Lessons From The Athlete's Foot in Italy

Editor's note: Carl Zwisler, an attorney for Haynes and Boone LLP specializing in international franchising, states that there are a number of lessons to be learned for future franchisee buyers and franchisors going abroad in the lawsuit of Winsport versus The Athlete's Foot.

Before buying an international master franchise, franchisees need to:

1. Know whether the franchisor has the resources to fulfill contractual obligations. Information about a parent or affiliate which has no contractual obligations to an international franchisee will not likely be the basis for viable claims if the international franchising entity does not fulfill its commitments.”

2. Understand a franchisor's financial condition. Research of both the company and the industry is an essential part of due diligence.  Franchisees also need to know whether the entity granting them franchises has the resources to fulfill contractual obligations. Information about a parent or affiliate which has no contractual obligations to an international franchisee will not likely be the basis for viable claims if the international franchising entity does not fulfill its commitments.

3. Perform due diligence in having conversations and interviews with other international franchisees.  If, for example, special purchasing programs are expected for international territories, a prospect should inquire of existing franchisees how those issues are being handled before signing a franchise agreement. 

4. Create franchise development schedules that are realistic. Both the franchisor and master franchisees/area developers should think through the consequences of schedules not being met.  In this case, the franchisee lost its right to expand, and, because of the litigation, the franchisor and the franchise both have faced litigation and its attendant costs.  Moreover, the franchisor apparently has been foreclosed from one of the world's most lucrative markets as the dispute process winds on, And the acrimony of the master franchisee is likely to have an adverse impact on development opportunities in other territories.

 There are lessons for international franchisors as well.

1. Franchisors need to appreciate differences in legal systems, and consider whether a selected forum may likely result in their being in litigation for years. Use of arbitration or the courts of a different country may result in lower costs or different outcomes.

2. U.S. franchisors may agree to translate their agreements into different languages, but the English language version should be agreed upon as the controlling version.  That could mitigate some of the potential arguments over what particular clauses mean.

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This is supplemental reading for the news story:

• Franchise Litigation Ties up The Athletes Foot in Italy