Be Sure You Know What is in Your Franchise Agreements – and Have Them Reviewed Regularly

Chuck Modell November 19th, 2018

All too often start-up franchisors rely on a consultant or attorney to prepare their franchise agreements for them. If they work with an attorney who has extensive experience in preparing these agreements, their reliance may be appropriate, but recent legal actions against some big named franchisors demonstrate the importance of knowing what is in your agreements, and having them reviewed at least annually by someone who keeps up with trends, pronouncements, and changes in the law.

In the last nine months, state and federal regulators have been pursuing franchisors that include in their agreement a provision restricting franchisees from hiring employees of other franchisees or of company-owned outlets. These provisions are intended to protect franchisees in the system against a situation where they invest thousands of dollars in training employees , only to have them hired away by their neighbors. The reality, however, is that these provisions only started appearing in the majority of franchise agreements in the last ten years, and were often added by well-meaning attorneys who saw a good idea in another franchisor’s agreement. Some franchisors did not even know the provision was in their agreement, which also means they were not enforcing it. In February 2018, the Department of Justice declared these provisions a restraint of trade and warned franchisors that they could be prosecuted for including them in their agreements. We suggested to all our clients that they remove the provision from their agreements, and most did so. However, that was not the case for all franchisors, and we are now seeing headlines like “Franchise Systems Attacked by Slew of Antitrust No-Poach Class Actions”. The State of Washington has also brought actions against a number of large franchise systems.

This is not the only example of a provision that needs to be updated. In the last few years of the Obama administration, the hot issue of the day was holding franchisors responsible for the employment actions of their franchisees. As those actions were announced, it was critical that franchisors make changes to their agreement to confirm that it is the responsibility of the franchisee, not the franchisor, to hire, train, supervise and discipline its employees. Because of these changes, and a change in labor policies on the federal level, this has become less of an issue for franchisors, though the issue of joint employer liability has not disappeared in franchising. Before joint employer liability, it was consumer actions against franchisors, trying to hold them responsible for the “slip and fall” or “tainted food” incidents in their franchised locations. Once again, franchisors that had experienced counsel regularly reviewing their agreements added provisions to their franchise agreements, lessening the likelihood they would be held liable in these cases.

These types of cases, and many others over the years, demonstrate the importance of working side-by-side with your attorney in preparing your franchise agreements, and knowing their contents, as opposed to hoping there is form language you can use. Because franchising covers so many areas of law, it is also critical you or your advisers stay on top of changes in the law, and review your agreements at least annually for needed changes in those agreements.