Franchisee in the Jailhouse
One huge dilemma a franchisor can face is when a franchisee is accused of a crime that has nothing to do with the operation of the franchised business. First, you have to look to the terms of your franchise agreement. Most franchise agreements will allow a franchisor to terminate the franchise agreement if a franchisee is convicted of a crime or engages conduct that reflects poorly on the franchisor’s brand and franchise system. But what happens before that person is convicted? What are your options?
If the franchisee is not yet convicted of the crime, there are may be other termination provisions you can rely upon to terminate the franchise agreement. If the franchisee is in jail and unable to operate the franchised business for a certain period of time, it is likely you will be able to terminate the franchise agreement for abandonment (if the franchise agreement provides for such termination). If there is any negative publicity surrounding the purported crime and the franchisee, which then gives a bad association with the brand and franchise system, you may be able to claim that such publicity has a detrimental effect on the brand and franchise system. One final option is to examine your franchise agreement to determine whether the franchisor has the right to step-in and take-over the operation of the franchised business during a period of default. This final option needs to be exercised with extreme caution because it will most likely trigger franchisor liability for anything that occurs during franchisor’s operation of the franchised business. As is evidenced above, it is extremely important for a franchisor to fully examine the termination rights it has under the franchise agreement (and to examine applicable state law) to ensure that it can adequately protect its brand and franchise system from harm caused by franchisee arrests.
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