Firm volunteers and some college students worked with members of the family that would live in the house every Saturday for four months to build the house. The family included a grandmother and grandfather, their son and his wife, and their children. At a dedication ceremony, J. Michael Dady, a partner in the fi rm, gave the family’s patriarch a watercolor painting of the house. Dady said the man looked puzzled for a second, and then, realizing the house in the painting was the one he would live in, he smiled and said gleefully, “This is my house; this is my house!”

The firm was happy to build something of long-term value for the MEMBERS IN MOTION family, and the experience benefi ted the fi rm as well. The project became a team-building exercise through which coworkers got to know each other better and to see each other differently, Dady said. For example, one of the fi rm’s secretaries, Patricia Gits, took the lead, teaching him how to do much of the work, such as installing windows, he said.

As plaintiff lawyers, “we help people in desperate need of help, often after others have told them they can’t be helped,” Dady said. Building a house was doing the same thing in a different way—with hammers, nails, and siding, he said. “A house sponsorship like this is not an opportunity reserved for Fortune 500 companies,” Dady added. “We are a 10-lawyer law fi rm. If we can do this, anyone can do this.”

Reprinted with permission of Trial (October 2011)
Copyright American Association for Justice,
formerly Association for Trial Lawyers of America (®ATLA)

• The franchisor holds the “keys to the kingdom.” The franchisee “rents” the brand, the software, and the operating system and must follow the rules or risk losing their franchise rights.
• If a franchisee is unhappy; “realize it’s OK to leave. Sell your franchise or work elsewhere. Otherwise you become an impediment to the rest of the franchisees who want to grow.”

The executive added in closing that the key element missing from the parties’ relationship was “trust,” and that the franchisees could help the system grow much more quickly if the franchisees would simply permit the franchisor to do what it wanted to do and “trust” that the franchisor would always do the right thing. The departing executive apparently saw no reason why the franchisees (whom he viewed not as businessmen but rather as disgruntled renters) would have any reason not to trust the franchisor to act in everyone’s best interest.

When someone buys a franchise, he or she is generally told that they are “partners” with the franchisor; that he or she is “in business for themselves, but not by themselves,” and that franchisee input is greatly valued. Of course none of these promises are placed in the written franchise agreement, and, even though they are generally found in the written glossy brochures still in the franchisee’s hands, they are quickly forgotten by the franchisor once the ink is dry on the franchise agreement. What remains in their place? What remains is the attitude of the executives at the franchisor regarding the proper role of a franchisee, which, in my example, is: 1) The franchisee is a mere renter of his business; 2) He is not in business “for himself,” in fact, he owns nothing at all and is allowed to exist at the whim of the franchisor; 3) The best analogy for a franchisor is that of a king who decides whether the franchisee’s business lives or dies; and 4) If the franchisee does not like what is going on, he should quit, then close or sell his business, and get a job someplace else.

As an attorney who has handled hundreds of franchisee/franchisor disputes, I can say with certainty that the attitude exhibited in this recent letter is not an unusual attitude for franchisor executives. Business advisors often tell franchisor executives that they must have “maximum flexibility” to do whatever they want, and franchisor attorneys spend hundreds of hours drafting documents designed specifically to limit the rights of franchisees and expand the rights of franchisors. So, what is a franchisee to do when faced with an unreasonable franchisor and an extremely bad franchise agreement? One option is to seek statutory protection.

Massachusetts is currently considering a Fair Franchising Act which would provide some basic protections for franchisees whose franchisors believe that franchisees are a hindrance who must either shut up or quit the system. The proposed Act would provide the following protections, among others:

