A franchisor’s decision to cancel a franchise agreement, whether via non-renewal or termination for cause, requires special consideration.
The Four Corners of the Contract
As with other contractual relationships, any decision to cancel a franchise agreement begins with an analysis of the terms of the agreement: what rights are within the four corners of the contract? A termination must rest squarely on a breach articulated by the franchise agreement or on principles of contract law, such as the implied covenant of good faith and fair dealing. Similarly, non-renewal must comport with the terms of the franchise agreement, including rights the franchisee may have to renew for additional periods.
Addenda, Amendments, and Ancillary Agreements
Franchise relationships are complex; and addenda, amendments, and ancillary agreements often govern the relationship in addition to the franchise agreement. Therefore, an analysis regarding cancellation of a franchise agreement should include a review of all ancillary documents that may alter the terms of the franchise agreement.
Implied Covenant of Good Faith and Fair Dealing
The implied covenant of good faith and fair dealing requires that parties to a contract deal with each other in a fair manner and act with good faith. The covenant cannot be used to change the terms of the franchise agreement; but the principle may impact a franchisor’s ability to cancel a franchise agreement, especially in those circumstances in which there has been no breach of the franchise agreement and the franchisor wishes not to renew an expiring contract.
Franchise Relationship Laws
A number of states have adopted franchise relationship laws, and franchisors should consult these statutes when assessing their rights to cancel a franchise agreement. For example, the Retail Franchising Act of Virginia provides, “It shall be unlawful for a franchisor to cancel a franchise agreement without reasonable cause . . .” (Virginia Code Annotated §13.1-564.) A number of other states have adopted similar requirements. Some statutes include a definition of what constitutes “good” or “reasonable cause” for canceling a franchise agreement.
Deciding which relationship law to apply may be tricky. While most franchise agreements include a choice-of-law provision, franchisors should look beyond the law governing the franchise agreement to include the law of the jurisdiction in which the franchise operates and the law of the jurisdiction in which the owner of the franchise resides. For example, the California Franchise Relations Act provides, “The provisions of this chapter apply to any franchisee where either the franchisee is domiciled in this state or the franchised business is or has been operated in this state.” (California Franchise Relations Act §20015.)
Special Industry Laws
In addition to state statutes generally applicable to franchising, Congress has enacted statutes that regulate franchising in certain industries. For example, the Petroleum Marketing Practices Act governs gasoline service station franchise agreements; and the Automobile Dealer Franchise Act governs automobile dealership franchise agreements. Many states have also adopted statutes regulating franchise relationships in certain industries.
Little FTC Acts
In 1964, the National Conference of Commissioners on Uniform State Laws (NCCUSL) adopted the Uniform Deceptive Trade Practices Act. While the response to NCCUSL’s efforts was not uniform, all states adopted some form of consumer protection, sometimes referred to as “Little FTC Acts” because these statutes sought to expand protections found in the Federal Trade Commission Act. In some instances, Little FTC Acts extend “consumer” protections to businesses, including franchises. While protections found in Little FTC Acts tend to be used by plaintiffs in the franchise-sales context, they may also offer protections to franchisees in the cancellation of a franchise agreement. The Washington Consumer Protection Act, a broad consumer protection statute, provides, “Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.” (Revised Code of Washington §19.86.020.)
Due Diligence: Anticipating Claims
Finally, before cancelling a franchise agreement, franchisors should engage in reasonable due diligence to ensure cancellation does not run afoul of a law of general applicability (e.g., antitrust laws) and will not likely engender a claim from the franchisee (e.g., failure to properly account for advertising fund contributions and expenses).
Conclusion
Franchise agreements typically provide franchisors with strong rights to cancel the agreement. However, rights set forth in the franchise agreement are just the beginning of the analysis. A decision to cancel a franchise agreement must consider the laws that impact franchise relationships and augment the rights of franchisees.
OBITER DICTA: REFLECTIONS ON THE LAW OF FRANCHISING 