Can A Franchisee Sue A Franchisor?

Whether or not you can sue the franchisor as a franchisee is a loaded question. The law lets you sue anyone for anything at any time but doesn’t guarantee a win. So, when the question is “can a franchisee sue a franchisor?”, the answer is yes.

However, the task is not an easy one. There is a myriad of risks involved when you are planning to sue a franchisor. Before you take any legal action against your franchisor here are some important things to know:

Common reasons for Litigation in franchising

Franchise litigation

Two of the most common causes of litigations are:

  • When either party believes the other is not following the terms of the agreement

A franchisor can initiate the litigation when he feels the business operations are violating the terms and conditions of the agreement, or the monthly payments and royalties are not in time.

In the case of a franchisee, the litigation against the franchisor can be due to the non-fulfillment of a promise made verbally but not materialized. If the franchisee feels the franchisor did not provide the support promised during the initial set up of the business or failed to live up to the terms mentioned in the agreement related to the ongoing commitments.

  • When the behavior of the other party is unanticipated and might be injurious to the business

If a franchisor opens another unit close to the location of the franchisee’s business, then litigation may be initiated against the franchisor. The franchisee will naturally feel threatened with a shop close to his area and it might bring down his sales.

The franchisor can take action to stop any unanticipated action of the franchisee that may harm the brand image.

When to take legal action against your Franchisor?

Full-blown courtroom litigation is always considered the last option. There are multiple alternatives which can be cost-effective as well as mutually beneficial for the franchisee and the franchisor. Hence, legal action should be taken only when there is no other way left to resolve the dispute.

As a dissatisfied franchisee, you have a choice between ADR or Alternative Dispute Resolution and litigation. Take time to understand all options you have before taking a final decision.

Here are some grounds on which a franchisee can opt for legal action against their franchisors:

  • State and federal disclosure violations which include incomplete as well as inaccurate information in the Franchise Disclosure Document (FDD).
  • Illegal price-fixing arrangements or other illegal restrictions being imposed.
  • Not receiving a proper refusal or consent for renewal or transfer of the franchised outlet.
  • Any practice of discrimination and selective enforcement of regulations.
  • Any franchise agreement violation or territory encroachment.

Many franchises have agreements with the provision of mandatory arbitration. If such a clause is present in your agreement you will have to first assess if the clause is legally enforceable and what are the requirements for asserting the legal rights.

Provisions in Agreement to resolve a dispute

The agreement usually contains multiple options for resolving a dispute. Most of these are franchisor friendly and knowing about them is important for every franchisee.

Mandatory mediation

The claim to mediation should come before you sue the franchisor in the court. In many cases, a mediation claim is mandatory even before the arbitration. The mediation process involves the two parties at dispute and a neutral third party. It is an attempt to amicably resolve the issues without having to seek the court’s help.

Mandatory Arbitration

This is different from mediation. Here the third party, also known as the arbitrator decides on behalf of both franchisee and franchisor to solve the problem. The decision may or may not be binding. Usually, the company calls for a panel of three to four people or more arbitrators to handle the problem.

The agreements may also have information regarding ADR cost splitting where the costs of mediation or arbitration should be shared by franchisee and franchisor. Some agreements require the prevailing party to pay the attorney’s fee for the non-prevailing party. Irrespective of the result of the litigation, this can be a huge cost to bear. The geographical location of mediation, arbitration, or litigation may also be mentioned in the franchise agreement.

Risks in Suing a franchisor

Suing your franchisor is not an easy step to take and the risks involved are something you should know:

  • Limitation Periods

These are the deadlines within which a franchisee has the right to assert claims against the franchisor. The period is decided by the organization or institution. It usually ranges from 6 months to one year. The deadline is set based on the type of claim and the state law that is applicable. The franchisors often set this limit to one year, which implies the suit can be brought in one year from the date of the wrongful conduct. The courts will enforce these limitation periods on the franchisee. Hence the franchisee should be well aware of the limitation periods if he feels the franchisor has wronged him in any way.

  • Counterclaims

The franchisee often forgets the fact that when they assert claims against the franchisor, counterclaims can be asserted by the franchisor on the franchisee. Franchisees should also be aware that once the lawsuit has been filed, the proceedings cannot be stopped. Whether in court or arbitration, franchisors will assert counterclaims as a form of leverage. The agreement also plays a major role in litigation or arbitration. Since the agreement is written by the franchisor’s lawyer, most terms are written to provide maximum protection to the franchisor and more leverage over the franchisee. Even after doing everything perfectly, the franchisors often point out something unlawful in the litigation.

  • Expensive Arbitrations

Arbitration can be seen as a private form of litigation where you do not take the matter to the court and try to solve it within the organization. However, this can be a costly affair when compared to litigation. One needs to pay the arbitration organization for administering the process and the arbitrator also charges an hourly fee. Courts also enforce the arbitration provisions in most cases. As a franchisee, if you feel the need to sue the franchisor the do consider the costs that you have bear during the process.

  • Length, cost, and uncertainty

The duration and cost of litigation or arbitration can be much more than expected. During the litigation, the franchisee needs to operate the franchise failing which the franchisor can consider it as a breach of the agreement. The lengthier the case gets; the cost also increases. Another thing about litigations is uncertainty. When matters have been taken to the court it is not in the hands of the two parties or the legal team. The judge might not see the things in your way. Do a proper estimation of the time and money you can afford to spend.

Alternatives to litigation

Litigation and arbitration can be a powerful way for the franchisee to correct the wrongs done by the franchisor. However, cost and duration can be draining. Suing the franchisor might not give you the result you expect and there are high chances that you end up losing your time as well as money. So, here are a few ways to avoid getting into any legal matter:

  • Sell the franchise

Find a third party approved by the franchisor and sell the franchise at the best price possible. However, the business can be sold easily only if is running profitably. The franchisee might crystallize a loss in this case but the debt might be a manageable one.

  • Mediation

As explained in the previous section, mediation can be a peaceful and cost-effective way of resolving an issue. Mediation is the best way to come out with practical and compromised results. If a direct discussion fails to resolve the issue, get a mediator for help. If the mediation process is not able to solve the dispute, then go for other options.

  • Walking out

This can sound the simplest way out but the franchisor might assert a claim for breach of the agreement on the franchisee. This might hamper the future business opportunity of the franchisee with other brands in the market. The better option is to leave once the term of the agreement is over.

Three things to avoid getting into litigation

  • Research

If you don’t want to waste your money or time in legal cases, the first step is to do proper research before you purchase any franchise. Find out all information about their terms and conditions before you commit to anything.

  • Get in writing

Whatever the franchisor promises you in the initial discussion, make sure to have all of it in writing to avoid disputes in the future.

  • Accept responsibility

Before you decide to sue your franchisor, find out how other franchisees are doing. If you are the only one unsuccessful in this business then the fault might lie in you. Your success is something that you are responsible for. Avoid blaming the franchise agreement for your failures.