Franchise and Business Opportunities

Avoiding Wrongful Termination: Know Your Franchise Rights Michael Dady, Attorney Dady & Garner, P.A. Is your franchise business facing the threat of termination? Do you know your rights as a franchisee, which may prevent a franchisor from wrongfully terminating your franchise business? Potential termination can be an overwhelming ordeal for any franchisee. By becoming familiar with your state’s franchise relationship laws, which set forth the “good cause” and procedural requirements for termination, you will be better equipped to protect your individual interests and respond to a franchisor’s threat. Most franchise relationship laws require the franchisor to have “good cause” for termination before a franchisor may legally terminate a franchisee. Minnesota’s franchise law, for example, requires that a franchisee must have substantially failed to comply with the requirements imposed by the franchisor before the franchisor has good cause to terminate the relationship. For example, in Iowa, as long as the franchisor has “a legitimate business reason” for the termination, which is not arbitrary or capricious when compared to the franchisor’s acts in similar circumstances, good cause for termination can be shown. Additionally, other states’ laws may require that the termination be made in good faith. As a franchisee, it is important that you are familiar with your state’s franchise relationship laws so you know what constitutes “good cause” for termination. A state’s franchise relationship laws may provide statutory examples of what justifies “good cause” for termination. In Minnesota, for example, state law contains a non-exhaustive list of acts that constitute “good cause,” which include: The franchisee’s failure to comply with the requirements imposed by the franchisor, or breach of the franchise agreement; Voluntary abandonment of the franchise by the franchisee; Criminal conviction of the franchisee on a charge related to the franchise business; The franchisee’s insolvency or bankruptcy, or assignment for the benefit of creditors; and Conduct by the franchisee that materially impairs the goodwill of the franchise business. Where state statute has not specifically defined “good cause,” state courts have been left to interpret “good cause” on a case-by-case basis. State courts have found good cause for termination where a franchisee has damaged the franchisor’s reputation, sold competing products, failed to maintain standards, failed to meet sales and other requirements, underreported sales, and failed to report sales or pay royalties. Additionally, a franchisor’s withdrawal from the market may be viewed as good cause for termination. Since “good cause” for termination has been interpreted differently across jurisdictions, again, it is of vital importance that you, as a franchisee, are aware of your statutory and common law rights. When a franchisor has the legitimate and legal right to terminate your franchise business, it still must comply with specific procedural requirements for termination. Most often, the franchisor must: Give written notice of termination; Include all reasons for termination in the notice; State how much time, if any, the franchisee has to cure the default; and Continue to comply with the franchisor’s obligations during the notice period. Typically, state laws require that notice of termination must be given a certain number of days in advance of the actual termination. Franchise relationship laws may require a franchisor to give notice to the franchisee anywhere from 30 to 90 days before the termination is to take place. A franchisee must also be made aware of the reasons for its termination. In some states, the franchisee may have a right to cure the default that prompted the franchisor to provide notice of the termination. The opportunity to cure may run anywhere from 10 to 90 days. If the franchisee successfully cures the default within the cure period, it may avoid the termination of its franchise business. It is also important to remember that the franchisor is not relieved of its obligations under the franchise agreement simply because the franchisor intends to terminate your franchise business. The franchise relationship exists throughout the notice and cure periods. As a result, the franchisor is bound to abide by the terms of the franchise agreement until the actual date of termination. When your franchise business faces the threat of termination, it is important that you know your franchise rights under your state’s statutory and case law. With your knowledge and the help of a qualified franchise attorney, wrongful termination may be avoided. Michael Dady is the founding partner of Dady & Garner, P.A., a nine-member firm with offices in Minneapolis and New York, which limits its national practice to representing franchisees, dealers and distributors engaged in serious disputes with their franchisors or suppliers. Michael Dady is a former member of the Governing Committee of the ABA Forum on Franchising; he is listed in the Best Lawyers in America; and is a member of the Million Dollar Advocates Forum, having recovered several results in excess of one million dollars for clients who have been treated unfairly. To learn more about Dady & Garner, P.A. or to reach Michael, click here. To see all Forum articles regarding franchise law, click here.