Archives for: Franchise Law News

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)

Tension Rules Franchisor-Franchisee Relationships

Attorney J. Michael Dady claims that restaurant chain discounting ruins franchisees’ profits and insists more disclosure would keep franchisors honest.

 

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.