Incompetent Franchisor - What Can I Do?
Many of the franchise clients we speak to come to us after their franchisor has made changes to the system which result in chaos for the franchisees.
For example, Dickey’s Barbecue, a franchisor with hundreds of locations, had built up its brand by, among other things, offering free ice cream to kids. The restaurants had a self-serve ice cream machine for its customers. It had a set menu which had proven successful. However, the franchisor then changed the menu and took out the free ice cream. While the changes do not seem drastic, it really hurt the brand and the franchisees once implemented.
Another example is AAMCO Transmissions. For decades that brand had been known exclusively as a transmission repair shop. Many of the franchisees had relationships with other auto tire and repair shops to do the transmission work for their customers. However, AAMCO then decided to become “total car care.” The idea was that it would bring additional work to the franchisees. The problem with making that transition was that the franchisees then became competitors with the other shops in the area that were referring their transmission work to the franchisee. The other shops stopped referring that work because they did not want AAMCO to then convert that customer into an AAMCO customer for other automobile repair work. In both cases, the franchisor obviously failed to consider the market and the effect these changes would have on their brand when implemented. There were no marketing studies conducted before the changes were made. There were no discussions with the franchisees to determine the effect these changes would have in their markets. Had the franchisor simply done a bit of due diligence, perhaps they would have reconsidered their choices because of the negative consequences that they would have known about.
The question is what right does the franchisor have to make changes to the franchise system? In most cases, the franchise agreement gives the franchisor the absolute right to make changes in the system without input from the franchisees. What if the changes made by the franchisor end up hurting the franchisee’s business? The sad reality is that if a franchisor makes a bad business decision by changing the system, that alone does not give the franchisee the right to terminate the franchisee agreement nor does it give the franchisee a legal claim against the franchisor. The toughest discussions we have with potential clients is telling them that a franchisor can be completely incompetent but that alone it is not a breach of the franchise agreement. In most of the cases, we can look at the financials of the franchisor in the Franchise Disclosure Document and the financials of our client and see a direct correlation between changes in the system and a drop in revenue. Many times, the damage caused by the changes are so substantial that the franchisee cannot survive.
All is not lost. As we investigate these systems, we can usually identify other actions taken by the franchisor that, in contrast to the other unfortunate scenarios, actually support a breach of contract action. These typically include the franchisor failing to offer support and guidance as required by the franchise agreement. When there is a change to the system, it is even more important for the franchisor to advise the franchisees so that the system is moving in one direction. Every franchise case we handle at Fortman Law is different. Much of what we do is extremely specific to the facts and circumstances of each case.
If you are a franchisee in a system where the franchisor has made changes which are harming your business, it is crucial to consult with an attorney who has experience in franchise law. Fortman Law has represented franchisees nationwide for over 15 years. Please do not hesitate to contact us to discuss the specifics of your case.