Franchising | November 2010 | By Daniel P. Smith

Lessons Learned

Reflecting on a decade of franchisee-franchisor litigation provides important insight. What can you learn?

Whether it’s started by the internationally renowned franchisor or the ma-and-pa franchisee, litigation stands an unwelcome event in a relationship desperately needing trust, respect, and the singular, shared aim of bottom-line success. Over the last decade, however, a litany of franchisor-franchisee disputes have made their way into the courtroom, proving to be a time- and cost-consuming process littered with stress and frustration for both sides.

While at first glance the franchisee-franchisor relationship might appear to be a creature of contract, wherein the franchisor can exert control with its unilateral rights to govern, reality has painted a different portrait far more based in the colors of collaboration and responsiveness. Successful franchise relationships result from transparency and honesty running through all phases of the relationship—often well beyond any contractual stipulations—and, furthermore, a shared recognition that each needs the other to achieve productive results.

“The franchisor-franchisee relationship [is] really a complex partnership of balanced mutual dependence,” says Florida attorney R. Alan Higbee, a noted expert on franchise matters. “The key to most franchisor-franchisee relationships, like most partnership relationships, is trust and communication.”

From some of this decade’s most notable court cases, important lessons can be gleaned that highlight and emphasize the importance of finding a sincere and honest middle ground that keeps the ultimate focus on food, customers, and profitability.

“At the end of the day, the common lesson learned from all of the disputes … is that franchisors need to find a way to maintain a level of trust and communication with their franchisees that prevents major disputes from arising in the first place,” Higbee says.

The Quiznos Case:
Misrepresenting ‘Material Facts’

A quartet of lawsuits dating back to 2006 placed Denver-based Quiznos in a defensive position. All four cases, originally brought to four U.S. district courts, alleged violations of U.S. racketeering and corruption statutes revolving around the system’s supply chain, food costs, marketing funds, and unpaid royalties.

Quiznos franchisees, including many who had never opened a store, charged that the company had “systematically defrauded” its franchisees by misrepresenting material facts during the franchise sales process and pairing inflated product prices with low retail prices to resist franchisee profit. The lawsuits also cited encroachment issues, as well as Quiznos’ slow response to approve sites and open stores. Accusations swirled that Quiznos failed to act in good faith and looked to buoy the brand’s value at the expense of its franchisees.

In November 2009, all four class-action suits reached a preliminary settlement, albeit sans any finding or admission of liability on Quiznos’ behalf. The settlement called for Quiznos to make administrative changes and concessions to franchisees, as well as contributions to the chain’s advertising and marketing trust funds.

In addition, the proposed settlement demanded Quiznos recognize an independent association of franchisees, create a franchisee advertising advisory council, introduce a formal resolution process for addressing franchisee grievances, and identify a clear program to assist franchisees who wished to sell their stores or acquire additional locations.

A Lesson Learned:
“Prospective franchisees should examine the economics of the individual franchised unit, but should also familiarize themselves with the business model of the franchisor. Franchisees should be concerned when the franchisor makes their profits up front before the individual units are successful.”
former McDonald’s
corporate franchise executive
Richard Adams,
now head of the San Diego–
based Franchise Equity Group

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