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Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2003

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2003

March 14, 2019

 

And the saga continues . . .

In Jon K. Morrison, Inc. v. Avis Rent-A-Car Systems, Inc., Bus. Franchise Guide (CCH) ¶ 12,701 (W.D. Wash. Nov. 20, 2003), Jon K. Morrison, Inc. (“plaintiff”) signed an

agency operator’s agreement (“Agreement”) with Avis Rent-A-Car System, Inc. (“defendant”). Five years after signing, defendant informed plaintiff that the parties were amending the Agreement to include a “fleet surcharge,” which would reduce plaintiff’s commissions by twenty cents per vehicle. Notably, the Agreement provided that it “is not granting franchise rights” and that plaintiff “waives any and all rights under franchise law should a court rule that the business is a franchise.”

 

After defendant sent plaintiff notice of its intent to terminate the Agreement, plaintiff filed suit asking, among other things, that the court render the Agreement a franchise and that termination was unjust under the Washington Franchise Investment Protection Act (“FIPA”). After referring to how the statute defines a franchise fee, the court found the definition to “suggest[] that a franchise fee includes ‘fees hidden in the franchisor’s charges for goods or services’” and made note of several cases where Washington courts have found an indirect or “hidden” franchise fee.

 

Nevertheless, the court ultimately found that neither the commission arrangement nor the fleet surcharge was a franchise fee. The commission arrangement was not a franchise fee because the money that plaintiff collected was forwarded to defendant, who received 10% of the gross amount as compensation. Plaintiff never directly paid defendant any money. To render this arrangement a franchise “would convert every commissioned sales person in a clothing store into a franchise where none of the concerns FIPA was intended to address are in play.”

 

The fleet surcharge was not a franchise fee because it was “not an amount paid to the principle in order to continue to do business.” Further, the fleet surcharge was not an amount paid by the franchisee. Instead, it was “simply one factor in the determination of the commission to be paid to the agent.” Because of this, the court did not render the relationship between the parties a franchise because plaintiff never paid a franchise fee.

 

Takeaway: Fleet surcharges and commissions have not been found to satisfy the franchise fee element of the Washington Franchise Investment Protection Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2002

March 7, 2019

 

And the saga continues . . .

In Pool Concepts, Inc. v. Watkins, Inc., Bus. Franchise Guide (CCH) ¶ 12,249 (D. Minn. Jan. 20, 2002), a Minnesota franchise dealer of Caldera products (“plaintiff”) filed suit against a California manufacturer of Caldera products (“defendant”) after defendant threatened termination.

 

The principal dispute was whether plaintiff paid a franchise fee. Under the Minnesota Franchise Act, a “franchise fee” means “any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business . . . .” Minn. Stat. § 80C.01, subdiv. 9.

 

According to plaintiff, the following payments to defendant constituted franchise fees: “(1) the payment of funds by plaintiff to defendant that are ultimately transferred by defendant into the so-called ‘co-op’ advertising fund, (2) the sales literature that defendant required plaintiff to purchase and (3) the minimum parts inventory that defendant required plaintiff to maintain in excess of plaintiff’s desires and/or requirements.”

 

Ultimately, the court rendered the co-op advertising program to constitute a “franchise fee,” reasoning that “when plaintiff purchases spas from defendant, it is purchasing the spa and also the ability to participate in the co-op advertising fund that is created as a result of the transaction. The money that defendant collects from plaintiff for spas includes the funds defendant contributes to the co-op fund. Moreover, the payment of funds is not optional, as it is tied to the purchase of spas. Because the money for the co-op fund comes directly from plaintiff . . . this money constitutes a franchise fee.”

 

Takeaway: Mandatory contributions to an advertising fund have been found to satisfy the franchise fee element of the Minnesota Franchise Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2001

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2001

 

February 28, 2019

 

And the saga continues . . .

 

In Romeo Maintenance & Rental v. U-Haul Company of Minnesota, Bus. Franchise Guide (CCH) ¶ 12,259 (Minn. Dist. Ct. Feb. 13, 2001), plaintiff filed suit against defendant seeking a claim for relief under the Minnesota Franchise Act. Finding that plaintiff did not allege in the Complaint that it paid defendant a franchise fee, the court dismissed the Minnesota Franchise Act claim. Plaintiff then filed a motion for reconsideration.

