Dispute with your franchisor? Your franchise agreement likely includes a dispute resolution provision that requires mediation and then arbitration to resolve disputes. This means that you are contractually bound to resolve the dispute outside of the courts. That does not mean, however, you don’t have legal rights and options.
Fortunately, there is a toolbox of legal alternatives to litigation, and your franchisor must honor the rights and benefits due to you as outlined in the franchise agreement.
Review Your Franchise Agreement
Your franchise agreement should include the process for starting and running the franchise, as well as the responsibilities of each party, including details on initial and recurring fees, quality standards, territory restrictions, and the rights to use the franchisor’s logo and trademarks. The agreement should also cover training, operations, technology systems, and ongoing support.
Each party must honor their end of the agreement. If you find that your franchisor has violated the agreement, you should speak to an attorney right away.
You should also speak to a lawyer if you have questions about your franchise disclosure documents (FDD) or if your franchisor has broken state franchise laws. In Texas, for example, the Deceptive Trade Practices Act (DTPA) and the Business Opportunity Act (BOA) can both protect franchisees in disputes with franchisors.
Understand Your Legal Alternatives for Franchise Dispute Resolution
Franchisors know when their franchisees have a legitimate complaint, and they likely will want to do what they can to fix it. Your first step should always be speaking with the franchisor directly. In many cases, the franchisor’s chief executive will personally visit you to talk things out and resolve the problem.
Otherwise, you and your franchisor can engage in informal negotiations, called mediation. In situations where both parties breach the franchise agreement, for example, you and your franchisor can “trade” forgiveness and start fresh.
Your franchise may even offer to buy you out of a bad situation, saving you the headache of getting out of your franchise agreement (if that is what you want to do).
If all else fails, you can initiate arbitration.
A Note About Forum Selection Clauses in Franchise Agreements
Most franchise agreements include an arbitration provision with a forum selection clause. This allows the franchisor to select the forum where the arbitration will take place.
“Usually, it’s on the home turf of the franchisor, requiring the franchisee to travel to them to dispute the matter,” says Managing Shareholder Trey Hendershot. “Franchisors have deep pockets and also tend to select the most expensive arbitrator available.”
That’s why it’s important to have an attorney review the franchise agreement before you sign.
Common Reasons for Franchise Disputes
The most common reasons for franchise disputes include a lack of adequate training, miscommunication about duties and obligations, and changes to everyday processes. Often, franchisees do not receive enough support or make enough money, and they feel like they have been misled by the franchisor’s promises.
Other times, franchisors and franchisees may disagree about how to run an individual business.
Franchisors spell out their promises and operating instructions in franchise agreements and FDD. If a franchisor does not provide the support promised or misrepresented their obligations, that could constitute a breach of the franchise agreement.
If you can find a breach of the franchise agreement or a franchise violation, you have a better chance of reaching a favorable resolution.
Ask a Franchise Agreement Attorney to Review your FDD
Once you’ve signed a standard franchise agreement, it’s difficult to find a breach. There is little in a typical FDD that holds the franchisor accountable to the franchisee. The franchisor has drafted the agreement to protect its own interests, not the franchisee’s. But every agreement can be negotiated and revised prior to signing.
“You’re paying those franchise fees to be granted the use of the franchisor’s brand, products, training, and business information,” says Hendershot. “Make sure your franchise agreement outlines those duties and obligations, so you have recourse if the franchisor doesn’t fulfill their end of the bargain.”
An experienced franchise attorney will review your agreement to ensure that your rights and interests are preserved and protected. For example, does the agreement:
- Clearly detail the franchisor’s obligations, particularly with regards to operations assistance, advertising, technology, and training?
- Communicate what is required of the franchisee, such as adequate insurance, quality control, hours of operation, etc.?
- Include the conditions for when and how the agreement may be terminated?
- Protect the franchisee from an overly restrictive non-compete clause that may limit career options once the contract is terminated?
- Offer favorable dispute resolution terms?
Franchise Disputes May Feel Like a David vs. Goliath Situation
When confronting franchisors, franchisees may feel like David facing Goliath. However, if backed by a valid claim and skilled legal team, you have every chance to achieve your goals.
At Hendershot Cowart P.C., we can help you make the right decision for your situation. Our team can help you look over your franchise agreement, negotiate a possible settlement, and represent you in arbitration proceedings if necessary.
We focus on business and contract law, and we have over 100 years of collective experience handling cases just like yours.
Call us at (713) 909-7323 or contact us online to start working toward a resolution to your franchise dispute today.