Can State Law Trump Your Franchise Agreement?
Before entering into a franchise agreement, it is absolutely essential for prospective franchisees to have the terms reviewed and negotiated by an experienced franchise attorney.
A franchise is a long-term relationship, and franchisees generally have few options (if any) for terminating prior to the stipulated expiration date. As a result, franchisees who do not protect themselves at the outset by negotiating for more-favorable terms (or at least making an informed decision) will often face unexpected and costly surprises for years to come.
That said, for franchisees facing disputes with their franchisors, it is critical not to lose sight of the fact that several states have enacted laws that are specifically intended to help protect franchisees’ investments in their businesses. When the terms of a franchise agreement are inconsistent with one of these laws, the law will control.
Protections in State Franchise Relationship Laws
Currently, 17 states have franchise relationship laws in place which provide protections that are generally greater than those afforded to franchisees in franchise agreements. While each state’s law is unique, the following are among the more-common provisions designed to help protect franchisees:
• “Good Cause” Termination – Several states’ franchise relationship laws include some variation of a requirement for the franchisor have “good cause” in order to terminate a franchise. Some states, including Nebraska, New Jersey, Wisconsin and Minnesota, use the term, “good faith,” while Delaware’s law prohibits “unjust” terminations.
• Opportunity to Cure – Even when a franchisor has “good cause” to terminate, in some states it must still provide the franchisee with advance notice and an opportunity to cure (in other words, to eliminate the “good cause”).
• Limited Conditions for Renewal – While many states’ non-renewal restrictions provide only minimal protections (which franchisors can frequently overcome by including certain language in their franchise agreements), there are some notable exceptions. For example, in Wisconsin, franchisors cannot deny renewal based upon a franchisee’s refusal to sign a new franchise agreement that “substantially changes the competitive circumstances . . . without good cause.”
• Limited Conditions for Transfer – Some states’ franchise relationship laws include “good cause” limitations on transfer restrictions as well. Although, here too, franchisors have been able to use a variety of loopholes to limit their effectiveness. As a result, generally speaking, as long as there is a legitimate business reason for imposing a particular transfer restriction, the franchisor’s decision to deny a transfer will be upheld.
• Remedies – What happens if a franchisor terminates a franchise or refuses to renew a franchise in violation of an applicable franchise relationship law? Once again, the answer varies from state to state. In some states, the franchisor is simply required to repurchase the franchisee’s inventory, while in others it will also be required to purchase the franchisee’s goodwill. Lost profits, expenses, legal fees and other damages are available under certain states’ laws as well.
So, can state law trump your franchise agreement? Potentially, yes. As discussed above, the answer will depend on a number of factors, including which state’s laws govern, the specific issue at hand and possibly even the language in the agreement.
ABOUT THE AUTHOR: Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchise lawyer with more than 30 years’ experience representing franchisees and dealers. He is the founder of the Goldstein Law Firm, which was recently named Finance Monthly’s 2016 Franchise Law Firm of the Year.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.