Terminating a franchise can pose several potential pitfalls and expose a franchisor to significant liability. A franchisor may not simply cancel, terminate, or refuse to renew a franchisee for just any reason. In most situations, there must be “good cause,” timely notice, and proper documentation to support the decision. Failure to understand and follow these rules may violate the New Jersey Franchise Practices Act, N.J.S.A. § 56:10-1 et seq. (“Act”) and expose a franchisor to liability for monetary relief and an award of attorney fees and costs to the franchisee.
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McDonald’s Closure of Russian Locations Spotlights the Proper Way to Franchise Internationally
Recently, McDonald’s has been receiving much attention for its closure of restaurants in Russia due to Russia’s aggression into Ukraine. As part of the coverage, news outlets have been reporting on some of the underlying infrastructure McDonald’s invested in as part of its efforts to expand into Russia. As noted in the Washington Post, as part of its Russian expansion, McDonald’s:
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Infrastructure Spending’s Impact On Franchise Sites
Over the next five years, the federal government expects to spend over a trillion dollars on a wide range of infrastructure projects, including road widenings, bridge repairs, and upgrading mass transit and the power grid (to name a few). Some projects will require the government to exercise its power of eminent domain to take private property to create new right-of-way access or expand existing access rights.
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Franchisor Beware: Registered Trademarks Does Not Mean Impunity from Priority Local Use Challenge
Federal trademark registration is the Holy Grail for companies, especially franchises, looking to expand their footprint and access a national audience. But even though trademark registration confers on owners certain exclusive rights and benefits, such as constructive national notice of use, protects against registration of confusingly similar marks, provides notice of ownership, and enables recovery of statutory and exemplary damages in appropriate cases, it does not extinguish the rights of an owner of a substantially similar mark who has used the mark in commerce prior to registration. This can be especially problematic for growing franchises that have built their business on a recognizable name and charge significant fees for franchisees to use that name in running a local franchise location.
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Use It or Lose It: Supreme Court Rules Against Special Rules Favoring Arbitration When Deciding Waiver of That Right
On May 23, 2022, the U.S. Supreme Court, in a unanimous decision, decided Morgan v. Sundance, Inc., No. 21-328, in favor of an employee who sued her employer, a Taco Bell franchisee, for wage theft. The Court concluded that waiving arbitration rights does not require a showing that the party seeking to have their case heard in federal court would be prejudiced by continuing with arbitration. The case, although decided on narrow grounds, demonstrates the risk that a party takes when it decides to delay enforcing a contractual arbitration provision. By eliminating the prejudice requirement, the Court removed a safety valve that saved parties who decided to forgo arbitration for a period of time, then ultimately opted for arbitration. As a result of the holding, a party seeking to invoke the right to arbitrate should not delay, or they will risk forfeiture of the right to arbitrate at a later time.
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No-Poach Clauses in Franchise Agreements: The Saga Continues in 2022
For the past few years, it seems franchisors have been riding a roller coaster when it comes to no-poach clauses in their franchise agreements. While for a time it seemed as though scrutiny for such clauses might be fading, on February 17, 2022, the Department of Justice (“DOJ”) filed a motion requesting permission to file a statement of interest in an ongoing case involving restrictions contained in McDonald’s’ franchise agreements. These restrictions prohibit the solicitation or employment by franchisees of individuals who had worked at another McDonald’s. McDonald’s had been relying on an existing statement of interest filed in a separate case by the DOJ during the previous administration’s tenure that called for an evaluation under the “rule of reason” rather than as a “per-se” violation under the Sherman Act.
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The ETS, the Supreme Court Ruling, and the Vax-or-Test Rollercoaster: What Should Your Business Do Now?
Updated as of 1/27/22 due to OSHA’s withdrawal of the Emergency Temporary Standard (ETS)
The vax-or-test legal rollercoaster ride continues, leaving human resource managers’ heads spinning, lawyers prognosticating, and employers simply wondering what comes next.
On January 13, 2022, the United States Supreme Court, in a 6-3 majority decision, dealt a substantial blow to the future implementation of the Occupational Safety and Health Administration’s (OSHA’s) Emergency Temporary Standard (ETS) for large employers, putting the ETS on hold indefinitely pending further review by the United States Court of Appeal for the 6th Circuit (which had reinstated the vaccinate-or-test mandate). Among other things, the ETS mandated that all businesses with 100+ employees require their employees to either vaccinate (and provide proof thereof) or submit to weekly COVID-19 testing to attend work.
Deferral Agreements – Considerations for Extending Relief to Troubled Franchisees
Deferral agreements, or workout agreements, are a favorable option for franchisors seeking to restructure and manage the obligations of a struggling franchisee before more draconian measures, such as termination of a franchise agreement and litigation. These agreements allow parties to agree to restructured conditions under a franchise agreement and/or postpone certain events before further action is required. The most common example is the franchisee who is having problems paying royalties or performing contractual obligations on a timely basis. The failure to make payments under a franchise agreement usually indicates a larger problem with the franchisee’s business, and bankruptcy court may be the next avenue if things do not improve.
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What to do When Your Franchisee Files for Bankruptcy
With the economic downturn caused by COVID-19, many expected a tidal wave of commercial bankruptcy filings. After an initial spike of retail bankruptcy cases at the outset of the pandemic, the onslaught of bankruptcy has not yet materialized. Whether due to PPP loans, other available credit, modification and forbearance agreements, or government moratoriums on foreclosure and eviction proceedings, many businesses have been able to temporarily avoid debt obligations without the need to file for bankruptcy protection. As moratoriums terminate and debt obligations become due, franchisors would be mindful to prepare for an uptick in franchisee bankruptcy filings.
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FTC Issues Penalty Offenses Concerning Money Making Opportunities to Hundreds of Franchise Companies
The Federal Trade Commission (“FTC”) has kept itself busy as of late, issuing a series of notices to over 1,000 businesses (many of them franchise companies) advising them that they could face civil penalties for conduct that the FTC has deemed unlawful. The Notice of Penalty Offenses Concerning Money-Making Opportunities is of particular importance to franchise companies. The first round of notices went out in late October. They advised businesses that if they deceive or mislead consumers about potential earnings or otherwise make false or misleading representations in connection with a money-making opportunity, they could be subject to large civil penalties (up to $43,792 per violation).
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