If you watch the law blogs, you’ll see that giant companies like Google, Walmart, and Apple spend a lot of time in court. It should come as no surprise that large franchise corporations also spend a lot of time in court, often being sued by their own franchisees. But a new decision handed down in the U.S. Court of Appeals confirms what you’ve probably heard before: be sure of your mind before you sign.
In the case we’re referencing, franchisees sued franchisors with some of the most common complaints franchisees have:
- They spent more than they expected to get their franchises set up.
- They didn’t like the required investment in a marketing fund.
- There were changes in the system.
The franchisor provided an estimate of start up costs, with the phrase “a franchisee’s costs will depend on a number of factors including local economic and market conditions.” The franchisees were put in touch with other franchisees and had the chance to ask about other franchisees’ experiences. The court decided that the franchisors were not responsible for anything requiring a prediction about the future, and that they had not been dishonest in providing estimates, especially with the caveat they offered.
The franchisees didn’t just complain about the marketing fund, they also demanded an audited report on the marketing fund. However, for this item and for the complaints the franchisees had about changes in the system, the court found that nothing in the franchisor’s behavior was in conflict with the terms of the contract. The court didn’t say anything for or against the behavior of the franchisor in these matters; their decisions were based simply on whether the franchisor did anything that was against the terms of the Franchise Agreement.
There are logical reasons for a franchisor to make changes in a system. Since franchisors tend to add franchisees on a regular basis, there is no point at which they can make a change without affecting current franchisees. Imagine that the company updates its signage. There will inevitably be franchisees who are using the old signage and have to change to the new. The only way to avoid it would be for the franchisor never to change the signage — and franchisees naturally want franchisors to keep up to date. You want your franchisor to appeal to new customers as well as the faithful customers they already have.
Marketing fees are often controversial. While franchisees may appreciate the benefit of getting national advertising they would not be able to afford on their own, they may also have their own ideas about how to use their marketing budgets. Sometimes franchisees are also required to spend a certain percentage of revenue on local advertising, as well. Many people dislike being told how to spend their money.
However much we may sympathize with the franchisees in this case, the Court of Appeals agreed with the initial court ruling in the case: they upheld the agreement the parties had signed. A contract is binding. If you have any uncertainties, consult a franchise lawyer, talk with your franchisor, and try to work things out. If you still don’t agree, don’t sign.
