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Franchising From the Franchisee Lawyer Perspective

Imagine a client walks into your office wanting to get out of a contractual arrangement that they entered into three years ago. They explain that they are losing money, and that the contract makes no sense for them any longer.

In probing them, and reading the contract, you learn your client’s business is essentially controlled by the other party. The contract dictates the most basic aspects of the business—the hours of operation and the training requirements of the employees. It gives the other party approval rights over who the manager will be; the layout and appearance of the location; and controls what products and services your client can sell. Digging further you find that your client had to buy all of the original FF&E from the other party, and once open, is required to continue buying all inventory from the other party and its wholly owned affiliates, all at prices that are above what your client could get on the street for the exact same products. And, beyond controlling the price of goods (by being the only seller of those goods your client is allowed to purchase from), the contract also allows the other party to control the retail price of the goods and services your client may offer as well. In sum, your client has little to no control of their own profit margin.

The financial terms surprise you. Your client paid $75,000 to be in this one-sided relationship, and continues to pay 8 percent of their gross revenue to stay in the relationship, irrespective of whether they are making any money.

The boilerplate terms are no better. Your client is required to indemnify the other party for anything that happens at the location, even if it is the fault of the other party (and the indemnification is not reciprocal). The contract expressly disclaims any obligation the other party has to act in good faith. The dispute resolution provisions give the other party the right to bring injunctions, but your client does not have that right. Your client’s right to bring a claim is subject to a one-year statute of limitations, but there are no such limits on the other side. Venue and choice of law both favor the other party. And the attorney fee provision is also unilateral; the other party can get theirs if they win, but your client has no such stated right.

Finally, getting to the reason your client came in, you turn to the termination provisions. The agreement, which is for a 20-year term, while allowing the other side to terminate, inexplicably gives your client no right to terminate for any reason. And, if your client “breaches” by terminating because…read more

 

*NOTICE: This article 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 article.

J. Michael Dady Discusses The Legal Side of Franchising With Minnesota Business Magazine

J. Michael Dady Discusses The Legal Side of Franchising With Minnesota Business Magazine

Dady & Gardner founder J. Michael Dady recently sat down with Minnesota Business Magazine to discuss the fine art of fine print in franchise law.

“Buying a franchise is way less complicated than starting your own business from scratch, right? You just find a successful concept, slap your signature on a boilerplate contract and start printing money.

Well…no. That’s not how it works.

Franchises fail less frequently than novel concepts, so they’re “safer” in that sense. That doesn’t mean they’re easy to run or manage. Legally speaking, buying and operating a franchise is more complex — and fraught with greater peril — than pursuing an original idea.”

Read the rest of the article here.

Battle over the Franchisor Business Judgment Rule and the Path to Peace

Battle over the Franchisor Business Judgment Rule and the Path to Peace

Brian B. Schnell and Ronald K. Gardner, Jr.

Brian Schnell

In successful franchise systems, both the franchisor and the franchisees obsess over the franchisees’ bottom line. Healthy franchise systems also see the franchisor properly balancing its own interests with the interests of the franchisees and the system as a whole. The franchisor’s role in growing, evolving, and protecting the brand and system is key to this balancing act. If the franchisor fulfills its role, the franchise system is better able to compete effectively against competition, including other franchise systems and non-franchise businesses. But when courts are forced to evaluate the decisions the franchisor makes in attempting this balance, the question becomes by what standard should a franchisor’s decisions be judged?

In many instances, the implied covenant of good faith and fair dealing is used as the yardstick, particularly in cases where the dispute involves a franchisor’s discretionary decision. However, in recent years, many franchisors have started incorporating the business judgment rule into their franchise agreements. From the franchisee’s perspective, franchisors are using the business judgment rule as a “substitute” for the implied covenant. From the franchisor’s perspective, the business judgment rule is a standard for resolving whether a franchisor has acted reasonably and in good faith. This article sets out to explore whether the implied covenant, the business judgment rule, or some other standard is appropriate when the issue of franchisor discretion arises. The reader will find that while our analysis and preliminary conclusions, written from the point of view of both experienced franchisor and franchisee counsel, are polar opposites, our final conclusions are remarkably similar. Ronald Gardner

The franchise agreement is the key document that outlines the roles and responsibilities of the franchisor and franchisee. It also shapes how the franchise system responds to changes in the business environment and other competitive threats. No franchise system will be sustainable without effectively responding to customers’ ever-changing demands. In order to effectively implement change and maintain sustainability in the hearts, minds, and pocketbooks of customers, a franchisor must (1) focus on customer-centric initiatives and the bottom line of its franchisees; (2) instill in its franchisees an undying devotion to the brand so they have the same customer-centric focus; (3) empower its franchisees through collaboration on key strategic and customer-centric initiatives; and (4) create a strong franchise agreement that allows it to fulfill its role and responsibility to grow, protect, and evolve the franchise system and brand.

