What Price Can Franchisors Charge Franchisees for Products or Services?

The state of Washington has a franchise relationship law that requires franchisors to only charge franchisee fair and reasonable price for products and services that it sell to franchisees. 

State franchise relationship laws establish limitations on franchisors’ right to act cases in terminations, renewals, and defaults.  There no federal franchise relationship laws.  The federal franchise laws only govern the sale of franchises — however, there almost 2 dozen states that have enacted franchise relationship laws. 

The Washington franchise relationship law beckons the question of what is fair and reasonable pricing? In a recent case[i], the Washington Supreme Court gives some insight into considerations of what is a fair and responsible price to charge franchisee for products or services. 

  1. What is the fair market value of the product or services?
  2. What price did the franchise pay for the product or service?
  3. What do competitors charge for the product or service?
  4. Are all franchisees charged the same amount for the same or similar products or services?
  5. What is the franchisor’s profit margin on the product or service?

The court gives this example of unreasonable and unfair pricing:

For example, if the franchisor obtains a product for price x, and the franchisee could only obtain it on the open market for 5x, then selling it at the price of 2x might not be unfair or unreasonable—but if all other similarly situated franchisors are selling it for 1.5x, then the price of 2x may be unfair or unreasonable.

[i] MONEY MAILER, LLC v.  BREWER No. 96304-5 Washington Supreme Court, September 19, 2019


Are Franchise Application ADR Provisions Enforceable?

ADR is an abbreviation for alternative dispute resolution. Arbitrate and mediate are types of alternative dispute resolution.

Following the general rule, the court in the case of Doctor’s Associates, Inc. [Subway franchisor] v. Alemayehu held that arbitration and mediation agreements are enforceable if there is adequate consideration for a binding agreement and the intent of the parties is to arbitrate or mediate disputes.

Consideration is required for arbitration and mediation to provisions to be binding.  For without consideration there can be no binding agreement or contract.

“consideration may consist of a performance or of a return promise,” 

Restatement (Second) of Contracts § 71, cmt. d 

This case involved an arbitration provision in Subway’s prospective franchise application. Alemayehu was seeking to purchase a Subway franchise via a transfer from another Subway franchisee and thereby was required to complete a franchise application.    Alemayehu’s application was ultimately denied, and Alemayehu was found unfit to be a Subway franchise.  Alemayehu filed suit against Subway. 

The court held that Alemayehu’s claim must be held via arbitration.  Alemayehu submitted the application in exchange for Subway reviewing of the application and Alemayehu candidacy to become a Subway franchisee. 

The court held that an arbitration clause with the franchise application was enforceable. 

Franchisor Auditors and Inspections

Do you complete inspections and audits of your franchise locations?  Are the inspections done as a matter of routine practice? Do you only complete audits and inspections if a problem is reported?  If an inspection yields findings of subpar operating standards, what do you do with the results? 

Following brand standards, reporting revenues, and paying royalties
goes to the core of the franchise relationship. Failure to follow the franchisor’s brand standards can irreparably harms the goodwill of the franchisor and the franchise system.

Franchise audits and inspection can be way to ensure brand uniformity, quality, and compliance with operating standards. Read about:

  • How Are Compliance Audits are being Conducted
  • When Are Compliance Audits Done
  • Franchisee Perspective On Compliance Audits
  • What Courts Have To Say About Compliance Audits

See our article that appeared in Franchise Law Journal!

Compliance Audits Rule!

or visit: https://gettinslaw.com/publications/the-how-when-and-why-of-franchisor-audits-and-inspections/

Read the article!

Liquidated Damages for Breach of Franchise Agreement?

Liquidated damages (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).


Yes, was the answer of court in the case of Howard Johnson International, Inc. v. Manomay, LLC.  The franchise agreement, in this case, had a liquidated damage provision, which allowed the franchisor, Howard Johnson, to collect liquidated damages in the event that the franchisee breached the franchise agreement.  The franchisee breached the franchise agreement by not paying.  Howard Johnson terminated the franchise agreement and demand payment of unpaid royalties and liquidated damages. 

The court awarded the Howard Johnson the payment of unpaid royalties, attorney fees, and liquidated damages totaling $89,691.60.

[W]hen a liquidated damages clause for a commercial transaction is negotiated by parties with comparable bargaining power, the ultimate issue is whether the amount of liquidated damages is reasonable, either at the time of contract formation or the breach.

Ramada, 2018 WL 3105421, at *5

The court citing case precedent held that liquidated damages in commercial contracts negotiated by parties with comparable bargaining power are enforceable if the amount of liquidated damages is set at the time of contacting and the amount is a reasonable forecast of the harm resulting from breach.

Tipped Employees are Not Cheap General Labor

I am writing case updates for the upcoming American Bar Association (ABA) Fair Labor Standard Act (FLSA) Midwinter Report.  The annual FLSA Midwinter Report will be presented at the February 2020 Midwinter Meeting of the Federal Labor Standards Legislation Committee, and I will be listed as a contributor in the printed version.