 

The court noted on reconsideration that its previous order, finding no indirect franchise fee where plaintiff incurred expenses and paid defendant royalties as a “simple principle-agency relationship,” was an error. The court further stated that while ordinary business expenses are not considered a franchise fee, plaintiff’s required maintenance of dedicated phone lines and electronic databases that it would not have otherwise purchased “in the ordinary course of business as an independent truck rental business” might be sufficient to constitute an indirect franchise fee. As such, the court reversed its previous order granting defendant’s motion to dismiss the franchise act claim and reinstated it.

 

Takeaway: The court gave more breadth to the term “indirect franchise fee” for purposes of the Minnesota Franchise Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: At a Glance

Historical Review of Franchise Fees: At a Glance

 

February 21, 2019

 

Whether a particular relationship is considered a franchise requires an in-depth dive into both federal and state statutes defining a “franchise.” As is common in all states that have passed franchise acts, the definition of a franchise includes various elements. While these elements nearly always include the use of a trademark or association with a trademark, a community of interest between the parties, and/or a franchisor’s marketing plan assistance and/or control, the most fundamental element is the payment of a “franchise fee.”

 

Federal Franchise Rule

The start of any inquiry into whether or not a particular business entity is considered a “franchise” should always begin with a glance at the Federal Trade Commission Franchise Rule (“FTC Rule”). Effective since October 21, 1979, the FTC Rule was designed to equip potential franchisees with protection before expending (potentially) significant funds in a franchise investment.

 

The FTC Rule provides:

 

(h) Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;

(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and

(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.

 

16 C.F.R. § 436.1(h). As seen, the FTC Rule makes no mention of a “franchise fee.” And instead, requires a “payment.” This “required payment” element encompasses “all consideration that the franchisee must pay to the franchisor or an affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing operation of the franchise.” 16 C.F.R. § 436.1(s).

 

State Franchise Acts

Even though the Federal Trade Commission enacted the FTC Rule, various states can (and indeed, most have) choose to enact their own statutes to furnish both current franchisees and potential franchisees with protection. Currently, there is no uniform definition of a “franchise” among the states, and not all states require the payment of a “franchise fee” in their respective definition of a franchise. In those states that have enacted a state specific franchise act, entities should still be aware of Business Opportunity Laws, and other industry specific laws, that might still govern some aspects of a franchise or business relationship.

 

Despite statutes defining what “is” and what “is not” to be considered a franchise fee, it is not surprise that these statutes leave much ambiguity in their application. In the following blog posts, we will review cases throughout the years litigating the franchise fee element.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Common Franchise Agreement Provisions: Right of First Refusal

Common Franchise Agreement Provisions: Right of First Refusal

February 14, 2019

 

What is it

A right of first refusal is extremely common in the franchise industry. Most (if not all) franchise agreements contain a provision giving the franchisor a right of first refusal on the franchisee’s proposed transfer of its business, including a proposed transfer of the franchisee’s assets or lease interest, to any third party. Pursuant to most rights of first refusal, prior to effectuating such a transfer, the franchisee must first offer to sell such interest to the franchisor, generally on the same terms and conditions offered to the third party. Accordingly, there will usually be, at least, three parties involved in a right of first refusal: the franchisee, the franchisor, and the third party.

In effect, a right of first refusal will function similar to the following:

  • Harry is a WandWorld franchisee.
  • Harry wants to transfer its obligations under its WandWorld franchise agreement to Ron (third party).
  • Harry and Ron work out agreeable terms for Ron to purchase Harry’s franchised WandWorld business, and formalize the terms of the offer in a signed Letter of Intent.
  • Harry provides Hermione (franchisor) with the Letter of Intent.
  • Hermione may either purchase Harry’s franchised business under the same terms and conditions offered to Ron, or allow Harry’s proposed transfer to Ron to go through.

 

Where is it

The right of first refusal provision is commonly located under the “Transfer” provisions of the franchise agreement.

 

Concerns with it

The right of first refusal process both slows down a franchisees ability to sell its business and makes it less likely for a potential purchaser to want to perform the due diligence required to make the franchisee an offer.

