The Obligations of a Franchisor

I recently met with an executive new to franchising.  At the beginning of our meeting, she asked: “So, what obligations does the franchisor have to its existing franchisees?”  She asked me to be brief in my response.

I told her a franchisor’s obligations to its franchisees stem from the following four sources.

First and foremost, the franchise agreement governs most aspects of the relationship between the franchisor and the franchisee.  However, some jurisdictions impose an implied duty of good faith and fair dealing, either by case law or statute, which may impact enforcement of the franchise agreement.  The implied covenant of good faith and fair dealing does not rest on a uniform body of law.  The franchisor does not have a fiduciary duty to act in the best interest of the franchisee.

Second, some states have enacted franchise relationship statutes.  For example, the Iowa Franchise Act prohibits a franchisor from establishing a competing location that “adversely affects” the business of an existing franchisee.  This requirement negates any contractual provision to the contrary.

Third, although not a “relationship obligation,” the Amended FTC Franchise Rule and the states that regulate franchise sales impose disclosure requirements that may inform the franchisor’s decision about how to manage a franchise system and, therefore, may impact the franchise relationship.  For example, Item 8 of the Amended FTC Franchise Rule requires franchisors to disclose, [w]hether the franchisor or its affiliates will or may derive revenue or other material consideration from the required purchases or leases by franchisees.”  A requirement to disclose this source of revenue has led some franchisors to change the nature of their supplier relationships so that, instead of generating rebate revenue for the franchisor, suppliers provide benefits to a system-wide marketing fund.

Finally, in wrapping up, laws with general applicability may also impose obligations upon a franchisor.  For example, unfair trade practice statutes (sometimes called “Little FTC Acts”) and antitrust laws may impact franchise relationships and how a franchisor sets prices; intellectual property laws may impact how a franchisor polices its marks and system standards; and employment laws may impact how a franchisor offers training to its franchisees.

She thanked me for the “long” overview of franchise law and asked me to be more concise in the future.