A Termination By Any Other Name

Editor's note: Michael Garner of Dady & Garner, P.A. has practiced franchise law for over thirty years. He is regarded as one of the nation's premier trial lawyers.

Franchisees need to be alert to tactics that franchisors use that have hidden objectives.

One of these is the “de facto” termination. 

Typically, a franchise agreement will require a franchisor to give a written notice, with cause, if it seeks to terminate the franchise with the franchisee.  Obviously, if a franchisor sends a written notice of termination, the franchisee will be alerted to both the gravity of the situation and the need for legal representation.

Some franchisors, in an effort to achieve the objective of termination without raising the franchisee’s awareness, will take steps that effectively terminate the franchise in substance, but without the notice.  Thus, for examples, franchisors might cut services, divert advertising to other areas, be unresponsive, delay new programs, and the like.  Other strategies include encroachment on the franchisee’s territory through actual stores in the same area or sales over the Internet.  Taken together, all of these actions can erode a franchisee’s business to the extent that it is no longer viable, causing the franchisee to give up.  Thus, the franchisor accomplishes indirectly what it might not be able to accomplish lawfully through a direct termination.

Franchisees need to be sensitive to the possibilities of a de facto or indirect termination.  Courts that have confronted this situation have regularly recognized that franchisors may do this, and have enjoined conduct that amounted to a termination but was not labeled as such.  This is another embodiment of the legal maxim that you cannot do indirectly what you’re prohibited from doing directly.

Coming next, other franchisor strategies.