Evaluating Key Franchise Cases

Evaluating Key Franchise Cases


Reviewing recent cases with your franchise attorney is a great way to stay on top of emerging legal trends and avoid missteps that have recently led to liability for other franchisors. While franchise cases are being argued every day, shrewd franchisors will incorporate an analysis of key cases into their annual FDD update process to ensure that they are staying on top of developing law.

The 2015 year saw a number of notable decisions that affect the franchise community. The first example is a recent decision involving the Kidville franchise system that highlighted the importance of sales compliance. In this case, a franchisor ran into trouble for working with a franchisee to develop a pro forma statement prior to signing a franchise agreement, which violates the FTC Franchise Rule’s prohibition on pre-sale disclosure of financial performance representations that are not disclosed in Item 19 of the FDD.  Though there are other legal factors in play, the take-away from this case is clear: best practices dictate that a franchisor and its sales team should refrain from making any financial performance representations outside of Item 19, which includes assisting a franchisee in preparing a pro forma, or even commenting on a franchisee’s pro forma to let them know that it looks good or that they should change their projections. Once the franchise agreement is signed, then the franchisor is free to provide this type of assistance.

The next case concerned Dunkin Donuts’ requirement that its franchisees remodel their store to accommodate new equipment, including a new point-of-sale system.  This case ultimately was decided in Dunkin’s favor, but only after the franchisee harmed its position by stopping royalty payments while the matter was being decided.  While the specific facts of each case will have a sizable impact on the final decision, a couple themes emerged from this decision. First, franchisors should be clear in their franchise agreements and operations manual with respect to their right to require franchisees to remodel their business to incorporate changes in system requirements or standards.  Franchisors should also exercise this right fairly and in a non-discriminatory manner, with sufficient advance notice as well as reasonable timelines for completing the remodeling. Additionally, in the event that a franchisee challenges the underlying requirement, it’s a good idea for franchisor to collect any available data that supports the value of the remodel from a business perspective (for example, if company stores showed a 20% increase in sales after installing a new piece of equipment).

2015 also saw a number of cases and administrative rulings concerning the circumstances under which a franchisor may be considered a joint employer of its franchisees’ employees.  Unfortunately, the various cases and rulings have yet to produce a clear standard that franchisors can rely on with any certainty.  Cases involving Jimmy John’s and Domino’s both contained helpful language that enforcing brand standards does not amount to the type of control that could give rise to a finding that the franchisor is a joint employer, but administrative decisions from the NLRB and Department of Labor has cast doubt on this conclusion.  At this time, franchisors should refrain from controlling franchisee personnel (for example, franchisors should not post franchisee job openings on the franchisor’s website, nor train the day-to-day employees of franchisees), and they should ensure that their franchisees hold themselves out as independent business owners.

Perhaps the most important take-away from the joint employer rulings is that the legal climate is constantly changing, and that franchisors and their attorneys should stay on top of recent developments and ensure that their FDDs, franchise agreements, and actual system practices remain on the right side of the law.