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Are Franchisees Agents of Franchisors?

Did you read that a federal district court in Utah recently found evidence that a Best Western franchisee was actually the "agent" of the franchisor? The evidence was based on the fact that Best Western had strict requirements for its franchisees, showing its ultimate authority.

The evidence described that Best Western had control over the buildings, grounds and public areas and how they should be kept. And it showed how the hotel chain ruled over the housekeeping department and how guest rooms and bathrooms should be maintained. The franchisor's right to conduct regular inspections was also cited in evidence.

The court decided in Licari v. Best Western International, Inc. et al., that those facts were enough to support a potential jury-finding of "control" at trial, that the franchisor was at fault.

As you know, there are no federal laws requiring franchisors to abide by the common law duty of good faith in their dealings with franchisees; no fiduciary duty when the franchisor handles its franchisees' money in pooled advertising funds; and no duty of due care that the franchisor must show to its franchisees. It is the absence of national minimum standards of fair dealing that is responsible for most franchise litigation.

In other words, the only rules that apply in franchising are those the franchisor's attorneys include in their one-sided license agreements, which are presented to franchisees on a take it-or-leave-it basis.

It is also astounding to consider that the only regulatory body overseeing the franchise industry, the Federal Trade Commission (FTC), says that it "does not have the resources to follow up on all meritorious complaints". Remember that franchise industries employ more than eight million workers in over half a million small businesses. Combined annual sales in these franchised businesses total more than $1 trillion in retail sales in the United States.

After 33 years of inadequate FTC enforcement, the major problem facing franchisees today is still the franchisor/franchisee relationship, which comprise 92% of the current franchise complaints before the FTC.

Corporate lawyers have managed to draft contracts to eliminate the implied covenant of good faith and fair dealing in franchise agreements. Furthermore, they have lobbied successfully in every state legislature to eliminate the fiduciary duty that franchisors should owe to their franchisees.

Let's keep an eye on this case and see if it establishes a principal/agent relationship between franchisors and franchisees.

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