Joe Dye Culik
Three Defenses That Franchisees Have If Their Franchisor Sues Them
Abraham Lincoln said that you can’t please all the people all the time. This is no less true in the franchisor-franchisee relationship than it is anywhere else. Most of the time, with good faith, discussion, and negotiation, disagreements can be resolved. (In fact, our office’s main goal in any dispute is to minimize disruptions to our clients’ businesses.)
Sometimes, though, a disagreement is intractable and can only be resolved through the legal system: through the courts, or sometimes through arbitration.
As every franchisee knows, franchise agreements are one-sided. Many franchise-agreement provisions strongly favor the franchisor. So franchisees worry, justifiably, that it might not end well for them given the seemingly endless resources of the franchisor.
Fear not – there are three of common defenses that franchisees can use to even the score. You can’t use all these defenses all the time, but in our experience, they are unused by franchisees more than they are used.
The first defense that franchisees can use in disputes with franchisors is breach of contract. Under North Carolina law, if a party to an agreement breaches it, the other party is no longer obligated to keep their own promises under it.
In the franchise context, if the franchisor itself broke the agreement before the franchisee did, this may provide a defense against the franchisor. Franchise agreements are long and complicated, and it is just as easy for a franchisor to breach its own agreement as it is for the franchisee. A franchisee should seek a thorough and competent review of their franchise agreement to see whether the franchisor itself is in breach.
The second defense that franchisees can use in disputes with franchisors is violation of guidelines issued by the Federal Trade Commission. Franchises are heavily regulated by the federal government. Some of these regulations are published in the Code of Federal Regulations at 16 CFR 436. The regulations’ requirements are too numerous to list here, but violation of some of them may give a franchisee a claim against its franchisor under the North Carolina Unfair and Deceptive Trade Practices Act, N.C.G.S. § 75-1.1. A violation may even permit a franchisee to avoid the franchise agreement altogether. Whether there is a violation is a complex issue and should be reviewed by a legal representative.
Finally, the third defense that franchisees can use, is misrepresentations made by the franchisor during the purchase of the franchise. Unfortunately, franchisors sometimes make unsupportable, or even untrue, statements to induce the franchisee to enter into an agreement. North Carolina law says that if you enter into an agreement because of statements the other party made that the other party knew or should have known were false, the agreement may sometimes be invalidated.
As you can see from the foregoing, the relationship between a franchisor and franchisee is a complex one and is governed by an array of laws and regulations. Many franchisees are unaware of their rights against their franchisors, and thus miss out on opportunities to even the playing field.
DYE CULIK PC is a Charlotte, North Carolina business and franchise law firm that represents entrepreneurs throughout the Old North State. If you have an issue with your franchisor, contact us at 980-999-3557 to see how we can help.