An Exploration of Lawsuits Involving Franchises and Franchisors

An Exploration of Lawsuits Involving Franchises and Franchisors

The relationship between the franchisor and the franchise is built on trust and mutual understanding where both parties aim to gain specific benefits from working with each other. A litany of court cases involving these two parties, however, have found their way in various courtrooms in the United States as disputes arise from violations of the spirit of the terms agreed upon by the two parties.A franchisor by definition is a business entity which allows an individual to run a location of their business in exchange for a specific fee (Guilloux et al., 2008). A franchisee, on the other hand, is the individual or group of people appointed to manage a business on behalf of the franchisor and are expected to pay a certain agreed-upon fee (Guilloux et al., 2008). The current high level of fractious relationships within the franchising sector suggests that the segment suffers from goal divergence between the stakeholders (Wright et al., 2009). The topic was selected to provide insights on the motivations for a high level of conflicts between the principals and their agents in what would appear to be a symbiotic business relationship. Disputes arising from a franchising relationship need to be quickly and efficiently resolved to maintain a healthy business relationship between the players involved.

Article Review

Franchising offers a fertile breeding ground for litigations due to the volatile nature of the modern business environment. When disputes arise, both the franchisors and the franchisee are very keen to promptly resolve the dispute to avoid an adverse effect on their business operations. Mary Peterson’s article titled “Strategies in Franchise Litigation” highlights some of the techniques available to a counsel when finding a quick solution to a disagreement between the franchisor and the franchisee. Pearson recommends a design of a well-structured alternative dispute resolution mechanism to maintain a healthy performance of a franchise network (2012). The franchise should be modified to suit the specific demands of the network to guarantee an efficient resolution of the conflict and maintain the franchisor-franchise relationship at the same time (Pearson, 2012). The article recommends integration of several alternative resolution mechanisms to formulate the best solution for the parties in conflict, arguing that it is imperative that the solution identified maintains a positive working relationship between the franchisor and franchisee.

The alternative resolution disputes may fail depending on the gravity of the misunderstanding, hence dragging the matter in a court of law. Quick resolution of the conflict is important for the business relationship to thrive even when the option of litigation is explored by the players in the franchise network. Larson (2012) recommends the legal counsels involved in the litigation process to analyze the facts of each case and determine if the dispute could be solved by application. However, if the nature of the dispute is impossible to be appropriately solved by application and action is deemed appropriate, then a prompt resolution could be achieved through a summary judgment motion (Larson, 2012).The article relates to the topic in the sense that it provides important insights on how to quickly and efficiently resolve franchise disputes when they arise. Whatever the litigation procedure adopted by the counsel, a quick, efficient, and tailor-made solution is imperative towards achieving a flourishing franchise network.

The process of litigation is draining to the franchise network since it distracts both parties involved from building the brand. An article by Fedder et al. (2010) titled “Can We Resolve Franchise Disputes Faster, Cheaper and Better?” argues that lawyers involved in the dispute resolution process have to investigate better, cheaper, and faster methods of dispute resolution when disagreements arise in franchising. Fedder et al. (2010) reckons that lawyers have developed strategies for handling “problems of unplanned negotiations that occur late in lawsuits” by using innovative practices such as “settlement counsel and cooperative practice” (p. 2). The article relates to the chosen topic as it explains the modern methods available to lawyers to fast track the litigation process involving franchise relationships without damaging the business prospects of the network. While lawsuits are inevitable in the event conflicts, arise between the franchisor and franchisee, exploration of cheap, fast and quick resolution to the misunderstanding is in the interest of both parties grow the business.

Laws and Regulations

The franchise industry is a global market leader and an integral part of the economy. As such, both state and federal institutions have formulated various laws and regulations to govern the relationship between the franchise and the franchisor. One of such laws is the “community of interests” which must exist between the franchisor and the franchisee as it relates to the business interests of the former (Märzheuser-Wood &Babbot,  n.d.). This law is a test which is aims to objectively analyze how closely tied the franchisee, and its business is to the franchisor regarding certain specific items such as finances, control, contributions, and operations (Märzheuser-Wood &Babbot,  n.d.). The relationship of interdependence between the two parties forms what is the hallmark of the community of interest (Märzheuser-Wood &Babbot,  n.d.). The law relates to the chosen topic since it provides a background to the reasons behind majority of the lawsuits involving franchisors and the franchisees. The complexities of factors covered under the community of interests dictates how fast and the cost of litigation in the event of a franchisor-franchisee dispute, all which have to be considered if the method of arriving at a solution is to be appropriate for the business brand.

Court Case

Over the years, lawsuits involving colossal amounts of money have graced the American justice system with mixed results. One such litigation involving a franchisor and the franchisee is the Broussard v. Meineke discount muffler shops of 1997. The case was heard and determined by the Court of Appeal and represents a model decision addressing the issue of class certification in franchising. The franchisees, Broussard, brought a lawsuit against the franchisor, Meineke, complaining about a misappropriation of the transfer funds. Under the terms of their agreement, the franchisor was supposed to contribute about 10% of the revenues generated from sales on a weekly basis towards the advertisement funding(Barry &Zacko, 2014). While the franchisors had the right to control the funds meant for advertisement as per the terms of the agreement, they were also obligated to spend the funds kitty exclusively to cover advertisement expenses(Barry &Zacko, 2014). However, the jury determined that Meineke through its in-house advertisement initiative, its parent companies, and certain officials affiliated to the company made deliberate attempts to conceal misappropriations concerning the funds.

The Court of Appeal agreed with the findings of the jury that the franchisors had deviated from the terms of the agreement. The decision of the court of appeal the franchisors on the fiduciary standard regarding the use of advertisement funds caused a concern that future litigations would disadvantage the franchisor and ignore their advantage over based on terms agreed as per the contract(Barry &Zacko, 2014). However, those concerns were quashed when the Fourth Circuit Court of Appeals faulted the ruling made by district court which had earlier allowed the franchisees to advance their fiduciary duty claims(Barry &Zacko, 2014). The court further ruled that no fiduciary duties exist in the context of advertisement and that class actions are generally inappropriate in a class action context given the unique nature of interactions between the franchisees and the franchisors (Barry &Zacko, 2014). The ruling of the higher court is of particular importance to the topic since it covers the community of interest earlier discussed, the test which seeks to determine the extent of the ties between the franchisor and the franchisee regarding funding, actions, and strategy among other things. The case represents an example where the federal law protected the superior position of the franchisor on the contract agreement given the fact that they own the brand which the franchisee operates under.

I agree with the ruling of the Fourth Circuit Court of Appeals to quash the earlier decision which favored the plaintiffs. The basis of my argument is that the court acknowledged that the nature of the relationship between the two parties was unique, hence deemed it inappropriate to apply a standard fiduciary duty on the franchisors. While the finding by the Court of Appeal that the defendants had violated the terms of the agreement was correct, I feel that it erroneously failed to adhere to the legal provision of community of interest between the franchisor and the franchisee. Meineke owned the brand of the business and as such, morally had the prerogative of making the decision when and how much to invest in advertisements. Nevertheless, the fact that the defendants lied about the misappropriations of the funds was against the basis of trust between business partners.

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