What to Sue a Franchisee For

Franchise Business Lawsuit Lawyers in NC

Typically, franchisors sue franchisees in federal court because federal judges are more familiar with franchise law, there’s a larger body of franchise case law, and federal judgments are portable and sometimes easier to execute.  Franchisors also frequently utilize federal court for their litigation with franchisees because federal questions of law are involved.  Here are a few common claims that franchisors assert against franchisees.

Trademark Infringement Claims

There are remedies for trademark infringement under federal and state law.  However, franchisors usually are more successful with trademark infringement claims against franchisees under the Lanham Act.  Federal trademarks don’t necessarily grant the owner the ability to use the mark as much as they grant them the ability to exclude others from using the mark.  That’s an important distinction to make.  The first step in bringing a claim under the Lanham Act is for a franchisor to demonstrate that unauthorized trademark use occurred.  In other words, the franchisee’s ability to use the trademark must have been terminated.  This often comes up when a franchisee has been terminated for any one of several reasons, but they refuse to stop operating under the same franchise branding.  The precise elements required to prove a Lanham Act violation vary slightly by jurisdiction.  However, the franchisor generally must prove that (i) the mark is valid and legally protectable, (ii) the mark is owned by the plaintiff/franchisor, and (iii) the defendant/franchisee’s use of the mark to identify goods or services is likely to create confusion concerning the origin of the goods or services.  Those requirements come from a Burger King case in the 11th Circuit.

Breach of the Franchise Agreement

This one is pretty obvious.  A franchisee goes rogue and starts doing something (or everything) they are expressly prohibited from doing in their Franchise Agreement.  This type of claim is essentially a more involved breach of contract claim.  The elements for a breach of contract claim are (i) the existence of a valid contract, and (ii) a breach of that contract.  The same simple elements apply when a franchisor sues a franchisee for breach of the Franchise Agreement.  The franchisor will first have to prove that the Franchise Agreement is valid.  As long as the franchisor properly disclosed the franchisee in accordance with the FTC Rule and properly executed the Franchise Agreement, that shouldn’t be a problem.  Then, the franchisor must prove that the franchisee is violating one or more terms of the Franchise Agreement.  This is where it is important to make sure the Franchise Agreement accurately and completely reflects the entire Franchise Disclosure Document.  If some provision is in the Franchise Disclosure Document, but it is nowhere to be found in the Franchise Agreement, then the franchisor is out of luck when it comes to enforcing that provision.  The Franchise Disclosure Document is a disclosure.  The Franchise Agreement is the contract that governs the relationship, rights and obligations between the franchisor and franchisee, and it will be the basis for any breach of contract claim that either side brings in court.

Unjust Enrichment

A claim for unjust enrichment is typically an alternative claim asserted when there is no valid contract to enforce.  However, in franchise litigation, there is almost always a Franchise Agreement that both parties have agreed to.  Within that context, unjust enrichment can be asserted if the franchisee has been terminated but continues to operate under the franchisor’s brand.  This opens up the door for the franchisor to seek future profits as damages, which are usually very hard to recover.  The key in claiming unjust enrichment is to have ongoing infringement on the other side of the lawsuit.  If a franchisee that was just terminated keeps using the franchisor’s marks as if nothing happened, they will likely be turning over every cent they’re currently making to the franchisor.

Breach of Lease

Franchisors often enter into lease agreements with franchisees.  If the franchisor wants to regain control of the premises, they must make a claim for breach of the lease agreement.  They will essentially make a claim for summary ejectment just as if they were a residential landlord evicting a tenant.  Once they succeed, the franchisor can enter the premises and assess damages, make repairs, or truly take over the operation under certain circumstances.  It is important to remember that the Franchise Agreement and the lease are two separate, distinct contracts.  The breach of one does not automatically lead to the breach of the other.

Breach of Guaranty

These days, almost every single franchisee signs a personal guaranty.  Sometimes several owners of the franchisee entity sign the guaranty.  Sometimes the guaranty is limited in scope or amount.  Regardless, there is always someone on the hook if the franchisee breaches the Franchise Agreement.  Franchisors require a personal guaranty to protect themselves and to make sure their franchisees have skin in the game.  The principals that sign this personally guarantee the performance of the franchisee entity under the Franchise Agreement and the personal guaranty is usually executed at the same time as the Franchise Agreement.  A claim for breach of these guaranties is almost automatic whenever a franchisor brings a claim for breach of the Franchise Agreement.  Then, all of the other claims are essentially attached to those who signed the guaranty.

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