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Q & A’s with Franchise King Robert Zarco on Common Concerns from Franchisees

On Behalf of | Mar 14, 2023 | Firm News, Legal Resources |

Robert Zarco, Esq.
Founding Partner
Zarco Einhorn Salkowski, P.A.

Am I required to service customer claims sent to me by the franchisor or another franchisee?

If the FDD or Franchise Agreement discloses your requirement to service all customer claims even those not originated by you, then yes, you must.

If the FDD or Franchise Agreement does not address that requirement, then the franchisee can refuse since there is no legal obligation to do so.  It would be a commercially unreasonable request with a burdensome expense without corresponding payment income as an offset.

Alternatively, you can agree if there is no requirement in the FDD or Franchise Agreement after negotiating a proper incentive and financial arrangement.

What triggers Joint Employer Liability?

Joint Employer liability in franchising is determined on a case by case basis, not a blanket basis. It goes hand in hand with Vicarious Liability since both deal with the level of control that a franchisor has over any given franchisee’s method of operating. While the measure of control is determined in the totality of the relationship analysis, legal damages are based on specific examples by the franchisee affected, versus the general big picture.

Joint Employer tool generally benefits the franchisee, not the franchisor!  A franchisor may not dictate or control every aspect of a franchisee’s business which acts like an independent contractor.  Threats by franchisors to the contrary are generally empty and erroneous. Franchisors are trying to fight the Joint Employer law and recruiting frightened franchisees to help fight their battle.

During the litmus test of liability by a customer in a lawsuit, the party in control of the decisions and circumstances that led to a customer’s claim of an accident or loss will be primarily liable; usually, that will be the franchisor if guilty under joint employer where it is found that the franchisor forced the detrimental conditions that gave rise to the customer’s claim in a lawsuit.  If a franchisee has no choice due to the empty threats by the franchisor that they’ll lose their business, that’s a classic case of excessive control, falling under vicarious liability and joint employer.

My franchisor is mandating costly upgrades to my store or equipment, is this reasonable and required?

Franchise Agreements give the franchisor a ‘Reasonable Right’ to mandate certain things from time to time. Reasonable requires a financial net positive result for the franchisee, who in essence acts as an independent contractor.  The franchisor’s requirement must be ‘Commercially Viable’ and considered according to the implied covenant of ‘Good Faith and Fair Dealing’; it cannot be arbitrary and unsupported in the case of a business and legal dispute.

Franchisees can request in writing from the franchisor results from testing, market studies, survey, cost benefit analysis, and anticipated rate of return on the investment that franchisees should reasonably derive from implementation of the franchisor’s mandate, and agree to the request once that evidence proves it is commercially reasonable (financially viable). Of course, that analysis must take into account the alternative opportunity cost for that money franchisors mandate be invested by franchisees.

Where safety is involved, the issue is not just financial and the franchisor’s mandate may be justified as shown in the testing and proof provided.  And, sometimes the material investment is too minor to escalate a costly legal dispute. We can’t eliminate the possibility that the mandate provides a monetary kick-back from the vendor to the franchisor.

Can my franchisor mandate my hours of operation in the operations manual beyond what’s commercially reasonable?

No, geographical markets vary greatly.  Franchisors largely sell consistency of products, quality, service, cleanliness, value, branding, but not all markets are the same; for instance, New York City does not resemble Topeka, Kansas in prices, density of population, lifestyle, tastes and preferences, etc.  Commercially unreasonable mandates to operate 24 hours, for instance, not only potentially negatively affect expenses and profitability, but it also impacts the safety of customers and staff and the corresponding insurance risk associated with that requirement, especially when not reasonably merited.

Franchisees should beware of periodic amendments made to the franchise agreement through changes in the operations manual by implementing powerful operating policies that may be slipped in.  Policies are not generally legally enforceable unless they are a part of the Franchise Agreement. Some franchisors purposely make it ambiguous claiming ‘Unjustifiable Reliance’ on the part of the franchisee’s interpretation.

Franchise case law over the last 3 to 4 decades has not settled many of these old battles to avoid rigidity in the performance of obligations.  Intentional ambiguity can serve both franchisors and franchisees on a case by case basis with words like reasonable and discretion.  Discretion must not be arbitrary, must be made in good faith, and must be commercially reasonable!

The Franchise Agreements for some veteran franchisors are shockingly the same as in decades ago, whereas their updates are instead made in their Operations Manuals (policy) that can be hundreds of pages long.  Why?  Because critical case law in the franchisor’s favor was developed over time with that agreement, and changing the agreement may void the validity of that favorable case law! This is an instance where your case is often only as good as your attorney…to know the history and respectfully convince the Judge to do justice and acknowledge the differences in conditions between the old legal precedent and today’s case.