• The franchisor may not terminate the franchisee without “good cause shown” and 90 days notice.The franchisor may not refuse to renew the franchisee except for “good cause shown” and on at least 90 days written notice
• The franchisor may be liable for money damages for encroaching upon a franchisee’s business market with another outlet that reduces the franchisee’s sales.
• The franchisor may be required, upon a termination, to compensate the franchisee for the fair market value at the time of termination of the franchise, of the franchisee’s inventory, supplies, equipment and furnishing purchased by the franchisee from the franchisor or its approved sources and good will, if any. The franchisor may avoid paying for good will if the franchisor does not enforce a post-termination covenant not to compete.
• A franchisor is prohibited from terminating or not renewing a franchise for any of the following reasons:
1. Refusal to take part in promotional campaigns of the franchisor’s products.
2. Failure to meet sales quotas suggested by the franchisor.
3. Refusal to sell any products at a price suggested by the franchisor or supplier.
4. Refusal to keep the premises open and operating during those hours which are documented by the franchisee to be unprofitable to the franchisee or to preclude the franchisee from establishing his own hours of operation beyond the hour of 10 p.m. and prior to 6 a.m..
5. Refusal to give the franchisor or supplier of financial records of the operation of the franchise which are not related or unnecessary to the franchisee’s obligations under the franchise agreement.
• The franchisor is also prohibited from doing any of the following:
1. Prohibiting the right of free association among franchisees.
2. Prohibiting the transfer by will of the rights of any franchisee.
3. Requiring or prohibiting any change in management of any franchise except for good cause shown.
4. Imposing unreasonable standards of performance upon a franchisee.
5. Failing to deal in good faith with a franchisee.
6. Selling a franchisee any product or service for more than a fair and reasonable price.
7. Imposing upon a franchisee an unreasonable or unnecessary standard of conduct.
8. Discriminating between franchises in the charges offered or made for royalties, goods, services, equipment, rentals, advertising services, or in any other business dealing, unless the franchisor satisfies the burden of proving that any classification of or discrimination between franchisees is reasonable, is based on franchises granted at materially different times and the discrimination is reasonably related to the difference in time or on other proper and justifiable distinctions, and is not arbitrary.

Legislation such as the Fair Franchising Act being considered in Massachusetts will go a long way toward evening out the imbalance in the franchise relationship and limiting the ability of franchisors to treat the franchise relationship as one between “king” and “renter.” Franchisees would secure such basic rights as the right to be treated reasonably and in good faith. Franchisees could not be terminated for minor or technical contract violations, or for refusing to take part in programs that they deem injurious to the franchisees’ businesses. Franchisees would have the right to seek redress for unfair same-brand competition. In short, franchisees would be able to actually operate their businesses in a manner more consistent with what the franchisees are actually told to expect when they purchased the franchise.

The law being considered in Massachusetts has faced strong opposition from franchisors. This is to be expected, since the party with the upper hand in a one-sided contract situation always wants to avoid any legislation that would even the playing field. But, as stated in the letter I was recently forwarded, when a relationship gets so badly out of whack that the franchisor thinks it is a king and the franchisee is a mere renter who should “shut up or get out” then legislation such as the Fair Franchising Act is badly needed and should be passed into law in Massachusetts and elsewhere.

Jeff Haff

A: A franchise contract is a long and complex legal document that will bind you and the franchiser to certain responsibilities. It’s a good idea to review the contract with a lawyer, especially since this is your first time in business.

Be aware, though, that this review is mostly to let you know what you’re getting yourself into—you won’t have much bargaining power with the franchiser. And once you sign on the dotted line, you will be taking on significant obligations.

It’s best to conduct your due diligence well ahead of time. That includes reviewing not only the contract, but also the disclosure statement that franchisers are legally required to provide before you sign. The disclosure document can spell out details such as how much you’ll have to pay for advertising.

One of the most important considerations to keep in mind when you’re reading the deal: Can the franchiser sell another outlet close to your business, including an airport kiosk or a counter in a megastore?

“Be wary of intrabrand competition. If they can put someone across the street, that will hurt you,” says Ronald Gardner, a lawyer with Dady & Gardner in Minneapolis. Also check with the franchiser to see if anyone else owns franchise rights in your area but hasn’t yet built an outlet.

Look for other types of competition, too, such as the franchiser’s right to sell branded products like salad dressing and taco shells in the supermarket. If people can buy those products and cook them at home, they might be less inclined to stop in your store to grab a bite.

Some franchisers require you to run the shop yourself, instead of hiring a manager, says Harris Chernow, a lawyer for Chernow Kapustin LLC in Horsham, Pa. This could be a problem if you have another job or other responsibilities. The contract may also prohibit you from buying franchises from other companies or owning a local, independent business that could be deemed a competitor, Mr. Chernow says. You may also need to get approval to buy more franchises from the same company, or sell the one you own.

