Minnesota Federal Court Upholds Franchise Release

Henry Pfutzenreuter September 9th, 2020

We have long recommended to our franchisor clients that when they provide benefits or concessions to franchisees, above those required under their franchise agreements, they should obtain a general release from the franchisee in consideration for those benefits or concessions.  Last month the U.S. District Court for the District of Minnesota upheld the validity of these releases.

General Releases After Obtaining a Franchise

In Tim-Minn, Inc. v. Tim Hortons USA, Inc. a Tim Hortons franchisee alleged that Tim Hortons provided false and misleading financial representations to the franchisee in connection with franchise and area development agreements requiring the franchisee to open 280 Tim Hortons’ restaurants. Larkin Hoffman represented Tim Hortons as local counsel in the franchise litigation.

Tim Hortons moved to dismiss the claims based on a general release included in an amendment to the parties’ area development agreement that reduced the franchisee’s obligation to build out all the stores required under their area development agreement. The franchisee argued that the release was an invalid waiver of its rights under the Minnesota Franchises Act (the “MFA”), which prohibits a franchisor from requiring a franchisee to waive its rights under the MFA as a condition to obtaining a franchise.

The court rejected the franchisee’s argument, holding that since the parties “did not enter into a franchise agreement” when the franchisee provided the release, and instead “amended their existing agreement,” it was not prohibited under the MFA. Consequently, the court dismissed the franchisees’ claims under the MFA and transferred the remaining common law claims to Florida pursuant to the franchise agreement’s valid forum selection clause.

Best Practices for General Releases

Most state franchise relationship statutes have anti-waiver provisions prohibiting franchisors from requiring franchisees to waive their statutory rights as a condition to obtaining the franchise. Franchisees often cite these provisions to try and revive claims barred by otherwise valid releases. The court’s decision in Tim-Minn supports the validity of releases provided by franchisees after they obtain the franchise, thus supporting our recommendation that franchisors should require franchisees to sign general releases at appropriate times during their relationship, such as renewals, extensions of payment terms of other delays in the time for the franchisee to fulfill its obligations, or in this case, a reduction on the franchisee’s obligations. These releases ensure there are no unspoken issues that might arise later during the parties’ relationship. If there are, then the request for the release provides an opportunity for the parties to address those before making additional concessions, commitments and investments in their relationship.