An important check on the misuse of authority in the franchise relationship has typically been the covenant of good faith and fair dealing. More specifically, within this context of system change or any other decision a franchisor makes, when a franchisee disagrees with the franchisor, the franchisee often raises a good faith and fair dealing claim. Good faith and fair dealing generally require that when a contract grants discretion to one party, that party is required to exercise that discretion in a fair and reasonable manner, consistent with the reasonable expectations of the parties.1

In recent years, however, franchisors have sought to replace or frame the good faith and fair dealing discretionary standard with a corporate law doctrine: the business judgment rule.2 By contractually replacing or defining good faith and fair dealing with the business judgment rule, a franchisor may exercise its discretion on the basis of its “reasonable business judgment.” Often, “reasonable business judgment” provisions also explicitly state that the franchisor meets the standard, even if other reasonable or arguably preferable alternatives are available, if the decision or action is intended to promote or benefit the system generally, even if it also promotes the franchisor’s financial or other individual interests.

Here is a typical business judgment rule provision that may be incorporated into a franchise agreement:

Our Reasonable Business Judgment. Whenever we reserve discretion in a particular area or where we agree to exercise our rights reasonably or in good faith, we will satisfy our obligations whenever we exercise reasonable business judgment in making our decision or exercising our rights. Our decisions or actions will be deemed to be the result of reasonable business judgment, even if other reasonable or even arguably preferable alternatives are available, if our decision or action is intended, in whole or significant part, to promote or benefit the franchise system generally, even if the decision or action also promotes our financial or other individual interest. Examples of items that will promote or benefit the franchise system include, without limitation, enhancing the value of the trademarks, improving customer service and satisfaction, improving product quality, improving uniformity, enhancing or encouraging modernization, and improving the competitive position of the franchise system.

The introduction of the “reasonable business judgment” standard of discretion into the franchise arena significantly impacts the franchisor/franchisee relationship. While franchisors have already introduced the “reasonable business judgment” standard into franchise agreements and discussion on the subject began over a decade ago,3 there is a notable dearth of case law discussing this particular standard of discretion in the franchise context.4

In light of the lack of case law on the subject and the seemingly increased use of the business judgment rule in franchise agreements, this article will provide perspective, from the standpoints of both franchisor and franchisee, on the appropriateness of the business judgment rule as a discretionary standard for franchisors as compared to the application of the covenant of good faith and fair dealing.

This article begins with a discussion of the development of the business judgment rule and proceeds to discuss the franchisor and the franchisee’s perspective as to its application in the franchise context. Finally, this article concludes with the authors’ shared conclusions that aim to benefit franchisors and franchisees alike.

____________________________________________________________________

1. RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981).
2. The authors note that within the last few years a significant majority of the franchise agreements drafted by franchisor counsel or reviewed by franchisee counsel include some form of the business judgment rule.
3. See, e.g., Jeffrey C. Selman, Applying the Business Judgment Rule to the Franchise Relationship, 19 FRANCHISE L.J. 111 (2000).
4. The lack of case law is likely attributable, at least in part, to the prevalence and uniform enforcement of private arbitration agreements and settlements. To date, In re Sizzler Restaurants International, Inc., 225 B.R. 466, 474 (Bankr. C.D. Cal. 1998), is the most notable decision discussing the business judgment rule in the franchise context. See infra notes 50–53 and accompanying text for further discussion of the Sizzler decision.

______________________________________________________________________

Brian B. Schnell (brian.schnell@faegrebd.com) is a partner in the Minneapolis office of Faegre Baker Daniels LLP. Ronald K. Gardner, Jr. (rkgardner@dadygardner.com) is the managing partner of Dady & Gardner, P.A. in Minneapolis. The authors would like to express their thanks to Andrew Malzahn, an associate with Dady & Gardner.

Dady & Gardner, P.A., recognized as “Band 1” franchisee law firm by Chambers U.S.A

We are delighted to announce that our firm, Dady & Gardner, P.A., has once again been recognized as the only “Band 1” franchisee law firm in America by Chambers U.S.A.

