Franchise Disputes: When to Arbitrate or Litigate

Hand Holding Gavel

Do you own a franchise? If so, it’s likely that from time to time you have issues with your franchisor. While often these disputes can be resolved informally, sometimes a franchisee must resort to arbitration or litigation. 

We’ve developed the following hypothetical case study to help you understand when it may be in your best interest to move forward with legal action. Please be aware that this case study is instructional only, and not legal advice for your specific situation. 

The Castro Brothers’ Franchise Quandary

The Castro brothers bought a moving company franchise, You Move Me, in 2015. In the Franchise Agreement, which is the contract that sets forth the respective rights and obligations of the Franchisor and the Franchisee, the Castros were granted the exclusive territory of Chandler, Arizona for a seven-year term.

Among other obligations, the Franchisor agreed to provide safety training annually for a team of up to 8 of the Castro movers.

Initially, the Castro brothers felt good about the relationship with their Franchisor. They had done their due diligence on the franchise and had their Franchise Agreement carefully reviewed by a knowledgeable law firm. The Castros focused their services on small businesses in the Chandler area and their profits were growing.

But recently, things have started going the wrong way. For one thing, they learned that another You Move Me franchisee in the nearby area was soliciting and accepting business in the Chandler area. Although the Castros called the Franchisor to say that their exclusive territory was being violated, the breach was still continuing. 

It had also become increasingly difficult to get the Franchisor to conduct the annual safety training, which taught the movers how to handle chemicals they might be exposed to in the office workplace, and how to ergonomically move large, heavy items.

The Castros rightfully believed this training was necessary to protect their workforce. Frustrated and upset that their discussions with the Franchisor hadn’t resulted in any satisfaction, they decided to consult their lawyer about filing a lawsuit. 

Legal Framework of a Franchise

Franchising is a marketing technique where the maker of a product or service grants to others the exclusive right to market that product or service. Unlike an exclusive license to sell, the franchising relationship contemplates a continuing close, cooperative relationship between a franchisor and franchisee.

As with the Castro brothers, though, sometimes the relationship can become difficult and detrimental to the business.

The franchise relationship is regulated by a complex overlay of Federal and state law:

– The Federal Trade Commission (FTC) regulates what the franchisor must disclose to a potential franchisee before the sale of a franchise. Specifically, a franchisor must file a Franchise Disclosure Document identifying in detail the business opportunity, the fees to be paid by a franchisee, the respective duties and rights of the parties, and many other things.

– The states govern official registrations of the franchise. Arizona is not a franchise registration state. This means if the franchisor has complied with the Federal FTC document filing requirements, it need not file the franchise documents with the state.

– State law also governs the relationship between the franchisor and franchisee, such as grounds for termination and renewal of the franchise, and equal treatment of franchisees.

Interactions between the franchisor and franchisee may give rise to many possible causes of action under both Federal and state statutes. There is a basic premise that, because of the franchisor’s superior and economically more powerful position, it must act with the utmost good faith and integrity. Common causes of action asserted by a franchisee against a franchisor include:

– Offering an inaccurate or incomplete Franchise Disclosure Document;

– Refusing to enforce territory encroachment;

– Breach of contract in providing the services agreed to in the Franchise Agreement;

– Selective enforcement of franchisees’ contractual obligations and other discriminatory practices; 

– Breach of the implied covenant of good faith and fair dealing, and

– Fraud

It would appear that the Castros might have a case against their Franchisor in regard to its failure to enforce a territory restriction, as well as in failing to provide the contractual safety training. 

An initial threshold question is whether the Castro brothers’ Franchise Agreement permits litigation. In the last 20 years, many franchisors have moved to include arbitration clauses in their Franchise Agreements, foreclosing lawsuits. Sometimes, arbitration clauses can be invalidated. But even if they pass legal scrutiny, arbitration can generally provide some relief to an aggrieved franchisee. 

Contact Counxel Legal Firm

It’s unfortunate when a franchisor doesn’t live up to its legal obligations, and sometimes forcing legal action is necessary to move the business forward. Counxel Legal Firm can help you review your franchise agreement before you sign it, negotiate with your franchisor when things aren’t going well, and help you decide whether arbitration or litigation is ultimately in your best interest.

Contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.

*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!

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