In the first case that I am reviewing, the court expanded on some legal background worthy of a blog. 

Historically, we thought of tipped employees as waitresses.  However, the world of tipped employees has expanded.  As consumers, we tip a large number of service persons including quick-service restaurant works, uber or cab drivers, bellhops, hair and nail stylist.  The list goes on. 

What qualifies as a tipped employee and what does the Fair Labor Standard Act (FLSA) require for classification of a tipped employee. Here is what the court[i] said in response to these questions. 

Who qualifies as an FLSA tipped employee?

“any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”

29 U.S.C. § 203(t); accord Iowa Admin. Code r. 875-217.50(2).

What are the criteria for a tipped employee?

 Employers may pay tipped employees a lower base per hour rate instead of the federally mandated minimum per hour wage rate, so long as tips make up the difference lower base per hour rate and minimum wage.

Except, however, if the employee performs untipped duties related to the employee’s tipped occupation take up a substantial amount of his or her work time—more than 20%— or duties unrelated to the employee’s tipped occupation, than the employee is entitled to be paid minimum wage for that non-tipped labor.[i] 

There is another call-out.  The classification of the tipped employees described above is based on the Federal Fair Labor Standard Act.  States may and do have statutes and regulations regarding minimum wage, tipped employees rates and qualifications.

[i]  The DOL’s Field Operations Handbook

[i] HOWE v. JOHNNY’S ITALIAN STEAKHOUSE, L.L.C., 2018 WL 6521496 United States District Court, S.D. Iowa, Central Division, Case No. 4:16-CV-00086-SMR-HCA.  September 11, 2018.

You May Need More Capital To Offer and Sells Franchises in California

There are no hard and fast rules about how much capital or money a franchisor is required to have in the bank.  If a franchisor has limited amounts of funds in the bank, a state may require the franchisor to include a risk factor on the state cover sheet of the franchise disclosure document [FDD].  For new franchisors or franchisors that have limited amount of funds, a state may require a franchisor to defer initial franchise fees, initial escrow fees, or secure a bond. 

Based on a new policy, California is requiring Franchisors to have additional capital.

However, based on recent comment letters and conversations with the examiners in California, California requires something new.  Based on a new policy, California requires Franchisors to have additional capital.  The amount required is still convoluted.  However, when registering in California, franchisor should plan on having an amount equal to the initial franchise fee in the bank.  Without sufficient funds in the bank, the state of California may refuse the franchise registration application. 

The New and Expanded Franchise State Cover Page

On May 19, 2019, the NASAA [North American Securities Administrators Association] Membership issued instructions for the new Franchise Disclosure Document [FDD] state cover page.  The state cover sheet is expanding.  It is now 3 pages, not just one.  The pages include:

  • How to Use This Franchise Disclosure Document
  • What You Need to Know About Franchising Generally
  • Special Risk(s) to Consider About This Franchise

The first page, How to Use This Franchise Disclosure Document, is a table with 8 questions in the first column and in the second column, a cross-reference in the franchise disclosure document.  A narrative above tables states the mission of the table. The narrative reads:

Here are some questions you may be asking about buying a franchise and tips on how to find more information:

The question includes:

  1. How much can I earn?
  2. How much will I need to invest?
  3. Does the franchisor have the financial ability to provide support to my business?
  4. Is the franchise system stable, growing, or shrinking?
  5. Will my business be the only [XYZ] business in my area?
  6. Does the franchisor have a troubled legal history?
  7. What’s it like to be [an XYZ] franchisee?
  8. What else should I know?

The next page, What You Need to Know About Franchising Generally, is 7 general statements about franchising on the topics including:

  1. Continuing responsibility to pay fees.
  2. Business model can change.
  3. Supplier restrictions.
  4. Operating restrictions.
  5. Competition from franchisor.
  6. Renewal.
  7. When your franchise ends

The final page, special risk factors page, is kin to the risk factors required by the prior version of the state cover sheet. 

Franchisors must comply with the new state cover page requirements by January 1, 2020.

Possible New Limits for Franchisors in Florida

The Florida senate is putting forth a bill to limit franchisor ability to renew, terminate, or refuse franchisee transfer. The bill written by Senator Latvala purposes, per the bill, to create laws, unless under good cause and/or certain circumstances and notice, prohibiting franchisors from:

  • terminating a franchise
  • refusing to renew a franchise
  • denying ownership of a franchise after the death of the franchisee
  • preventing a franchisee from selling or transferring a franchise, assets of the franchise business, or an interest in the franchisee
  • intentionally misrepresenting or failing to disclose specified information;

