Legal Blog

Franchise Facts: Help! I’ve Fallen Into a Franchise and I Can’t Get Out!

If you’ve ever signed a cable contract, cell phone plan, alarm agreement, or gym membership agreement, you’ve probably learned that canceling those contracts is not always easy. Most have a cancellation fee, and unless there are extenuating circumstances, many vendors will not waive those fees. The bottom line is that you cannot simply walk away at will.  And for this reason, many people feel trapped until they can safely switch cable companies, change cell phone providers or cancel that unused gym membership.

Many franchisees experience a similar feeling of helplessness when they try to leave their franchised businesses. Instead of a two-page, two-year contract, most franchisees sign a 60-page franchise agreement that lasts for upwards of 10 to 20 years. A lot can happen over such a long period of time, and for many franchisees continuing the business becomes less and less attractive over time. What many franchisees do not realize, unfortunately, is that in most cases their franchise agreements cannot be voluntarily terminated without penalty.

It is easy to understand why many franchisees believe their franchise agreements are “at will” contracts that can be terminated at any time. Why would a franchisor insist on keeping a poorly performing or disgruntled franchisee in the family, right?  But there are many reasons why franchisors attempt to hold franchisees to their franchise agreements, and those reasons are typically not personal. One reason is to avoid having to disclose the loss of a franchised unit, and a shrinkage of the system, in the FDD (which is used to attract other franchisees to join). Another reason is to send a message to other franchisees that they can’t abandon ship. Franchisors know that voluntarily allowing one franchisee to leave without a fight can be a slippery slope, and can lead to a mass exodus (and potentially unravel the system).  Then there is the obvious reason – to maintain the royalty stream generated by the unhappy franchisee.  From the start, franchisees must understand that jumping out of the franchise may not be a viable option.

Franchisees intent on leaving their systems must consider the potential liability under their franchise agreements before taking any action. Because franchise agreements are contracts, a breach typically allows the franchisor to sue for damages, including an amount representing the royalties and other fees that would have been received by the franchisor had the contract not been terminated. These are called “actual” damages, and they are designed to put the franchisor in the same place it would have been in if the franchise had been in business for the full term.  Another type of damages is called “liquidated damages.”  Those damages are set out in a formula in the franchise agreement. Franchisees wishing to end their franchise relationship must be aware of their potential damages “exposure” before making any decisions to leave a franchise system without permission.

The reality is that franchise agreements are not just 60 pages of optional guidelines that evaporate at a franchisee’s whim.  They are mandatory rules that must be followed, and simply walking away from the deal can lead franchisees into a dispute with their franchisors, resulting in costly litigation. Franchisees must be cautious to weigh their options and exposures before taking any action to end their franchises.

 

If you have any questions about this topic or any other franchise law issue, please contact Brian Loffredo at bloffredo@offitkurman.com.

ABOUT BRIAN LOFFREDO

bloffredo@offitkurman.com | 301.575.0345

Brian is a commercial litigator with more than seventeen years of experience representing clients in the franchise industry. Brian routinely assists clients during the licensing and franchise/FDD review process, as well as with the resolution of franchise-related disputes, including those involving terminations, territorial disputes, fraud, disclosure/relationship law violations and breaches of contract.

In addition, Brian represents and counsels clients in the construction industry on matters involving litigation, construction defects, licensing and compliance, collections, mechanic’s liens, payment bond and Miller Act claims, contract drafting, and compliance with home improvement laws and other construction industry laws.

Brian also has extensive experience representing financial institutions with workouts, collections and residential / commercial foreclosures.

 

 

 

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