 

How to avoid it

Although it is unlikely that a franchisor will agree to remove its right of first refusal, it is best to attempt to avoid it altogether by negotiating for its removal prior to signing a franchise agreement. In the alternative, make sure the terms of the right of first refusal are reasonable. So, in the event you cannot get it removed altogether, make sure the franchisor is required to exercise its right of first refusal within a reasonable amount of time. In the past, we have seen a right of first refusal allowing the franchisor 120 days to decide whether to exercise its right of first refusal, and then 90 days to do its own due diligence with no obligation to purchase—meaning that half a year could go by, during which time the franchisee’s first third party offer would undoubtedly be off the table.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Minnesota Supreme Court Clarifies Test and Requires Specific Language By Used for Certain Indemnity Clauses—Dewitt v. London Road Rental Center, Inc., 910 N.W.2d 412 (Minn. 2018)

In Dewitt v. London Road Rental Center, Inc., 910 N.W.2d 412 (Minn. 2018), the Minnesota Supreme Court resolved the confusion surrounding the proper test for determining whether an indemnity clause is enforceable under Minnesota law.

 

In Dewitt, a rented picnic table collapsed on a restaurant patron causing severe injuries. Id. at 414. The injured patron filed suit against both the restaurant and the rental company. Id. The rental company filed a cross-claim against the restaurant, seeking the protection of an indemnity clause in the rental agreement. Id. The district court determined that “although the indemnity clause did not expressly include [the rental company’s] own negligence within its scope, the clause’s broad language necessarily included coverage for [the rental company’s] negligence.” Id. (emphasis in original).

 

The Minnesota Court of Appeals affirmed this decision, stating that “[t]he test is whether the language is so broad that it necessarily applies to negligence.” Dewitt v. London Rd. Rental Ctr., Inc., 899 N.W.2d 883, 891 (Minn. Ct. App. 2017). After applying this test to the indemnity clause in dispute, the court concluded that the indemnity clause was enforceable, and the restaurant had agreed to indemnify the rental company for the rental cpomnay’s neglience. Id. at 892.

 

The Minnesota Supreme Court expressly rejected the test used by the court of appeals, stating:

 

The test is therefore not whether the language of an indemnity clause is “so broad” that it necessarily includes the indemnitee’s own negligence…. Rather, the proper test is whether the clause includes specific language that expressly shows, in clear and unequivocal language, that the parties intended the clause to obligate the indemnitor to indemnify the indemnitee for the indemnitee’s own negligence.

 

Dewitt, 910 N.W.2d at 417 (internal citations omitted) (emphasis in original).  Further, the court noted, “indemnity cannot be established by implication.” Id. at 418.

 

The court explained that the more broadly stated rule set forth in National Hydro Systems v. M.A. Mortenson Co., 529 N.W.2d 690 (Minn. 1995) and Yang v. Voyagaire Houseboats, Inc., 701 N.W.2d 783 (Minn. 2005) has never been actually applied by the court. Dewitt, 910 N.W.2d at 417–18. “The only rule that [the Minnesota Supreme Court] ha[s] applied has been whether the parties expressed their intent in ‘clear and unequivocal terms….’” Id. at 418 (emphasis in original). Applying the proper legal test to the indemnity clause before it, the court ultimately found the indemnity clause inapplicable, “because it d[id] not include express language that clearly and unequivocally show[ed] the parties’ intent for [the restaurant] to be financially responsible to [the rental company] for [the rental company’s] own negligence.” Id. at 420.

 

Takeaway: When determining whether an indemnity clause is enforceable under Minnesota law, the test is “whether the clause includes specific language that expressly shows, in clear and unequivocal language, that the parties intended the clause to obligate the indemnitor to indemnify the indemnitee for the indemnitee’s own negligence.” Id. at 417. If the contract language does not require a franchisee (for example) to specifically indemnify a franchisor against the franchisor’s own negligence, then, under Minnesota law, the franchisee will have no implied obligation to do so.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Minnesota’s Implied Covenant of Good Faith and Fair Dealing May Not be Contracted Away

In Northwest, Inc. v. Ginsberg, 572 U.S. 273 (2014), the United States Supreme Court held that Minnesota’s implied covenant of good faith and fair dealing may not be contracted away.