The bill being considered in for Florida is not unique. Many states have laws regarding the termination, renewal, and transfer of the franchise.
The law carries some teeth providing that violations constitute a misdemeanor of the second degree; providing penalties; providing that a person may be awarded certain damages, attorney fees, and other costs under specified circumstances; providing that certain actions are deemed unfair and deceptive; authorizing the Department of Legal Affairs by itself or jointly with the Department of Agriculture and Consumer Services to sue a franchisor on behalf of certain persons for specified violations.
The bill also provides remedies for a franchisee or an aggrieved or injured person under certain circumstances; authorizes punitive damages under certain circumstances; authorizes the Department of Legal Affairs or the state attorney to bring an action for injunctive relief or other civil relief under certain circumstances; and clarifies that specified remedies are in addition to existing remedies.
This bill is not law and will not be law until and unless enacted. However, this highlights the need to review state laws prior to not renewing, terminating, or denying franchisee transfers. As mentioned, many states already have laws regarding renewal, termination, and franchisee transfers.
Franchise Relationship Laws.

HIPAA Alert: Is Your Franchise System Covered?

bigstock-Business-team-covering-face-wi-46872919There are franchises in countless industries: food service, home repair, business services, entertainment and recreation, personal care services, and health care. Yes, health care franchises. Health care franchises include concepts that provide health, nursing, physical therapy, dental, urgent care, massage, chiropractic, and rehabilitation services. And, franchises that offer and sell health care devices and products such as hearing aids and prescription eye glasses and contacts. It does not stop there.
Being part of the health care industry carries special privacy and security considerations. Every business is concerned about privacy and security, but entities working in the health care industry, are held to a higher standard. At the federal level, there is the HIPAA privacy and security and at the state level there are numerous health care privacy and security laws.   HIPAA is the federal law that covers health care privacy and security. The mandates of HIPAA can be robust and a concern for everyone in the health care industry.

As with laws that directly affect the franchise business operations, the franchisors may take the position, it is the responsibility of the franchisee to comply.  Yes, as part of the franchise disclosure document or FDD, the franchisor is required to disclose laws that affect the franchise business operations in Item 1.  And, the franchisor may provide an overview of HIPAA during the initial training.  But, at the end of day, the fall back is the provision in the franchise agreement that says:  “It is the franchisee’s sole obligation and responsibility to operate the Franchise Business in compliance with any and all applicable laws.” 


If the franchisor views patient information for consultation with the franchisees,completes audits or consumer satisfaction surveys, or has access patient information- the franchisor may be considered a business associate and thereby obligating the franchisor to comply with HIPAA mandates.
What does HIPAA compliance require? HIPAA compliance requires the:
Signing of business associate agreements
Developing of privacy policies and procedures
Developing of security policies and procedure
Training of staff and workforce members
Providing of notification to patient and the Department of Health and Human Services in event of breach
The ideology of franchising is built-on uniformity; the use of a single brand name and the uniformity of one operating system that transcends varying demographic and geographic territories. The innate uniformity of franchising beckons for the development of franchise system-wide HIPAA safeguards and HIPAA compliance. Does not make sense if franchisors and franchisees alike use the same mode and means of communication, the same mode and means of storing information, and access information that system-wide HIPAA policies and procedures are developed uniformly to safeguard these means and modes of communication, storage, access, and disclosure of information.
For more information about HIPAA and health care privacy and security, sign up for our HIPAA newsletter at:  http://eepurl.com/IB1kH


Can a bankruptcy render a franchisee’s non-compete void?


The answer is ‘yes’ in at least one case. The case is Allegra Network, LLC v. In re Michael G. Ruth. Michael G. Ruth and Elnoria J. Ruth, collectively the “Ruths” entered into a franchise agreement initially in 1984. The franchise agreement was renewed in 2006. The franchise agreement stated that the laws of the state of Michigan governed the franchise agreement.

 In 2008, the then franchisor, Allegra Network, LLC, terminated the Ruths’ franchise agreement for failure to pay royalties. Allegra Network sued the Ruths for payment of unpaid royalties and enforcement of the post franchise agreement non-compete. The Ruths filed for bankruptcy.

 This is where it gets complicated. The court goes on a tangent. Under Michigan law, if a non-compete is violated, the remedy is monetary damages. The violator of the non-compete agreement must pay money damages. Now remember we are in bankruptcy. Under Chapter 13 bankruptcy all monetary obligations are discharged or erased. So, it only follows that the money damages for violation of the non-compete are erased. A little bit of circular reasoning.

 In essence, the former franchisee can compete against the franchisor.-without any liability. The obligation to pay damages for violations of the non-compete are erased by the bankruptcy. The franchisor has no remedy.

 In a side note, the court makes an interesting statement. This decision is not the outcome in all jurisdictions. The court states that if the case were in Minnesota or Texas, bankruptcy would not render the non-compete unenforceable.

 Business Take Away: Bankruptcy changes the typical rules and not all states have the same laws.

 Do want to know the non-compete laws in your state? Call or email us!