(Just some of the)
Problems Franchisees Face
Things you should know before you sign an Agreement.
AFA Services to Assist Franchisees
Do not sign a franchise agreement until you get these provisions changed!
· Gag Rules. Some franchise agreements now prohibit franchisees from discussing any aspect of their franchise experience with anyone outside the system. This defeats the FTC rule and other state disclosure laws which require lists of terminated franchisees to be provided to prospective franchisees.
· Franchisor Venue Provisions. These provisions require franchise disputes to be litigated or arbitrated in the home state of the franchisor. This not only increases costs for the franchisee, but also allows the franchisor to litigate, arbitrate or even mediate on their home turf.
· Lack of Reciprocal Cure Periods. Many franchise agreements give the franchisor 30, 60, or 90 days to cure any alleged defaults; some even do not allow the franchisee any remedy if the franchisor defaults. On the other hand, some franchise agreements provide for no cure periods for any alleged default by the franchisee. What is good for the goose is certainly good for the gander.
· Nonreciprocal Noncompetition Covenants. Many franchise agreements have oppressive post-term noncompetition covenants, both in terms of duration and geographical scope. At the same time, many franchise agreements allow the franchisor to place competing units pretty much where they want. If the franchisor wants protection from the franchisee after the agreement expires or terminates, why shouldn’t the franchisee be entitled to the same protection during the franchise agreement?
· Sole Sourcing Requirements. Many product-oriented franchise systems require franchisees to purchase products solely from the franchisor or from suppliers designated by the franchisor. No allowance is given to purchase from alternate sources even if quality standards are upheld. This leaves the determination of the gross margin achieved by the franchisee solely in the hands of the franchisor.
· Mandatory Subleases with Rent Overrides. Many franchise systems require the franchisee to sublease the franchised premises from the franchisor who has in turn leased the premises from the landlord. This places the franchisor in the real estate business and able to net a profit essentially without risk. In addition, the fact of these overrides and the amount of them are rarely disclosed in franchise offering circulars.
· Lack of Accountability of Advertising Fund. Over the years, franchise agreements have increasingly been drawn in a manner to give the franchisor maximum discretion over the use and application of advertising funds. Agreements are often drafted in such a way as to allow franchisors to not spend advertising dollars in the market where franchisees have contributed to ad funds.
· Lack of Reciprocal Legal Fee Provisions. Many franchise agreements require the franchisee to pay all of the franchisor’s legal expenses in the event of litigation between the parties. However, if the franchisee wins the litigation, the franchise agreement does not provide for legal fees. The only way a franchisee can obtain legal fees is if a state statute allows such recovery or in the unlikely event the franchisee prevails on a RICO claim.
· Kickbacks. Some franchise agreements openly acknowledge that the franchisor has the right to make deals with vendors who sell goods and services to franchisees that are mandated by the franchise agreement. Very often, these vendors provide kickbacks, promotional fees, and commissions to the franchisor in return for being allowed to sell their products and services to a captive market. Instead of passing these kickbacks, promotional fees and commissions on to franchisees to reduce their cost of goods sold and increase their margins, these payments are pocketed by the franchisors.
· Mandatory Arbitration Provisions. While arbitration is a faster and presumably cheaper, it has major disadvantages to franchisees. Arbitration is private, with the resulting decisions not creating any precedents. In addition, the ability of a franchisee to obtain documents from the franchisor and to take depositions is severely limited.
· Radically Different Franchise Agreements on Renewal. Many franchisees find that when it is time to renew, they are not really renewing their existing franchise agreement, but entering into a wholly new franchise agreement, often with materially different financial and operational terms.
· Unilateral Amendments to the Franchise Agreements. Many franchise agreements provide that the franchisor can change its operations manual or other company policies from time to time without notice to or with the consent of the franchisee. Thus, the franchisor has the right to unilaterally change the franchise agreement. Moreover, the franchisee is rarely given an opportunity to inspect the franchisor’s operating manual in advance of the sale of the franchise.