USA Trends and Developments Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison D. Marzocco, Rosen Karol Salis, PLLC
ney’s fees as well. These state-specific remedies can give a franchisee more leverage than the federal rule alone, as the FTC’s Franchise Rule does not allow an individual franchisee to sue directly. State relationship laws About half of US states regulate aspects of the fran - chisor–franchisee relationship directly, including rights regarding termination, encroachment and fair dealing, regardless of what the agreement says, and many give franchisees a private right to sue. State unfair trade practices statutes Many states have their own Little FTC Acts allowing franchisees to sue directly, sometimes for enhanced damages and attorney’s fees. Franchisee associations Many relationship laws protect a franchisee’s right to join or form an independent association without retali - ation, and collective leverage can sometimes accom - plish what an individual franchisee cannot, as the rela - tive bargaining power between individual franchisees and franchisors often puts individual franchisees at a disadvantage. What Happens If My Franchise Fails? Franchise failure through underperformance, default or closure sets off a series of contractual and legal consequences worth reviewing and understanding For a default, often but not always relating to the non- payment of fees, most agreements and many state relationship laws require written notice and a chance to cure – often 60 days or more, except for serious or incurable defaults such as health and safety violations, trade mark and IP-related violations, or abandonment of the franchise, which can permit faster termination. The franchisor’s step-in and repurchase (buy- back) rights Most agreements provide the franchisor with a right to take over operations temporarily by managing the location for a fee, or after termination, particularly where a franchisee is failing financially or has aban - doned the business or committed a serious default before financial distress hits. Termination and cure periods
of its franchise agreement. Termination often, but not always, comes with a franchisor option (not an obliga - tion) to purchase a part or all of the business’s assets, frequently using a formula well below fair going-con - cern value. Some state relationship laws improve on this – for example, requiring the repurchase of assets, inventory or goodwill at fair market value – but avail - able protection varies considerably from state to state. Bankruptcy A struggling franchisee’s bankruptcy filing generally triggers an automatic stay that halts the franchisor’s enforcement efforts. In a Chapter 11 reorganisation, a franchisee that was not in default at filing may be able to keep, or assume, its franchise agreement and lease, while one that was in default faces a harder path, typically needing to cure and demonstrate that it can perform going forward. Personal exposure Personal guaranties typically survive the underlying business, so closing or losing a struggling location does not necessarily end an owner’s personal liability for its debts. Guaranties should be carefully negoti - ated and limited. Can I Run My Franchise “My Own Way”? Franchise systems exist because of the need to have consistency across a franchise brand. While franchisees are owned and operated independently, franchise ownership inherently involves the franchisee surrendering some independence with respect to how they operate their businesses. The following are sev - eral examples of how a franchisee is limited in how it Franchisees cannot alter the design, signage or store layout without franchisor permission, which is not eas - ily obtained. Pricing and suppliers Minimum resale pricing and required supplier provi - sions can limit commercial flexibility, subject to anti - trust and state law limits. can operate independently. Mandatory brand standards
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