A franchise dispute can be made up of contract, fraud, or negligence claims between a franchisor and a franchisee. These disputes involve a mix of federal and state law, which can become even more complex depending on where the franchisor or franchisee is located. If you have a dispute arising with one or more of your franchisees, a dispute resolution lawyer can help you end those problems while protecting your rights and assets. Call a dedicated franchise attorney to develop a strategy for handling your franchise’s conflicts.
The franchisor created the concept or currently owns the concept, oversees the franchisees and manages supply chains. Franchisors hold all the intellectual property rights, including trademarks, copyrights, and patents, which it licenses to franchisees for use in their individual businesses. Franchisors are responsible for training franchisees, protecting the brand, and ensuring franchisee compliance.
Franchisees are the individuals or entities that purchase the limited rights to operate the franchisor’s business concept. There are a few different types of franchisees, each with different roles. Single-unit operators own one location. Area developers, sometimes referred to as multi-unit developers, or multi-unit owners, purchase the rights to develop multiple locations. In some franchise systems, there may also be area representatives (sometimes called master franchisees or sub-franchisors) who purchase the rights to large territories. Area representatives purchase the rights to develop one or more locations in addition to the right to sell franchises within their territory. When any of these parties create a problem for the franchisor, a dispute resolution lawyer could be key to keeping the network operating smoothly and ensuring compliance through litigation, arbitration, or negotiation and settlement.
Typical franchise disputes involve breach of contract claims between the franchisor and franchisee. Either party could initiate the dispute by demanding mediation, arbitration or litigation as provided for in the franchise agreement. Sometimes, depending on the number of franchisees involved, a franchise dispute could involve a class action. From time to time, other parties such as a supplier of the franchise system will be brought into the dispute as well.
In most cases, there is a personal guarantee that the individual owners of a business entity franchisee sign, which makes them personally responsible for the obligations of the franchisee under the franchise agreement. In that case, the franchisor would be suing them in their individual capacity along with the franchisee business entity. This primarily applies if a franchisor is suing a franchisee.
Some of the most common franchise disputes are when franchisors go after franchisees for overdue fees, royalties, or marketing fees. Franchisors often have to enforce non-competition agreements against their franchisees as well. The conflict may also be a franchisee pursuing a claim against a franchisor for misrepresentation in the sales process, deceptive trade practices, ongoing lack of training, or a breach of the franchise agreement.
Another main claim made by franchisees involves fraud during the sales process or other violations of the Federal Trade Commission Amended Franchise Rule. In franchising at the federal level, there is a requirement that a franchisee has a franchise disclosure document (FDD) in their possession for 14 days before they are allowed to pay any franchise fee or sign any franchise agreement. There are often claims that a franchisor did not follow this rule and sold the franchise prematurely.
In some cases, there might also be suppliers taking action against franchisors or franchisees for failure to pay bills. There may also be personal injury claims against a franchisor or franchisee when the claimant’s injury allegedly occurred due to negligence on either the franchisor or franchisee’s property. Franchise dispute lawyers could apply their experience handling all manner of issues within the franchise relationship.
Franchise disputes can obviously be avoided if everyone plays by the rules and does what they’re supposed to do under their franchise agreement. Franchisors can avoid disputes by ensuring they follow disclosure laws, waiting the required 14 days before accepting money or signing a franchise agreement, and making sure that any associated broker groups know the rules as well.
Franchisees can avoid lawsuits by operating their businesses within the franchisor’s guidelines in the franchise agreement and operations manual, paying their royalties and marketing fund fees, marketing their business locally, honoring their payment obligations with suppliers, and using the franchisor’s trademarks correctly. In all instances, these are simple ways franchisors and franchisees can avoid lawsuits.
When a dispute first arises, the best thing for a franchisor and franchisee to do is to talk about it. Quite often, there are underlying issues that are overlooked. For instance, a franchisee may be facing external financial pressure that forces them to cut corners. They may have family issues that affect their business performance. It is highly important for a franchisor to consider these things when addressing non-compliance. Sometimes, a simple forbearance agreement or management agreement can fix the problem with no need for further dispute resolution.
A North Carolina franchise dispute resolution lawyer is useful in the franchise dispute process because they are going to have the legal knowledge and experience necessary to assess the franchisor’s risk exposure in addition to the franchisor’s rights under its franchise agreements. We can analyze all the facts and evidence and put it together into a strong case to present in mediation, arbitration or litigation. If you are worried about conflict in your franchise system, call our experienced franchise attorneys today for a consultation on your case.