A franchisee is a business owner who opens and operates a franchised business, like a chain restaurant or a gas station with a brand name. Franchisees do not have all of the rights to their business; they have to comply with many of the rules set out by the franchisor. However, franchisees do still have several important rights that they can invoke to protect their financial interests and their future, and prevent their franchisor from overreaching and taking what is theirs.
The Franchise Disclosure Document
One of the most important rights that franchisees have is to the Franchise Disclosure Document, or FDD. This is an extensive report that has to be provided before starting the franchise. The FDD covers details about the potential franchise so the interested buyer can make an informed decision about the purchase. Under the Federal Trade Commission (FTC)'s Franchise Rule, the FDD has to include information like:
- Territory rights
- Restrictions on products and services
- Startup fees
- An estimated initial investment
- Trademarks and other intellectual property held by the franchisor
- Obligations of the franchisee
- Assistance provided by the franchisor
- Dispute resolution
- Financial statements from the franchisor
The Franchise Rule also forces the franchisor to provide the FDD to the franchisee at least 14 days before signing the franchise agreement.
Franchisees have a right to those two weeks: They give them and their franchise lawyer an opportunity to review the FDD and make an informed decision about buying into the franchise.
Once the franchise agreement has been signed, it becomes a binding contract. This endows rights and obligations on both the franchisee and the franchisor. By enforcing their contractual rights, franchisees can make sure that the franchisor upholds their end of the bargain while they operate the franchise.
Franchise agreements, however, are designed to protect the franchisor. They are not set in stone, though. Negotiating some of the terms of the agreement before it is signed can pay huge dividends over the long run for a business owner. Successful negotiations can secure new and stronger rights for the franchisee that can protect their financial interests and make it easier for them to expand in the future.
These contractual rights also include certain protections against fraudulent or problematic conduct by the franchisor in signing the original agreement. In forming the franchise agreement, the franchisor cannot:
- Use undue influence or duress to get the agreement signed
- Provide false or misleading information in the FDD
- Make the agreement unconscionable
If they do any of these things, the franchisee has a right to void the agreement.
Franchisees also have rights to not be unlawfully discriminated against by their franchisor. Franchisors need to have a justifiable reason to treat its franchisees differently. In most cases, the franchisor will find one: They can base their disparate treatment of a certain franchise on just about anything, from prior disputes to the precise location of the business.
However, that does not mean that franchisees have no rights against discrimination. Franchisors cannot make decisions that seem arbitrary, but that always seem to favor certain types of business owners over others.
The Right to Renew the Agreement
Many franchise agreements promise a right to renew. Lots of franchisee owners think that this means they can simply invoke that right and carry on with their business, the same as before.
Unfortunately, the right to renew a franchise agreement is often littered with conditions. Many of them can be quite onerous. Some common conditions for a renewal include:
- Upgrading the facilities
- Agreeing to even stricter terms in the franchise agreements that the franchisor claims are “then-current” – or added since the original agreement was signed
- Fixing things that the franchisor claims are breaching the franchise agreement
These additional terms and conditions can drastically undermine a franchisee's right to renew the agreement. They can even turn a good business opportunity into a very risky one.
Franchise Litigation Lawyers at the Katz Law Group
Opening and operating a franchise business can be a tricky endeavor. There is a power imbalance between franchisees and franchisors, with the big companies carrying most of the leverage.
However, franchisees do have some rights, and can negotiate to secure others. The franchise litigation lawyers at the Katz Law Group have nearly 40 years of experience helping franchisees fight for more and invoke those that they already have. Contact them online or call their law office at (508) 480-8202