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Ten Worst Provisions in a Franchise Contract

If you are in the process of performing your due diligence on a franchise opportunity, you are probably struggling to comprehend the seemingly-unending legalese in the franchise agreement. Indeed, even the best franchise lawyer struggles to interpret what the drafters intended when they wrote some of the language in many of these agreement templates that, frankly, should have been overhauled long, long ago.

That said, most franchise agreement provisions can be interpreted, and the news often is not good for prospective franchisees. Based on more than 30 years of franchise law experience, here are 10 of the absolute worst provisions in franchise agreements:

1. Mandatory Mediation and Arbitration.

We’ll start with a big one: Many franchise agreements contain provisions that require franchisees to submit all disputes to mediation or arbitration (or both) before they can enforce their rights in court. While mediation and arbitration have their virtues, these provisions are often designed to make it harder (and more expensive) for franchisees to pursue valid claims against their franchisor.

2. Choice of Venue.

In addition, franchise agreements will usually contain provisions stating that all disputes are subject to jurisdiction and venue in the state (and sometimes the city or county) where the franchisor’s headquarters are located. This, again, makes it more difficult and expensive for the franchisee – and provides home field advantage for the franchisor.

3. Non-Competition Covenants.

Non-competition covenants in franchise agreements will often prohibit franchisees from operating independently once their franchise agreement expires. While there are some legitimate arguments in favor of these provisions, franchisors often overreach and impose unreasonable restrictions on their former franchisees.

4. Confidentiality Requirements.

Franchise agreements will often contain confidentiality clauses that prohibit franchisees from talking to the public (and potentially even one another) about issues with the franchise system.

5. Lack of Franchisor Accountability.

While franchise agreements and Operations Manuals (which are typically binding under the franchise agreement) impose an inordinate number of obligations for franchisees, they establish almost no obligations for the franchisor. From use of marketing fund contributions to ongoing training, most franchisors promise next to nothing in their franchise agreements.

6. Modification of the Operations Manual.

Not only is the Operations Manual binding, but most franchisors reserve the right to modify it over time. This clause essentially allows the franchisor to make the franchise agreement even more strict whenever it pleases.

7. Unilateral Default and Termination.

Another one-sided provision: Most default and termination clauses only establish defaults that can be claimed by the franchisor. In many cases, franchisees will be bound for the entire term of the franchise agreement with no express right to get out if the franchisor fails to meet its obligations.

8. Mandatory Supplier Provisions.

Some franchisors establish relationships with suppliers who pay volume rebates, and then they mandate that their franchisees use these “preferred” suppliers. This establishes an additional revenue stream for the franchisor while limiting the franchisee’s ability to seek out competitive pricing.

9. Then-Current Renewal Terms.

When your franchise comes up for renewal, you may be required to negotiate the franchisor’s then-current franchise agreement instead of continuing to operate under your existing contract. This adds more expense to the renewal process, and when franchisors update their agreements it is usually not with their franchisees’ best interests in mind.

10. Conditions on Renewal and Assignment.

Franchise agreements will often impose other conditions on the franchisee’s “right” to renew as well. In addition, these and other conditions usually also apply to assignments – effectively allowing the franchisor to veto any unwanted franchise sales.

Do you know what is in your franchise agreement?

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About Jeffrey M. Goldstein

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Jeffrey M. Goldstein represents clients in commercial complex litigation matters across the country. Mr. Goldstein is recognized as one of the top franchise litigators in the country. Mr. Goldstein has extensive experience in representing clients in state and federal courts in cases involving fraud, RICO, antitrust, encroachment, and wrongful termination. Mr. Goldstein also has an active practice in state and federal appeals cases. Mr. Goldstein practices as a franchise lawyer in complex litigation cases representing only franchisees and dealers. Although Mr. Goldstein appears in courts in a pro hac vice capacity depending on the state, he also has direct access to New York, Pennsylvania, Massachusetts, and the District of Columbia (DC), Washington, where holds Bars for those states. 

In addition to his litigation practice, Mr. Goldstein counsels and advises clients in franchise and distribution matters. Mr. Goldstein has represented clients across the United States in almost every leading franchise system. Mr. Goldstein also is retained to counsel many national independent franchisee associations. Mr. Goldstein has also served as an expert witness in several federal court franchise cases.

Mr. Goldstein graduated magna cum laude from Bucknell University with dual degrees in Philosophy and Economics in 1979. In 1983, he obtained his Juris Doctorate from Boston University School of Law, where he also simultaneously received his Masters Degree in Economics.

You can reach Jeffrey M. Goldstein at (202) 293-3947 or email jgoldstein@goldlawgroup.com. His firm's website is www.goldlawgroup.com. 

The Goldstein Law Firm is one of a handful of law firms in the country that represents only franchisees & Dealers. Not every franchise lawyer is a franchisee lawyer. Almost all law firms specializing in franchise law represent either solely franchisors or both franchisors and franchisees, but not solely franchisees & dealers. The philosophy of The Goldstein Law Firm is that all of our franchise attorneys' effort should be focused on advocating for the rights of franchisees, not on cutting new law for franchisors who are very ably represented by the largest law firms in the world. The Goldstein Law Firm offers its franchisee and dealer clients a consistent and unclouded commitment to the cause of franchisees. On a national basis there are merely a handful of franchise lawyers who truly represent only franchisees & dealers. As a franchisee lawyer, Jeff Goldstein is one of these rare franchise lawyers who does not also represent manufacturers and franchisors. 

GLF specializes in: 

General Franchise and Distribution Antitrust violations
Franchise Price-Fixing claims
Wrongful franchise terminations
Franchise Encroachment claims
Franchise Territorial violations
Franchise Dual Distribution competition
Franchise Menu Pricing disputes
Unfair Franchisor competition
Franchise and Distribution Trademark violations
Franchise and Distribution Post-term covenant not to compete restrictions
Wrongful franchise default cases
Franchise Supplier overcharging claims
Franchisor tying arrangements
Franchisor Fraud and Misrepresentation Claims
Franchise Disclosure Document Defects

(202) 293-3947

www.goldlawgroup.com

jgoldstein@goldlawgroup.com

In those cases in which Jeff is retained to litigate franchise law questions, he appears in courts around the country either in a Pro Hac capacity, or through his direct membership in the Bars of New York, Massachusetts, District of Columbia, Washington, and Pennsylvania.

Area of Interest
Franchise Consultant