Documentation Key to Minimize Future Legal Woes
Chris McCuiston, CEO of Goldfish Swim School, offered franchisees three options for royalty and fee relief: Defer April payments to June with no interest; defer April payments to September with interest; or pay on time. Operators received a short document to select their option, sign and return by a specific date, he said in an interview.
It's the kind of clear and transparent communication that franchise attorneys at Faegre Drinker are advising. "If you have franchisees who are similarly situated…you want to treat them in a similar way," said Nick Rotchadl, whom I called to expand upon his comments in a firm-sponsored webinar on April 13. For example, a franchisor could offer a certain package of relief if sales are down by X, and another if sales are down by Y.
"Different franchisors are approaching the relief topic in different ways…It's all over the board," said Brian Schnell, the Faegre Drinker attorney moderating the firm's webinars. He's been using the phrase "Franchise Strong…and Leadership Matters."
Schnell advises against amending the franchise contract because that's too cumbersome. Rather, issue "a systemwide communication that spells it out."
Asked if he expected increased litigation between franchisees and franchisors when the COVID-19 crisis ends, Rotchadl said it's too early to say. "That's a difficult question to answer right now, because there's still quite a bit to go through to be done with the crisis, including what is an unclear and ambiguous process of reopening."
He repeated the need for a "systemwide memo that's transparent of what the relief is offering, how it will work, when it will be in place, when it will end. So later down the line, everybody has something to go back to."
Franchisors should take swift action to terminate a franchisee that's violating government shutdown orders, Rotchadl said, because risk of damage to the brand is high in those cases.
He also advises documenting issues that have nothing to do with COVID-19, despite an operator who might claim otherwise. "This situation is not a free pass for violations. For instance, non-payment that may have occurred months before COVID-19," he said. "If you do a nice job" of documentation, "when we come out of this, the record will be more favorable to you as a franchisor."
Schnell says most franchisors and franchisees are working together during the crisis, and not getting mired in small disputes. "You've heard me talk about the importance of Franchise Strong," he said on a webinar. "This is the time we all need to step in and step up—step in and step up now like never before. We will be judged by how we lead, and the results we achieve are absolutely critical."