What are your rights as a franchisee? Whether you are looking for more ways to grow your business or facing a potential dispute with a franchisor, this is a very important question. While you own your own business, you and your franchisor are inseparably intertwined, and your rights are largely dictated by the terms of your franchise agreement.
However, there are various laws that apply to the franchise relationship; and, depending on where you operate your franchise, you may have additional protections under your state’s franchise law as well. Then, there are the general rights that exist by virtue of the fact that your franchise agreement is silent on certain subjects.
Q&A with Franchise Attorney Jeffrey M. Goldstein
Q: Are franchisors required to impose uniform standards on all franchisees?
As a general rule, franchisors can impose different standards on different franchisees. While uniformity is one of the hallmarks of the franchise model, there are a variety of reasons why some franchisees may be subject to different standards than others. For example, franchisees in urban areas may need to do more to stand out from their competition than those in rural towns. Or, some franchisees may have negotiated additional protections into their franchise agreements.
However, there are limits on franchisors’ ability to treat franchisees differently. Providing disparate treatment without a justifiable basis may constitute franchise discrimination. Franchise discrimination is a violation of franchisees’ rights, and legal remedies are available.
Q: Do I have the right to negotiate my franchise agreement?
Yes, as a prospective franchisee, you absolutely have the right to request changes to your franchise agreement. Most standard franchise agreements are heavily one-sided in favor of the franchisor, and negotiating certain modifications can be crucial to establishing even basic rights.
As a practical matter, some franchisors will be willing to consider negotiation, and some won’t. The larger the franchise system and the less leverage you have (i.e. if you are a first-time franchise buyer), the less likely you are to be able to negotiate significant modifications. However, it is always worth trying, and an experienced franchise lawyer will be able to help you negotiate more effectively.
Q: What are franchisees’ rights under state franchise relationship and disclosure laws?
First, it is important to note that not all states have enacted franchise relationship and disclosure laws. To learn about the laws in your state (if any), you can view our list of state franchise laws.
The protections afforded under state franchise relationship and disclosure laws vary significantly from one state to the next. If your state has a franchise disclosure law, you may be entitled to rescind your franchise agreement within a certain period of time if you change your mind about your purchase. If your state has a franchise relationship law, you may have a legal cause of action for bad faith if your franchisor terminates or refuses to renew your franchise without proper justification. Various other protections may be available as well; and, if you are facing an issue in your franchise, you should discuss your state law rights with a knowledgeable franchise attorney.
Q: What is the FTC Franchise Rule and how does it protect franchisee rights?
The FTC Franchise Rule is a federal regulation that establishes uniform standards for franchisors’ Franchise Disclosure Documents (FDDs). However, unlike state franchise relationship and disclosure laws, it does not create a private right of action for franchisees. In other words, you cannot sue your franchisor strictly based upon a violation of the FTC Franchise Rule’s disclosure requirements. But, disclosure violations may trigger other rights, and they are absolutely factors to consider when facing a potential dispute with your franchisor.
Q: Do I have the right to renew my franchise at the end of the initial term?
Your right to renew is governed by the renewal provisions of your franchise agreement. Most likely, this “right” is subject to a variety of terms and conditions, and it is largely in the franchisor’s discretion whether to allow you to operate your franchise beyond the initial term. Common conditions on franchisees’ right to renew include:
- Providing timely notice of intent to renew
- Signing the franchisor’s then-current franchise agreement
- Upgrading your franchise to the franchisor’s then-current standards
- Curing any outstanding violations of your franchise agreement
Learn more: Understanding Your “Right” to Renew.
Q: Do I have the right to terminate my franchise if I am unable to earn a living?
Unfortunately, the answer to this question under most standard franchise agreements is, “No.” Franchisors can exert an extraordinary amount of control over their franchisees, and this includes preventing franchisees from terminating their franchises – even if they are unable to earn a living. If you cease operations before your franchise term expires, your franchisor may have the right to seek liquidated damages in the form of “lost future royalties,” and this can result in substantial financial liability at a time when you are already struggling to pay your bills.
What are your options if your franchise isn’t a success? It depends, and you should seek help as soon as possible. You may have options for turning your business around; or, you may have grounds to pursue legal action against your franchisor.
Q: Do I have the right to territorial exclusivity?
Your territorial rights depend on the terms of your franchise agreement. While some franchisors grant their franchisees true territorial exclusivity, others only offer protection against certain channels of competition. Some franchisors do not offer any territorial rights at all; and, in some systems, your “territory” is simply an outer boundary on where you can target potential customers.
If you have territorial rights and your franchisor violates them, you may have a cause of action for franchise encroachment.
Contact National Franchise Attorney Jeffrey M. Goldstein
If you are thinking about buying a franchise or facing a dispute with your franchisor, it is important to have a clear understanding of your legal rights. To learn more, you can contact the Goldstein Law Firm for a free and confidential consultation. Franchise attorney Jeffrey M. Goldstein has over 30 years of experience in franchise law, and he has successfully represented franchisees against many of the world’s leading franchise systems. To schedule an appointment, call (202) 293-3947 or inquire online today.
