Know Your Legal Rights

By Robert Zarco, Esq., of Zarco & Associates, P.A.

Franchise Equity Forum, Fall 1995

 The franchisor/franchisee relationship is unique from every other commercial contractual relationship because it contemplates long-term interdependent reliance on good faith and fair dealing.  The spirit of this relationship is often characterized as a "partnership" or a "marriage" where both parties are expected to look out for the best interests of each other.

Although there is something special about the franchisor/franchisee relationship that is different from typical commercial relationship, the courts have not been too eager to recognize any difference.  When business is going well, people tend to ignore (or plan for) the possibility that problems might someday arise between the franchisor and franchisee.  However, problems do occasionally arise which sometimes lead to the filing of a lawsuit.

Although no franchisee wishes to concern himself with the possibility of entering into a legal battle with their franchisor, the possibility does exist.  Accordingly, you should be aware of your legal rights and the legal strategies for: (1) resolving the problem; (2) avoiding termination: and (3) recovering compensation in the event the franchisor has acted in a manner that has caused injury to your franchise or business.

If any problems begin to arise between you and your franchisor, you should not hesitate to immediately contact an attorney knowledgeable in the are of franchise law.  Oftentimes when problems arise, disbelief prevents you from accurately assessing the situation.

This is when you most need to consider seeking competent legal advice to plan a future course of action.  The worst possible thing a franchisee can do when problems arise, is nothing.  Too often, when problems arise (due either to the external business environment or some act of the franchisor), the franchisee takes on a feeling of helplessness and disbelief.  These feelings of helplessness and disbelief often lead to inaction and the loss of valuable rights.  If the franchisor wishes to act quickly, the franchisee can lose everything with in a matter of days.  Accordingly once a problem begins to rise, it is extremely important that the franchisee seek competent legal advice from professionals knowledgeable in the field of franchise law.

If you have fallen behind on your royalty payments and/or other sums due to the franchisor, be wary of the potential of receiving a default notice.  Your franchise agreement is a contract and you must always expect the franchisor will act in accordance with that contract, including terminating your franchise.  There are, however, ways of avoiding termination.  First, the franchisee can negotiate a written solution to the problem, i.e., a written extension f the due date and written payoff schedule.  However, be careful of oral promises and requests that you execute a release.  If you are terminated, it will be difficult to prove the oral promises and most franchise agreements expressly exclude any reliance on oral promises or representations.

Sometimes, as part of negotiating a problem (or in granting a franchisee a franchise revewal0, the franchisor will request that the franchisee execute a release of claims.  This release usually states that the franchisee agrees to "release" (i.e., give up) all rights to sue the franchisor for past acts which may have caused harm to the franchisee. The release will usually include all acts of the franchisor which the franchisee has any knowledge of.  The release will prevent you from suing the franchisor over any act contemplated by the release.  Thus, if you execute a release, you may be giving away valuable legal rights.  For instance, if sales at your franchise are depressed due to encroachment, signing a release may prevent you from ever recovering from the franchisor for any damage (present or future) caused by the encroachment.  Thus, if your financial problems are caused by something which the franchisor has done, signing a release may act to prevent you from ever recovering for the harm caused to you by the franchisor.

The second strategy for avoiding termination is to file for bankruptcy protection.  If the franchisor has sent you a notice of default (i.e., a notice stating that you are in breach of the franchise agreement and providing you a limited number of days in which to cure), the filing of bankruptcy will cause to prevent the franchisor from declaring your franchise terminated.  Any clauses in your franchise agreement which purport to terminate the franchise upon the filing of bankruptcy are simply not recognized by the law as being enforceable.  Thus, the filing of bankruptcy will not cause your franchise agreement to be terminated.  In fact, if the franchisor is about to terminate your franchise, bankruptcy is one of the few ways of saving your franchise.  Although bankruptcy may seem an undesirable option, it is far more desirable than losing your franchise.  Once the franchisor has set you a notice of termination, it is extremely difficult to save the franchise. More likely than not, once the franchisor has declared your franchise termination, you will be faced almost immediately with a court hearing to stop you from using the franchisor's trademarks (i.e., signs, packaging, manuals, etc.).  For most franchisees, these means the end of their business and all that will remain is any potential counter-lawsuit you might have for wrongful termination and/or other wrongful acts of the franchisor.  Accordingly, for some, bankruptcy is the only way to save their franchise, since it allows you to reorganize your debts and continue in lawful operation of the business.  Once in bankruptcy, you will have the right to continue operating the franchise under the protection of the bankruptcy court and you may freely sue the franchisor for any wrongful acts which the franchisor may have committed (i.e., encroachment, misrepresentation, etc.).  As a word of caution, before considering any aspect of bankruptcy, you should first consult with a bankruptcy attorney and an attorney knowledgeable in the field of franchise litigation.

Sine no-0ne can predict the future, you should devote time in the present to prepare yourself for any potential problems.  This includes assigning your franchise to a corporation so that in the event you must file bankruptcy, only the corporation needs file.  This also includes spending some time becoming familiar with your legal rights.  As the old adage goes, an ounce of prevention is worth a pound of cure.

Finally, if you are currently experiencing problems with your franchisor, you should consider seeking competent expert legal advice before the situation progresses too far.

Although nobody wishes to think about the possibility of having problems with their franchise and franchisor, the prudent franchisee knows his/her legal rights and prepares for the possibility of one-day having to deal with such problems.  Accordingly, you should at least educate yourself in advance, as to what to do and what not to do, in the event a problem does arise.  In this way, if a problem ever does arise, you will have given yourself a fighting chance.

This document is for informational purposes only and does not purport to provide legal advice or endorse any particular attorney or law firm.  For more information, you should consult with an attorney of your own choosing.

Robert Zarco is a Miami attorney who practices principally in franchise and complex commercial litigation, mediation and arbitration.  Robert has earned national recognition in the area of franchise litigation by representing franchisee throughout the country in disputes involving major franchise systems including Arby's, Burger King, Coca-Cola, Dunkin' Donuts. McDonald's, 7-Eleven, Kenny Rogers Roasters, Taco Bell and many others.

He can be reached at:

(305) 374-5418
100 S. E. 2nd Street, Suite 2700
Miami, Florida 33131