franchisee who is considering a lawsuit against the franchisor has two main options.
First, a franchisee can sue on the basis that, in deciding to purchase a franchise, he or she relied on incorrect or misleading information provided by the franchisor. Franchisors are, by law, required to provide extensive background information, or disclosure, to the franchisee before the franchisee signs a franchise agreement. The franchisor is required to provide the franchisee with a document containing this disclosure 14 days before the franchisee signs the Franchise Agreement or pays any money to the franchisor. If the franchisor provides a disclosure document that is late or that is missing required information, the franchisee has the right to rescind, or reverse, the Franchise Agreement within 60 days of receiving the disclosure document. If the franchisor does not provide any disclosure document, the franchisee can rescind the agreement within 2 years after signing it. If the agreement is rescinded, the franchisor must refund the fees it has been paid by the franchisee and the franchisee is released from the franchise agreement.
BREACH OF THE FRANCHISE AGREEMENT
The second main option for the franchisee is to sue for a breach of the franchise agreement. For example, the franchise agreement may require the franchisor to purchase advertising and the franchisor may have failed to do so. The franchisee could then sue for the sales lost as a result of the franchisor’s failure to advertise. If the franchisor’s breach of the franchise agreement is so serious that the franchisee is essentially prevented from carrying on its business, this may bring the franchise agreement to an end and the franchisee will be released from its remaining obligations under the agreement (ie. the franchisee will not have to pay the franchise fees for the remaining term of the agreement).
Litigation against the franchisor can be risky because the franchisor likely has greater resources. Litigation is often expensive and can last for years. It can also be stressful and time-consuming and interfere with operating your business and enjoyment of life in general. Further, if you are unsuccessful in court you may be required to pay a portion of the franchisor’s legal fees. Having said that, litigation may be the best option available. If you have a franchise dispute, please feel free to contact us to discuss these issues in further detail.