Author: Steven V. Rose
Many people dream of owning a McDonald’s, Subway, Culver’s, Dunkin’ Donuts or other nationally or internationally known franchise. To do so, you have to acquire the right to use the company’s trademarks and successful business model for a period of time. This practice is called franchising.
In theory, the franchising is a win-win situation for the franchisor and the franchisee. For the franchisor, franchising allows a company to distribute its goods or services by avoiding the financial investments and liability that usually accompany corporate stores, otherwise known as “chain stores.” For the franchisee, the financial prospects are more attractive, than simply being an employee because she or he has a direct stake in the business.
At its core, the relationship between the franchisor and the franchisee is one of supplier and distributor. The franchisor allows the franchisee to use its trademarks and distribute its goods. In return, the franchisee pays a fee for these rights. The relationship is symbiotic as the success of one, to a certain extent, depends on the success of the other. However, in the typical situation, the franchisee is more dependent upon the franchisor. While this relationship, in theory, benefits both the franchisor and the franchisee, the relationship is also ripe ground to be abused by the franchisor.
Recognizing the franchisor’s ability to abuse of its inherent economic power, Minnesota passed the Minnesota Franchise Act (“Act”) to protect the franchisee from the franchisor’s inequitable and unfair treatment. Under the Act, no person may offer or sell a franchise by means of any written or oral communication which includes an untrue statement of a material fact or which omits a material fact necessary in order to make the statements made not misleading. Minn. Stat. §80C.13.
Once the franchise relationship is formed, the franchisor is prohibited from treating the franchisee unfairly or inequitably. Minn. Stat. §80C.14. It is unfair and inequitable to terminate the relationship without cause. Under the Act, the franchisor may not terminate the relationship except for good cause. Minn. Stat. §80C.14, subd. 3(b). The term “good cause” is defined as the franchisee’s failure to substantially comply with the reasonable and material requirements imposed by the franchisor. Except for limited circumstances, the franchisor may not terminate the relationship unless: 1) the franchisor provides written notice, describing the reasons for the termination, at least 90 days prior to the effective date of termination; and 2) the franchisee fails to cure the reasons stated in the notice within 60 days after receiving the notice. Minn. Stat. §80C.14, subd.3.
To comply with the statutory termination requirements, the written notice of default must specifically identify all of the franchisee’s defaults and the specific actions that the franchisee must take to cure each default. Culligan Int’l Co. v. Culligan Water Conditioning of Carver County, Inc., 563 F. Supp. 1265 (D. Minn. 1983).
The Act also identifies that a franchisor’s decision not to renew a franchise is an inequitable and unfair practice unless the franchisor has good cause not to renew the franchise; has provided the franchisee written notice of the decision 180 days prior to the termination; has allowed the franchisee time to cure the stated reasons for non-renewal; and has allowed the franchisee sufficient time to recover the fair market going concern value of the franchise. Minn. Stat. §80C.14, subd. 4. Franchisors are further prohibited from refusing to renew any franchise if the purpose of the nonrenewal is to convert the franchise to a franchisor-owned operation, i.e. a “corporate store.” It is also unfair and inequitable conduct to unreasonably withhold consent to the transfer of the franchise to a third party or to discriminate between franchisees. Minn. Stat. §80C.14, subd. 5; Minn.R. 2860.4400 (B). A franchisor’s conduct is deemed to be unfair and inequitable if it “impose[s] on a franchisee by contract, rule, whether written or oral, any standard of conduct that is unreasonable.” Minnesota Rule 2860.4400 (G).
To further protect the franchisee, the Act grants franchisees a private right of action against anyone who violates the Act. Minn. Stat. 80C.17. The Act allows the recovery for actual damages, rescission, and other equitable relief deemed necessary by the court and the recovery of attorney’s fees and costs. Id. Potential defendants include individuals who directly or indirectly control the franchisor; partners of the franchisor; officers and directors of the franchisor or person occupying similar status or similar purposes; and employees of the franchisor who materially aids in the act or transaction that constitutes the violation of the act. Id. Most claims under the Act will be grounded in fraud and technical violations of the Act. In addition to the claims under the Act, franchisees also have rights to sue franchisors who fail to fulfill their obligations under the franchise agreement or who misrepresent material facts regarding the franchise. For example, franchisees may sue for breach of contract, common law fraud, tortious interference with contract, and for breach of the implied covenant of good faith and fair dealing to name a few.
If you are an owner of a franchise and feel you are being treated inequitably or unfairly or believe that the franchisor has failed to act as promised at the beginning of the relationship, you may have a claim under the Act or have other common law claims to protect you from this mistreatment. You should consult with an attorney to explore your options and available remedies.