Trust, money at core of most franchise conflict
Brian Schnell, partner at Faegre Baker Daniels.
Brands large and small have been making headlines for one unfortunate reason lately: franchisee dissent. From emerging chains up all the way to McDonald’s, franchisees have been organizing and calling out their franchisors for issues from costs of goods to marketing and shoddy equipment.
There are simply too many disputes to keep track of them all, but in almost every system, the battle lines are drawn over profits or a lack of trust in brand leadership.
Cases such as Tim Hortons franchisees protesting operational changes, or the association forming in McDonald’s to push back against expensive remodels, or the group of Gigi’s Cupcakes owners filing suit over price increases are in the headlines. And those are just the big cases.
“These big profile cases in the media, they’re the tip of the iceberg. Most franchise systems, a lot of the franchisees don’t have the wherewithal to launch these kinds of claims against their franchisors that some of these big systems have,” said Joseph Adler.
Adler, a Canadian partner at Hoffer Adler, has explored many of these dissent cases and the legal mess that comes out of them. He said even when franchisees are making good money they’ll push back when they see missed potential to make even more.
But disputes also arise from perceived mismanagement of money, as seen in the Tim Hortons class action lawsuit brought by the Great White North Franchisee Association. One of the allegations against the company was that it misused the franchise’s marketing fund.
But after an issue, big or small, dissent can become insidious for the entire system.
“Apart of the money, I think it’s an issue of trust. It’s a breakdown in the system. The franchisor promises something and doesn’t follow through or brings something different and the franchisees say, ‘We can’t trust these people,’” said Adler.
That can quickly spiral and both sides dig in, causing more damage to the overall system.
“More often than not, in a dispute, there’s been a breakdown in communication and the parties have stopped listening to one another and trying to communicate in a collaborative way and they’ve moved to trying to win,” said Brian Schnell, a partner at Faegre Baker Daniels who works mostly with franchisors.
When both sides are looking to win, all the typical franchise work takes on the stink of whatever the actual dispute is.
“It’s hard to find resolution when parties have dug in and want to win the dispute, win the motion, win the lawsuit. Everybody does that, the lawyers, the business people, and all the sudden that tends to taint other conversations, other relationships get more difficult. For example, for a field support person to provide support even if they have nothing to do with the dispute,” said Schnell.
To avoid such situations, Schnell says it comes down to maintaining collaborative communication, even if the power is still in the hands of the franchisor.
“I’ll often hear that doing that takes more time, doing that is more difficult because it’s like herding cats. There’ll be a dozen excuses why that’s more challenging than in a non-franchise system where the decisions can just come down from on high,” said Schnell.
“If a franchisee hasn’t been involved, your margin in getting decisions right is so much smaller. If you haven’t involved them you better get it right almost all the time. If you’ve involved them, they’ll say, ‘You involved us and collectively that didn’t work out, let’s work on the next one.’”
Time for an exit?
The legal tactics when both sides have dug in are generally the same as exiting a problem franchisee or pursuing a rescission of a misrepresented contract. If faced with unscrupulous actors, ‘zees can often point to misrepresentations or other illegality and work to get out of the contract. But for disputes around strategy or arguably logical innovations, contracts favor the franchisor.
“These agreements are very one-sided and there’s a tendency not to negotiate anything with many franchisors. When you have that type of one-sided relationship and they’re not being treated the way you’d expect or when you have systems that don’t work well for a large number of franchisees with these one-sided contracts, it’s a problematic relationship,” said Peter Lagarias, senior partner at Lagarias, Napell & Dillon.
Lagarias, who works exclusively with franchisees, said he’s been part of legislative pushes to balance the contract, but in most states franchisees are still on the business end of complex and one-sided contracts. That leaves franchisees leading disputes in the proverbial crosshairs.
“The franchisors divide and conquer. They’re taking the approach that they can buy out and settle some of the grievances with some of the key people who are causing trouble,” noted Adler. “I see that in smaller systems or midsize systems where the franchisor is picking off some of these leading franchisee dissenters.”
One Tim Hortons franchisee serving as president of the Great White North Franchisee Association, for instance, had his contract terminated over sharing sensitive brand information.
The best protection for franchisees is a close read of the FDD and other contracts with a lawyer and talking to current franchisees and those who have left. This can help avoid the surprises that lead to franchise disputes.