 

In that case, the respondent was a member of airline’s frequent flyer program. Id. at 277. Shortly after achieving the highest level available in the program, the airline cancelled respondent’s membership because of respondent’s alleged “abuse” of the program. Id. Respondent subsequently filed a class action arguing that the airline discontinued respondent’s membership as a “cost-cutting measure,” and that the airline violated the implied duty of good faith and fair dealing. Id. at 278. The United States District Court for the Southern District of California held that respondent’s claims were pre-empted by the Airline Deregulation Act of 1978. Id. at 279. The Ninth Circuit reversed, and the United States Supreme Court granted certiorari. Id.

 

On the implied covenant of good faith and fair dealing issue, the Court noted that some states employ this doctrine as a mechanism to ensure neither party “violate[s] community standards of decency, fairness, or reasonableness.” Id. at 286 (internal quotations omitted). The Court stated that “the implied covenant must be regarded as a state-imposed obligation.” Id. As such, “under Minnesota law parties cannot contract out of the covenant.” Id. at 287 (emphasis added). The Court later went on to say that a State’s “unwillingness to allow people to disclaim the obligation of good faith . . . shows that the obligation cannot be implied, but is law imposed.” Id. (internal citations omitted). Therefore, Minnesota state law on this point was inconsistent with federal law and the Airline Deregulation Act governed (not Minnesota law).

 

Takeaway: Disclaimers of the covenant of good faith and fair dealing may be void under Minnesota law. Franchise agreements, along with many other agreements, commonly contain such disclaimers. Minnesota franchise attorneys and franchisees should keep this in mind when thinking of potential claims against franchisors for unreasonable or unfair conduct on the part of the franchisor.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

 

 

What to do if faced with franchise agreement termination or non-renewal

For a franchisee, wrongful termination or non-renewal of a franchise agreement poses a serious threat to the business you’ve worked so hard to establish. It  can often occur unexpectedly and for seemingly no reason. However, depending on your unique circumstances, you may be protected from termination or non-renewal and able to contest any such situation. Here are some key points regarding franchise agreements and what you should do if you find yourself faced with either of these life-altering events.

Termination vs. non-renewal

Franchise agreement termination and non-renewal are ultimately two different methods of achieving the same result for the franchisor. In a termination, the franchisor cancels the agreement before the end of the contract term, while non-renewal sees the franchisor refusing to renew the agreement at the end of its term. From the franchisee’s perspective, the result is the same: you lose your business.

Why franchisors terminate or choose to not renew

There are many reasons a franchisor may choose to terminate or not renew an agreement with a franchisee. In most cases, this action is done for the franchisor’s own benefit without regard for the future of the franchisee. Here are some of questionable reasons a franchisor will terminate or refuse to renew an agreement:

  • To take over a lucrative business or territory for itself
  • Consolidate multiple franchise locations in one franchisee’s hands
  • Transfer the franchise to a favored successor

All of the above circumstances put the franchisee in a seemingly powerless position, but there may be certain rights that can prevent termination or non-renewal depending on your location, agreement terms, industry, and certain other factors.

Your protections

Some states have statutes  which state that a franchisor cannot terminate an agreement without “good cause” as defined by the statute. For example, a franchisor would need to be able to demonstrate that your franchise is not paying its royalties or advertising fees, or was somehow violating health and safety requirements in order to terminate the agreement. As long as the franchise is performing to a minimum standard, the agreement must remains intact.

The franchisor will sometimes try to achieve the end of the relationship by failing to renew the agreement at the end of its stated term.  A smaller number of states also prevent this from happening without “good cause”.  In these states, the franchisee  may continue to conduct business as long as the franchise is capably performing. “Good cause” could include such things as failure to comply with the material terms of the franchise agreement, failure to meet sales quotas, or failure to achieve  quality standards. In states with strong statutory protection against termination or nonrenewal, if you are living up to your agreement, the franchisor  has no legal grounds for terminating or refusing to renew your contract.