“Band 1” represents the very best ranking available from Chambers U.S.A., which bases its rankings on its nationwide survey of franchise lawyers.  Our named partners, Michael Dady and Ron Gardner, have also been recognized, once again, as two of only three “Band 1” franchisee lawyers in the United States.  But our recognition doesn’t stop there.  Of the 14 franchisee lawyers recognized by Chambers U.S.A. this year, FIVE of them are here at Dady & Gardner, P.A.  No other firm has more than 2 recognized lawyers on the list!

Here is what Chambers U.S.A. has to say about our “Notable Practitioners.”

Michael Dady is a “strong advocate” who is always “extremely well prepared and knowledgeable” market sources say.  He has an excellent track record in the courtroom.

Ronald Gardner advises franchisees of all sizes on contractual negotiations and disputes.  Market sources say he is “an outstanding lawyer“.

Jeffery Haff is “practical,” “engaging” and “really understands the nitty gritty of arguments” sources say.  He represents franchisees, distributors and dealers nationwide on a range of cases.

Scott Korzenowski is respected for his knowledgeable representation of franchisees and dealers in litigation and arbitration proceedings.  Clients praise his responsiveness.

Kristy Miamen has a good and growing practice and is lauded by clients as “very detail-oriented and very well prepared.”  She represents franchisees, dealers and distributors in disputes with suppliers and franchisors.

We are proud to receive this ranking, but even more proud to serve our deserving franchisee and dealer clients.  It’s something we have done every day for over twenty years, and something we look forward to continue doing as far as the eye can see.

Chambers USA Top Ranked Lawyer Minnesota

Find us on Chambers USA

“The Good, the Bad, and the Ugly – Franchise Agreement and FDD Provisions” an article by J. Michael Dady

“The Good, the Bad, and the Ugly – Franchise Agreement and FDD Provisions” an article by J. Michael Dady

Michael Dady discusses Franchisee’s rights and limitations of the agreement.

 

1. The Duration of the Relationship

  • The Good: Consecutive, unlimited renewal terms, with renewal agreements that do not materially differ over time.
  • The Bad: Limited renewal rights, expressly allowing material, adverse changes to renewal agreements.
  • The Ugly: No renewal rights, with franchisor claiming the right to acquire the franchisee’s business at the end of the term for the fair market value of the hard assets… “

 

Read the full outline here: The Good the Bad and the Ugly-Franchise Agreement and FDD Provisions One Franchisee Lawyer’s Perspective

Ron Gardner from Dady & Gardner has been featured in the Forbes article “How Franchisors Squeeze Money From Their Franchisees.”

Ron Gardner from Dady & Gardner has been featured in the Forbes article “How Franchisors Squeeze Money From Their Franchisees.”

Ron Gardner continues to help people by sharing his insight on how Franchisors are able to take money from Franchisees.

“Franchises seem simple enough—a company like McDonalds, Anytime Fitness or Supercuts sells the rights to open one of its businesses to an enterprising individual wishing to run one. That individual gets to leverage the franchise’s name-recognition and reputation to attract customers while taking advantage of the predetermined business model. All in exchange for startup payment and a cut of the till (generally between 3% to 10% of gross sales, depending on the franchise)…”

You can find the full article at: http://www.forbes.com/sites/karstenstrauss/2014/05/27/how-franchisors-squeeze-money-from-their-franchisees/

Dady & Gardner, PA Rated #1 Once Again By Chambers USA 2012

Dady & Gardner, PA Rated #1 Once Again By Chambers USA 2012

Dady & Gardner, PA is proud to announce that Chambers USA has once again recognized it as the top law firm in the United States in the field of Franchisee Law.  Chambers states, “This impressive firm is singled out as the leader in the market for franchisee work.”   Dady & Gardner, PA is the only Tier-1 ranked law firm in the United States that represents franchisees only.

Chambers USA:  America’s Leading Lawyers for Business is an independent and objective annual publication that is among the most reputable law firm directories in the world.  Chambers employs a team of full-time researchers who interview thousands of lawyers and their clients around the world in order to identify the world’s leading lawyers and law firms, which is determined based on those which perform best according to the criteria most valued by clients.

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Firm Celebrates by Building a House

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Firm Celebrates by Building a House

As the Minneapolis law firm Dady & Gardner approached its 10-year anniversary, the firm decided to forgo a big party and instead it put its year-end bonuses into building a five-bedroom house with Habitat for Humanity. The firm spent $60,000 on building materials and 500 hours on the project.

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 benefited the firm 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 firm’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)