No Promise of Franchise Success!

corporate deal - isolated You buy a franchise with great hopes of success. During discovery day, you meet franchisees that are successful. The franchisor layouts out processes and systems that are in place aimed to help you and other franchisees be successful. But, what if does not come to fruition? Your franchise is not successful. You lose money and then finally close the doors. Can you sue the franchisor claiming “it was understood when I bought this franchise it would be successful? I relied on what you said. I reasonably believed that your system would lead to a successful franchise business for me.”

That is one of the many claims made by David and Denis Wojcik and their corporation in a recent case against the Saladworks franchisor and Saladworks designated vendors. The case is David J. Wojcik et al v. Interarh, Inc. et. al. The court said there is no general implied promise of success. A global promise of success just does not fly. A franchisee cannot just sue a franchisor because their franchise is not a success. In order for a franchisee to make a case, the franchisee must specifically plead a breach of an express or implied franchise covenant or misrepresentation to make a viable case.

In addition to the overall complaint that their franchise was not a success, the Wojcik made other specific claims for breach of the franchise agreement. The claims are congruent with common franchise business issues. Let’s take a look at their other complaints and see if they can withstand summary judgment. Here they are:

  • Problems with site selection, specifically the site selected was too small to provide adequate income and the site build-out costs were high, because of the prior use of the site.
  •  Altering of the franchise model such as discontinuation of the fountain machines in exchange for bottled beverages and reduction of POS system terminal which lead to lower consumer sales.
  • Designating inexperienced vendors and contractors that had little or no knowledge of local laws or regulations, which lead to construction cost overruns.
  • Understating labor and food estimates in the franchise disclosure document (FDD) that lead to faulty business plans and projects.
  • Failing to apply adequate national brand and market fund dollars for the benefit of the franchisee’s market and new business.
  •  Misinforming them about Saladworks loan default rates.

So let’s take a look at these objections. Franchisors modify their system model from time to time. Franchisors make estimates in Item 7 of the FDD regarding initial costs. Franchisors designate vendors that franchisees must buy from for purposes of uniformity. Franchisors make judgment call about how national advertising fund dollars will be used. These are all things that franchisors commonly do. Can all these decision lead to an implied breach of the franchise agreement or misrepresentation?

Yes, is the court’s answer. If under the express terms of the franchise agreement, the franchisor is given the right to use its discretion, then “yes” the franchisor can be held liable for breach of implied duty of the good faith and fair dealing if the franchisor uses its discretion improperly. So for franchisors, when you use your discretion or make judgment calls, consideration should be given to the impact on franchisees. It is a balancing act. Not all decisions will result in positive impact for all franchisees. One way to protect against vulnerabilities is to get buy-in and feedback from franchisees. This can be done in a number of ways. Here are several ways:

1. Ask franchisees to complete satisfaction surveys regarding their use of the approved and designated vendors.

2. Present system changes to the Franchisee Advisory Counsel for input and feedback.

3. Ask select franchisees to beta test system changes before implementing wide-spread system changes.

4. Survey franchisees about their operating cost to obtain better estimates of operating and start-up costs.

 

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