Question: I've been looking into a number of franchise companies. I'm finding that most of them seem to have had lawsuits with some of their franchisees. Is there a common denominator for why these suits occur and what can I do to avoid this if I become a franchisee?
Answer: The sad fact of life is that we live in a litigious society in which there are many people who believe that lawsuits are a fine method to solve disputes. I know a number of very good franchise attorneys and they all say that litigation should always be a last resort to conflict resolution. They also say that, in most franchise lawsuits, no one really emerges as a winner.
One party may prevail but the price of litigation, economic and otherwise, is usually much higher than either party anticipated.
The first cause is when one party to the franchise agreement believes the other is not doing whatever they agreed to do under the terms of the agreement. As an example of this, the franchisor may initiate litigation for failure to operate the business under the terms and conditions of the franchise agreement, for failing to pay ongoing fees or royalties as specified, for violating the territorial operating provisions of the agreement or for violating non-compete provisions.
A franchisee may initiate litigation alleging that the franchisor has failed to provide the agreed upon support in relation to any aspect of the initial business set up or has failed to live up to the terms of the agreement in relation to ongoing commitments. Franchisee lawsuits often allege that the franchisee was promised something verbally during the investigation of the opportunity that later did not materialize.
The second cause is when either party believes the other is conducting themselves in some unanticipated manner that is injurious to their business. As an example of this, a franchisee might initiate litigation if they believe that the franchisor is opening additional units so close to their unit that the new one will encroach on their business and harm it.
A franchisor may initiate litigation to stop an unanticipated action of the franchisee that they consider injurious to their brand such as hiring topless employees to help draw more customers into the business.
The second half of your question, what can you do to avoid ending up in litigation, is much more important than the first. There are three parts to this answer:
Research. First, make sure you conduct a complete and thorough investigation of any franchise opportunity before you invest. This sounds so simple as to be trite, but it is vitally important. Make sure you carefully review all disclosure documents and other material delivered to you by the franchisor. Pay special attention to any disclosed litigation history, including discussing the matters with both sides if they are willing to talk to you. Call the existing franchisees and ask them about their experiences resolving conflict with the franchisor. The really good franchise companies all want to avoid litigation if at all possible and you should get a great sense of their attitude in this area through these calls.
Get it in writing. Most good franchise companies will make you sign a compliance questionnaire before being accepted as a franchisee. Among other things, this questionnaire will always ask you if anyone promised you anything that varies in any way from the contract you are about to sign. If the answer is yes, do not execute the franchise agreement until you have that promise in writing. This is critical to making sure you don't end up in litigation later over whether any such promise existed or what exactly the promise was.
Accept responsibility. An absolute truth of franchising is that your success is not guaranteed. All good franchise systems have very low failure rates (another factor you'll discover in your research). If you get into a system where virtually everyone else is succeeding but you're not, before you start thinking about litigation - look in the mirror. Many people fall into a trap where when they experience difficulty, they start looking around for someone else to blame. Instead of doing this, get humble, ask for help, and follow the advice of the franchisor to the letter.
I can guarantee you that no good franchisor wants to be involved with you on the basis of either failure or litigation and will do everything they can to avoid both events, if at all possible. This needs to be your attitude as well.
Make sure you do your research and that you're getting into business with people who have these values as well. This is your best protection against ending up in litigation as a franchisee.