Finally, be aware of the risks you may take if there’s a legal dispute. The contract may require you to submit to arbitration or go to court in a city far from home. “On the day you’re signing up, it’s the happiest day of your life,” says Mr. Gardner. “People don’t stop and think, ‘What if this doesn’t work out?’ ”

Source:  WSJ – Small Talk

By David Farkas, Senior Editor — Chain Leader, March 3, 2010

J. Michael Dady of Dady & Gardner has been arguing case law on behalf of franchisees for more than 30 years. Today, Dady’s list of adversaries includes just about every major restaurant brand including Starbucks, McDonald’s and Burger King. Chain Leader recently asked the Minneapolis-based attorney to bring us up to date on legal issues currently affecting franchisees.

Can you offer a brief overview of restaurant franchisor-franchisee relations?
Across the board today there is an unusually significant emphasis on discounting to get people through the front door or to the drive-thru. There are pluses and minuses to that strategy from a franchisor’s perspective. They make their money based on a percentage of total revenues. But my clients make their money based on bottom-line profitably. You can’t lose a little on every deal and expect to make it up on volume, which is one of my criticisms of Burger King’s $1 double cheeseburger.

What are the legal implications of that situation?
There is attached to the franchisor-franchisee relationship a two-way street called the covenant of good faith and fair dealing. This means franchisees in their relationship with franchisors, and vice versa, have to act in a way that is fair and reasonable and is not discriminatory and in a way that does not deprive the other party of the fruits of the relationship. [Franchisees] buy into a franchise opportunity because they expect a franchisor will help them on the road to profitability. To the extent franchisors are imposing obligations on [franchisees] to sell goods below their actual costs, it violates that contract.

Has there been good news from a legal standpoint for franchisees lately?
We like the Randall, et al. vs. Lady of America case that came out recently in federal court in Minnesota. It says a franchisor may not disclaim the protections afforded to a prospective franchisee by applicable federal or state laws — be they statutory or common law principles — by a [written] disclaimer.

Can you elaborate?
I’ve said often that despite doing this for 30-plus years, I’ll still bet one of these super salesmen could probably talk me into signing just about anything. What the law says, and it varies some from state to state, but in general it says that when you are selling someone a franchise, you’ve got to do it like they did after the ’33 and ’34 [Securities Exchange] Acts were passed for selling stocks or bonds. You have to do it with full and fair disclosure so buyers can make informed decisions based on good information.

And the fact that you might oversell somebody, and the in process get them to sign some kind of disclaimer that says we didn’t say or do anything unlawful, that doesn’t work. If you indeed do or say something unlawful, you can’t avoid liability because as a great salesman you got them to sign the disclaimer. That’s a very important point. Before that case, which incidentally is mine, there were cases that suggested the contrary.

Has there been good news from a legal standpoint for franchisors?
I like to talk about my wins. Let someone else talk about my losses.

Let me put it this way, then. In your article “Calling a Penalty on Your Partner,” you mention that some franchisees forced to close early are still responsible for future royalties. Do franchisors easily get away with that?
It’s the number one point I raise with potential clients. People think intuitively, “If I enter into this franchise opportunity, I’m optimistic things will work out with my good effort and my franchisor’s partnership. But if after three or four years, I have lost lots of money, I will be able to shut my business down and go to law school without further liabilities to the franchisor.”

Lo and behold, if they have assets apart from what they poured into the business, franchisors will say, “You signed up for a 20-year franchise. You closed after five years. I have 15 more years of royalties coming. You’re obligated to keep your doors open and fund your operating losses so I can get my royalty check. Send me a check for 15 years worth of royalties. You owe me hundreds of thousands of dollars.”

And there are cases out there that say that’s right. I say to prospective franchisees that you want to have the express right to get out early if you can’t make it despite your best efforts.

How likely is it that a national franchise brand would require those royalties?
It varies dramatically, much more than you’d think. Let me ask this: How would you like to be a CEO of a company that says to prospects, “Whether you make money or not, you’ll be on the hook for royalties for 20 years”?