Know your agreement

Most Franchise Disclosure Documents state that the franchise agreement the franchisee must sign cannot be terminated without “good cause.”  However, as franchising has evolved over the years, the franchise agreements now impose so many obligations on franchisees and contain so many “automatic termination” triggers that it cannot really be said that an agreement cannot be terminated except for “good cause.”    Franchise agreements are drafted to provide franchisors with the widest possible leeway in franchisee relations.  The agreements now make it more likely the franchisee will breach some term of the agreement at some point, thus allowing the franchisor to lawfully terminate the agreement, or not renew it at the end of the term.

As stated above, some states require certain conditions for termination or non-renewal, while others require written notice within a certain time period prior to either action taking place.  Other states require an actual opportunity to cure a default prior to termination. You need to know whether you have renewal options/rightm and how to exercise them properly.  You also need to make sure you know the dates of your term and your actual substantive renewal rights. A failure to understand this information could result in the end of the term arriving without your noticing and your right to renew being lost. The language of your agreement will ultimately determine your protections and whether or not you are able to prevent termination and keep your business.

What to do in the face of termination or non-renewal

When faced with termination or non-renewal, you must take immediate action against it. From a legal standpoint, it is far easier to retain a franchise before the date of termination or nonrenewal than it is to ask a court to reinstate it once it has been lost.  Furthermore, if you do lose your franchise, you’ll also lose the income you’d need to help pay for the impending court case. Most franchise agreements also contain terms that prevent you from working in the same industry for a certain period of time following termination, hampering your ability to continue making a living either during or following the legal battle. Time is of the essence in effectively combating wrongful termination or non-renewal.

Save your franchise today

Dady & Gardner franchise attorneys have enjoyed many successes battling franchisors and suppliers over their attempts to terminate franchisees without good cause. We have helped many franchisees by winning court orders preventing termination and by winning very substantial monetary damages for terminations that were proven to be not justified. Contact us today to schedule a free consultation and prevent your own wrongful termination or non-renewal.  Or, if termination has already occurred, to determine whether you may be able to sue for damages based upon a wrongful termination or wrongful nonrenewal.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Buying a Franchise Business: Top Eleven Things to Look for in Franchise Agreements

December 11, 2018

 

Are you considering becoming a franchisee and operating a franchised business? Are you currently operating a franchised business? Are you looking at a franchise agreement and wondering what on earth you are reading? We at Dady & Gardner understand that franchise agreements are generally  quite confusing and hard to parse. That is why we have compiled a list of the top eleven things for you to look for in reviewing a potential franchise agreement or an existing agreement.  If your agreement has all, or almost all of the following things, you have a favorable franchise agreement:

 

  1. A good definition of the product line. Our clients like to know that, if they continue in the relationship, they will be able to handle the entire array of products and services currently being offered as well as all new and improved variations thereof.

 

  1. Protection against same-brand competition. Our clients like to know that, if they are investing their life’s savings, and their life’s work, in building demand for the products in their trade areas, they will be able to reap the benefits of those efforts without same-brand competition (competition by fellow franchisees in the same brand or competition from the franchisor for its own account).

 

  1. “Do the job, keep the line” duration. Our clients like to know that, if they do a good job building demand for the products in their trade areas, they will be able to continue as the only representatives of that product line in their respective trade areas so long as they continue to capably perform; and, if their supplier should ever believe they are not capably performing, they will not be abruptly terminated/not renewed, rather they will be given notice of perceived deficiencies and a reasonable opportunity to address them, with termination/nonrenewal to follow only if the perceived deficiencies are not adequately addressed (Typically, distributor and dealer agreements have “early out” provisions for dealers and distributors; but franchise agreements typically do not have “early out” provisions for franchisees—something that, increasingly, is of interest to franchisees as they face dramatic changes in their franchisor/franchisee relationships, with no way other than litigation to get out of good relationships that have turned bad).

 

  1. Franchisors’ obligations. Our clients like a reasonable recitation by the franchisor that it will in fact provide some significant and meaningful support to the franchisee, and that, if fees are charged, they can expect to receive fair value for the fees paid.

 

  1. Franchisees’ obligations. Our clients like a clear recitation of what is expected from them, and, if the franchisor reserves the right to make changes in the future in the franchisees’ performance obligations, those changes should be subject to a“reasonableness” covenant (and, ideally, significant changes should first be run through a franchisee board of advisors to confirm reasonableness before implementation).

