I review a good number of Franchise Disclosure Documents [FDD] for prospective franchisees. And, I write and update FDD for franchisors. More and more, plentifully so, I have noticed the increase in franchise systems that use customer satisfaction surveys. Franchisors historically have maintained the right to inspect franchise location. So that is not new.
Both poor franchise outlet inspections and customer surveys can be grounds for termination under the express terms of the franchise agreement. Are the termination provisions in the franchise agreement for poor or failing marks on an inspection and consumer surveys enforceable? Or, is franchisor’s right to termination for failing inspections and satisfaction survey considered a breach of the franchisor’s duty of good faith and fair dealing?
Good faith and fair dealing is a promise that every party makes when entering into a contract. Good faith and fair dealing is not written down in the agreement. It is simply understood. The court will not enforce a party’s right under a contract unless it is fair and the party is acting in good faith.
The rationale beyond franchise inspections and customer surveys is brand quality, goodwill, and reputation. If a franchise location is not maintaining good customer service or not following standard protocols, the franchise system as a whole may suffer.
In a recent court case HLT Existing Franchise Holding LLC v. Worcester Hospitality Group, LLC the Second Court of Appeals Court upheld a franchisor’s right to terminate a franchise based upon failed evaluation scores as a result of poor customer satisfaction survey scores. And, the Court showed a little favoritism to customer satisfaction surveys over franchise inspections.
Per the Court, customer surveys have independent basis. Survey scores are the doing or opinion of the franchisor. Customer surveys are the views, judgment, and opinion of the customer. And, the franchisor conducted customer satisfaction surveys in the normal course of business in all franchisor locations. The consumer surveys were processed by a recognized third party.
Thereby, the Court in its decision said:
‘…..HLT terminated the franchising agreement based on a contractually permitted, rational, and non-arbitrary factor–the poor guest survey scores–it did not breach the implied covenant of good faith and fair dealing or act arbitrarily or irrationally.’
So thumbs up for consumer surveys from the Second Circuit in this case. Note, when reviewing the customer surveys, the court found it important that:
1. The surveys were done as part of the franchise model and not as an isolated location specific occurrence.
2. There were objective franchise system standard requirements for grades on the customer surveys
3. The customer surveys were conducted by an independent third party.