Granted, that company won’t have many people signing franchise agreements.
Right. What the law should say is, “Only if [the franchisor] fully and fairly discloses that if [a franchisee] closes early, they will be on the hook for 20 years of royalties.” Because when [franchisors] are silent, [prospective franchisees] will understand the opposite. It’s been only within the last 10 years that franchisors have started to assert that claim.

Before, franchisors acted the way franchisees thought they would. In other words, this [franchisee] tried hard and he lost a lot of money. We’ll sell the franchise to someone else. They didn’t chase people for a lot of money. I say you should tell people that [you'll chase them for the royalties] and a lot of cases agree with me, but some don’t. Those cases scare the heck out of me.

Arbitration is supposed to be more efficient, less costly and just as fair as litigation. But according to some practitioners, that’s not necessarily the case any longer.

Some lawyers fear that the arbitration process is beginning to look more and more like a court proceeding — but without the right to appeal. Others are concerned that the increasing use of mandatory arbitration provisions forces citizens to give up substantive legal rights without them even knowing it.

At a recent seminar sponsored by the Minnesota State Bar Association’s Alternative Dispute Resolution Section — “The Pros and Cons of Arbitration” — panelists addressed these issues head on. Speakers at the hour-long event included commercial litigator Thomas Fraser, franchise attorney Ronald Gardner, consumer rights attorney Peter Barry and labor and employment lawyer Nancy Vollersten.

The panelists agreed that the arbitration process can and does continue to have a proper place in resolving disputes.

“Arbitration has a definite role to serve as an alternative to the court system, if it truly is an alternative,” Fraser told attendees.

But some lawyers contend that too many arbitration provisions are hidden within contracts in boilerplate language that consumers often don’t know about. Others assert that even if their clients know about the arbitration clause, they don’t have any say in how it’s drafted and are therefore patently unfair.

To that end, a key component of the discussion revolved around the Arbitration Fairness Act of 2009, which would ban mandatory predispute arbitration clauses in consumer, employment and franchise agreements. It would also void a predispute agreement requiring arbitration in cases arising under civil rights statutes.

The law, which would amend the Federal Arbitration Act, would not prohibit arbitration in such cases, but would merely require that the agreements be made after a dispute has arisen, thus ensuring that the agreement to arbitrate is voluntary. The act was introduced a year ago and is currently pending in the U.S. House of Representatives Judiciary Subcommittee on Commercial and Administrative Law.

Looks Like Litigation

In the commercial arbitration area, the mandatory aspect of predispute arbitration clauses isn’t the problem, according to Fraser. The problem, he said, is that arbitration is morphing into a process that is indistinguishable from a federal court lawsuit.

The huge amount of discovery being allowed in arbitration cases and the resulting increase in cost is a major issue, he said.

“The challenge today is to make sure that arbitration is an alternative to and different from a federal court lawsuit while preserving everybody’s substantive rights,” he said. Arbitration needs to get it back on track so that it’s a respected process that is substantively different from a regular lawsuit, he added.

Fraser also pointed out that an arbitration is only as good as the arbitrator.

“If you’ve got a bad arbitrator, you’ve got a bad process,” he said, noting that even if the arbitrator is wrong on the law, there’s not much opportunity for review or appeal.

Gardner said he’s not opposed to the notion of arbitration proceedings being more like federal lawsuits.

The plaintiff has the burden of proof, but no access to the information that it needs to prove its case, he said. “You have to be able to get some discovery in order to carry the burden of proof.”

Imbalance of Power

The perceived imbalance of power among parties to an arbitration clause is another problem.

Gardner, who represents franchisees, said that his clients don’t write the contracts they are being compelled to adhere to. Instead, the franchisor drafts the arbitration clauses and therefore “makes the rules” about the process. He noted that 65 percent of franchise agreements currently contain arbitration clauses.

An attorney who represents the Subway Restaurants franchisor, which said frequently gets sued, once told Gardner that the company includes arbitration clauses in franchise contracts as “an insurance policy against a runaway jury.” He explained that having an arbitrator hear the case ensures a measured response; even if Subway loses every time, an arbitrator isn’t going to ward millions of dollars in punitive damages.