 

  1. Fair opportunity for a good return on investment. Our clients like to know that, if they work hard and do a good job, they will be able to make a good living, and that, as their sales increase, their income will increase at least proportionately.

 

  1. Ability to sell related products. For our nonexclusive dealership and distributor clients (whether designated as “franchisees” or not), it is important for them to be able to sell complimentary products and services.

 

  1. Fair dispute resolution procedures. Our clients favor swift, evenhanded dispute resolution procedures. They typically do not oppose arbitration or attorneys’ fees provisions, provided the arbitration is in an acceptable venue, and the “attorneys’ fees provision” means that the prevailing party (not just the franchisor) gets attorneys’ fees from the other side when they win. They also don’t want to have to disclaim otherwise available statutory protection, or unduly limit their right to recover damages from their franchisor if it breaches its duties. Our clients typically don’t mind indemnifying the franchisor for the franchisee’s own mistakes, provided the franchisor is willing to make a reciprocal indemnification promise (and provided that neither indemnification promise is too broad).

 

  1. Right to sell/transfer. Our clients want the ability to sell the businesses which they have built for fair value, or transfer them to a son or daughter, without undue interference on the part of the franchisor (“Reasonable discretion” with respect to the franchisor’s right to approval is fine; arbitrary discretion is not). They don’t like franchisor rights of first refusal, as they tend to depress sale values. Our clients are becoming increasingly worried, in this day of mergers among competitors, and leveraged buyouts, about the franchisor’s unfettered right to assign its side of the contract.

 

  1. The right to do something else. If our clients are going to close or sell their businesses—particularly where the closings or sales are forced by the franchisor—our clients want the ability to make a living doing what they know (subject only to fair covenants against competition the actual buyers of their businesses might reasonably require).

 

  1. Good faith and fair dealing. Our clients like a written commitment from their franchisors that states what business people intuitively know, as follows:

“The parties to this relationship agree to deal with each other honestly, fairly, in good faith, and in a non-discriminatory, commercially reasonable manner.” (Who can be against that?!).

 

Are you thinking of purchasing a franchise? Our experienced attorneys regularly review franchise agreements in order to help preserve prospective franchisee’s rights early on. For more information regarding our franchise agreement review, contact one of our franchisee attorneys today.

 

*This blog item was revised adapted from “Michael Dady’s Top Ten List of Things to Look for in Franchise Agreements” Copyright © 2002 by J. Michael Dady, with the copyright author’s consent.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

 

 

Important Update: 7 Franchisors Now Obligated to Remove “No Poach” Clauses from Their Respective Franchise Agreements

On July 12, 2018, seven franchise systems entered into legally binding “assurances of discontinuance” with the Washington State Attorney General’s Office, which required them to remove “no poach” clauses (also known as “anti-poaching,” “non-solicitation,” and/or “no hire” clauses) from their franchise agreements on a national scale.  Those franchise systems are: Arby’s, Auntie Anne’s, Buffalo Wild Wings, Carl’s Jr., Cinnabon, Jimmy John’s, and McDonald’s.

 

While these “assurances” impose obligations upon those seven franchise systems, it is important for franchisees to know that they, too, will likely be impacted as follows:

 

  • If you are a franchisee of one of those seven franchise systems, and your franchised business is located in Washington state, your franchisor must remove the “no poach” clauses within 120 days of July 12, 2018;

 

  • If you are a franchisee of one of those seven franchise systems in any other state, Puerto Rico, or Washington D.C., your franchisor must remove the “no poach” clauses when your Franchise Agreement comes up for renewal; and

 

  • If you are a franchisee of one of those seven franchise systems, your franchisor must inform you of the specific requirements under the assurance of discontinuance.

 

What exactly does this mean for franchisees?

 

As a franchisee of any of those seven franchise systems, the “no poach” clause in your franchise agreement is likely no longer enforceable.  Depending on where your franchise business is located and where your franchise agreement is in its respective term, be aware that your franchise agreement may change to reflect the assurance of discontinuance agreed to by your franchisor.  As a result, keep in mind that neither you nor other same-brand franchisees in your area may be bound by the “no poach” clause, meaning there may be more freedom of movement of your employees and the employees of the other franchisees in your area.

 

*This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.