One party to a business franchise allows another party to start another branch of their company. The second party is allowed to utilize the company’s:
- Marketing techniques;
- Materials; and
- Logos.
This is especially common for businesses such as fast-food chains and retail department stores. The parent company is called the franchisor, while the party starting the new branch is called the franchisee. The franchisee generally purchases rights to use the material and business processes provided by the franchisor.
Generally speaking, there are two types of franchises:
- Entire Business Format Franchise: The franchisee receives the use of the trademarks, reputation (good will), trade secrets, copyrights, and marketing and service information owned by the franchisor; or
- Product Distribution Franchise: The franchisor distributes a specific product to franchisees, such as vending machines.
Some questions to consider before purchasing a franchise include:
- What do other franchise owners have to say about the franchise?
- Does the franchise have name recognition, or a good reputation?
- What does the franchise offer to its franchisees in terms of service for problems and questions?
- Have there been any lawsuits against the franchiser filed by a franchisee? What was the outcome?
- What training is required by the franchisor?
- What are the prospective returns associated with having that franchise in your location?
Franchises are generally governed by a franchise agreement, which is the contract that establishes the relationship, rights, and obligations of both the franchisor and franchisee. The franchise agreement generally provides the following information:
- The franchise fee;
- Restrictions placed on the business management structure of the franchisee;
- The cost of inventory;
- The income that the franchisor requires, and when it will be calculated;
- Length of the agreement; and
- A termination clause that determines the events that will cause the franchisor to terminate the franchise agreement.
Many franchise companies are governed by the Federal Trade Commission (“FTC”). Some of what the FTC requires includes:
- Uniform Franchise Offering Circular: A franchise company is required to distribute a uniform franchise offering circular. This circular includes all legal and financial information about the franchise company, and must be provided to any individual who is interested in purchasing a franchise; and
- Other Disclosures: The franchise company must provide the franchise company’s brochure to the prospective franchisee, as well as all potential franchise agreements. These disclosures must be provided at either the time of the first meeting, before a fee is paid, or before the agreement is signed.
What Are Some Of The Most Common Disputes Associated With Franchises?
Business franchise opportunities are often considered to be a straight-forward and less complicated way of starting a business. This is because the business owner generally must only follow the guidelines that are provided by the franchisor. However, there are some disputes that are commonly associated with franchises.
Trademark and/or copyright violations, such as using the franchise logo for personal use, are common disputes associated with franchises. A trademark is a word, phrase, logo, or other symbol that is used to identify:
- A product;
- The source of a product; and
- The manufacturer or merchant. A trademark is generally used to distinguish one product and its manufacturer from another.
Federal law offers protections for a person’s trademark when someone uses it without permission. The trademark is protected from infringement, which occurs when someone uses the same or similar trademark for a similar good or service. The trademark is also protected from dilution, which occurs when someone uses a well-established trademark for a different service. In doing so, they either tarnish the trademark’s good name through the use, or weakens the consumer’s association between the trademark and the services.
Other examples of disputes that are commonly associated with business franchises include:
- Unauthorized disclosure of trade secrets;
- Failure to follow company policies, such as instituting new changes to business operations;
- False advertising or unfair business marketing practices; and
- Breach of business contracts, such as outsourcing the work without consent or hiring undocumented workers.
- Breach of contract is further discussed below.
Most franchise disputes involve the franchisee having strayed away from the guidelines and intentions of the franchising company. This is why it is imperative that both parties be clear regarding the limitation and scope of what the business owner can and cannot do.
However, some business franchise dispute cases may involve other types of violations. An example of this would be when the franchisee is suing the franchisor because they refuse to provide them with payments or benefits.
What Legal Remedies Are Available For Business Franchise Disputes?
Franchise disputes often involve some sort of breach of contract. A breach of contract may occur when one party to a valid contract fails to fulfill their side of the agreement. The terms of a contract instruct the parties regarding what they must do and how they should do it, in order to maintain their promise as detailed in the contract. If one party does not do what the contract instructs that they do, the non-breaching party will be allowed to take legal action such as filing a lawsuit against the breaching party in court.
Generally speaking, there are two types of remedies that a party can receive for breach of contract. Legal remedies refer to monetary award damages, such as compensatory, nominal, and liquidated damages. Equitable remedies are issued by a court when a legal remedy will not sufficiently make up for the damage that was done. This includes remedies such as specific performance, reformation, or rescission.
The difference between the two categories of remedies that may be awarded will largely determine what the non-breaching party can expect to receive, as well as what the breaching party may be required to do as punishment.
An example of this would be when a person who is selling their house refuses to hand over the keys and property to the buyer at their closing. The buyer may sue for specific performance, meaning that the court can force the seller to give up their property to the buyer.
The type of legal remedy that is awarded will also determine how to calculate the amount of damages that the plaintiff should receive. An example of this would be if a buyer has already paid for certain items to be shipped to them, but the company who owns the products never sends the order and keeps their money. The buyer can sue for breach of contract and collect compensatory damages from the seller, or they could seek restitution for the missing.
Other examples of damages include:
- Expectation;
- Reliance;
- Consequential; and
- Punitive damages.
It is important to note that punitive damages are generally reserved for especially egregious cases. Punitive damages are meant to punish and deter the defendant and others from similar behavior in the future.
A franchisee may be required to pay compensation for losses caused by disclosing trade secrets. Alternatively, the franchising company may be required to pay losses associated with withheld wages or benefits. Other remedies may include an injunction that prohibits certain behavior, or an injunction that requires one of the parties to transfer property rights to the other.
Do I Need A Lawyer For Help With Business Franchise Disputes?
If you need help filing a claim for a business franchise dispute, you should hire a business lawyer. Your attorney can help you understand your legal rights and options according to your state’s specific business laws. An experienced attorney will also be able to represent you in court, as needed, should any disputes result in legal action.