Similarly, as a consumer rights attorney, Barry is in favor of the proposed Arbitration Fairness Act. it’s all about the inability of consumers to make an intelligent choice about how to resolve a dispute they have in a consumer or employment contract, he said.

If people choose to use arbitration after a dispute arises, that’s OK, said Barry. “But trying to resolve a dispute through forced arbitration before a dispute has even arisen and before consumers understand what their rights are is palpably unfair.”

Barry contends that mandatory arbitration clauses essentially negate many of the laws Congress has enacted to protect consumers.

People should be allowed to exercise their rights in state or federal court, not be forced into mandatory arbitration, he said. “The practical effect of inserting an arbitration clause is to chill litigation.”

Fraser pointed out that the power imbalance evident in consumer or franchise cases isn’t present in construction or commercial matters. “The bargaining power is relatively evenly balanced,” he said, so the inclusion of arbitration contracts generally doesn’t pose the same predicament.

In the traditional labor setting, arbitration is almost always the method used to resolve disputes. In fact, the proposed Arbitration Fairness Act specifically exempts arbitration provisions contained in collective bargaining agreements.

While arbitration is not always used in the employment arena, according to Vollersten, it can be an effective method of resolving disputes.

Arbitration appeals to some employers because while it’s not necessarily cheaper, it’s usually quicker, confidential and the employer has a hand in choosing the decision maker, she said.

Nonetheless, Vollersten said she’s conscious of the potential imbalance of power discussed by the other panelists. Thus, in determining whether it’s fair to enforce an arbitration clause in the employment context, Vollersten advocates an examination of the parties’ bargaining power.

If the employee is a physician or a high-level corporate executive, then enforcing the arbitration provision might be acceptable. But if the clause was signed by an applicant for a job at an auto parts store, then it might not, she said.

By Barbara A. Bagdon and Mary M. Kellerman

Franchise agreements almost always include covenants not to compete. Enforcement of these covenants comprises an increasing amount of litigation between former franchisees and their franchisors. Often, litigation involving restrictive covenants centers on the question of whether a court should issue a preliminary injunction to enforce the noncompete agreement, potentially forcing a former franchisee to cease operation of its business. This article will analyze recent case law regarding the enforcement of restrictive covenants in franchise agreements and identify where franchisors have succeeded and where they have failed in their attempts to obtain preliminary injunctive relief to enforce noncompete provisions in franchise agreements.

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The Great Defender
By Nancy Weingartner

Ask Ron Gardner, a partner with Dady & Gardner in Minneapolis, why he’s a franchise attorney, and he has a litany of reasons. But the main one: “My dad was a union guy and my mom was a social worker. I wanted to be in a courtroom. I didn’t want to make the world safe for shareholders. I wanted to help people like me and my parents – people on the wrong side of the deal.”

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Chambers, which bases its ratings on interviews with clients and adversaries, praised the firm’s integrity and skill, and noted that Dady & Gardner was both aggressive in pursuing its clients’ interests but reasonable in its approaches. Michael Dady was singled out as a “commanding, dominant” trial lawyer, “smart and forceful” in court, yet imaginative in his strategies. Ron Gardner was noted as a “terrific, balanced franchisee litigator” who was “highly regarded by all.” Chambers praised for “intellectual rigor and strong briefing ability” as well as being a “first-rate litigator.”

The court’s decision was significant because it rejected an earlier case involving Cottman, in which the court had upheld Pennsylvania law.

The Cottman franchisees are suing the franchisor for falsely representing the earnings potential of their franchises.

Observing that “Minnesota courts have repeatedly observed that the Minnesota Franchise Act is a remedial statute designed to favor franchisees over franchisors” the court rejected the franchisor’s arguments and held that the contract provisions were of no effect, thereby paving the way for the franchisees’ fraud claims.  Deborah Randall et al. v. Lady of America Franchise Corporation.

“The case is the first of its kind to hold that investors in a franchise company are liable to a franchisee for failing to perform adequate due diligence and to take corrective measures once they discover the fraud,” said, attorney for the former franchisee of Sona MedSpa, Kempton J. Coady.
In the past two years, 17 of 45 Sona franchisees have gone out of business, changed hands or left the system.  At one point, a total of nine (9) litigations or arbitrations were or are pending against Sona for medical or business fraud.