Franchise Lawsuits Happen
by FranchiseKing, Guest Blogger
- Created: September 2, 2010, 5:07 am
I;s true; the business model of franchising is one of the best business models ever developed. I-s a brilliant idea, and if i-s done well, it can create lots of success, for both franchisee and franchisor.
However, we do't live in a perfect world.
The US franchise industry is highly regulated, but regulations are just rules, and you know what happens with rules.
Even the regulators themselves admit that they ca't check everything. Her's wha's printed on the first page of the Franchise Disclosure Document. (*FDD)
Note, however, that no government agency has verified the information contained in this document.
(Yes, i's bolded in the document!)
Basically, i's up to the prospective franchise buyer, the consumer, to protect themselves. That can be done with proper franchise research, and proper legal representation, before the franchise contract is signed.
Buying a franchise can be quite an emotionally-charged experience. We all like to think that we make major purchases like houses and cars, and yes, even businesses, based only on'the facts. (If that were the case, there probably wouldn't be as many unhappy consumers running around, claiming that they've been fleeced.) Emotions are very powerful, and they play a major role in a business-buying decision.
When one looks at a fast food-type franchise, for instance, they'll have a certain visual associated with that fast food business. It may be one in which their 20+ employees are running around trying to take care of lines and lines of hungry customers, who just happen to be smiling as they happily fork over wads of cash. (Do you hear it? Listen closely. It's the sound of cash register drawers opening and closing, 12 hours a day!)
Well, lots of people buy fast food franchises, and most of them have a similar visual.
Then reality sets in. Maybe there's a recession, for instance. Maybe, the corporate headquarters of the franchisor is having some issues, and they are large enough to impact the entire franchise chain. There could even be a franchisee revolt going on, much like what just happened over at a pretty high profile fast food franchise chain.
From * Nation's Restaurant News;
Four class-action lawsuits brought by disgruntled Quiznos Sub franchisees against the chain's owners concluded Friday when a federal judge entered a ruling upholding the terms of a settlement valued at $206 million, according to court documents.
What was this lawsuit about?
In the lawsuits, attorneys for franchisees alleged that Quiznos Franchise Co. LLC and other entities with ownership or control of the Quiznos chain, including parent QCE Holdings LLC, had violated U.S. racketeering and corruption statutes. Those allegations revolved around the chain's supply chain and food costs, marketing and advertising funds, and disputes among franchisees who agreed to but did not open locations and whether royalties are owed.
Now, this is certainly not a typical legal scenario for a franchise business, but, I wanted to show you that as good as the business model of franchising is, there are still situations that arise.
Sometimes, franchisors actually sue their franchisees. As a franchisee, you're required, (it's disclosed in the FDD, and it's also on your contract) to pay a percentage of your gross revenues. (Sometimes, it's flat fee.) If you don't pay, you can be sued by the franchisor.
In summation, please remember that when you buy a franchise, you're also entering into a legal agreement, and it's important that you understand your franchise contract, completely. Engaging the services of a competent franchise attorney, should allow you to sleep well at night, so you can wake up and do some business, in your own business.
Buying a Franchise: A Consumer Guide - from the FTC
* American Bar Association - Attorney Locator
* Non-US Government links
The Franchise King®, Joel Libava, is president of Franchise Selection Specialists Inc. Joel provides franchise advisory services to those interested in exploring franchise ownership, by showing them how to select and research franchise opportunities. He is frequently called on by the media for his no-spin insights on the world of franchising. You can follow Joel on his award winning blog-The Franchise King Blog.
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