Modifying The Franchise System
By Marcus Hunt, Esquire
If there is one thing that you can be sure of, it is the fact that change is imminent. In franchising, if you do not stay in touch with the market or consumer demands, you are setting a course for extinction. I am sure everyone can think of multiple examples of companies that remained static and are no longer with us today.
As a franchisor, you are constantly evaluating your franchise system and how new products, advancing technologies and changing consumer demands might affect your bottome line. Changes to a franchising system may come in a variety of ways. The modification of the McDonald’s system to include breakfast required of a major investment by both franchisees and McDonald’s with new equipment, advertising, additional labor costs and additional training. There might be a trademark/service mark change like we saw at Hardee’s, changing signs and incorporating the little star logo. Pizza Hut added delivery service to meet competition from Domino’s. A door company adds a new line which in turn requires new samples, catalogs, training and advertising. Computer technology has required many companies to modify their system to accommodate the Internet.
Unfortunately, no matter how hard you have worked in advance by studying and analyzing modifications or by obtaining input from key franchisees, and often franchisee advisory counsels, there will always be one or more hostile franchisees who, even though they bought the franchise for your expertise, think they now know more than you. They are reluctant to make any changes, often citing the cost involved or the fact that their contract is about to expire. Be prepared for the argument that your modifications have caused a constructive termination of their contract or their contention that you have modified or amended the original contract without their required written consent or that you have violated the covenant of good faith and fair dealing.
Fortunately, the good news is that the majority of courts around the coutnry have consistently upheld the franchisor’s right to make modifications to its system when the franchisor has reserved the right to do so in its franchise agreement. The key is reserving your right to make modifications via your contract. It is important for you and your franchising counsel to work closely together when drafting your franchise agreement. Your attorney must not only be cognizant of your business and your future expectations, but he or she must be franchise savvy, knowing how franchising works and how franchisee disputes often arise.
If the subject of your future franchise system modification is not already on your list, make sure you add it for your next legal check up.
If you would like more information, or we can assist you with another problem, please call the Duell Law Firm at 1.866.388.4112 or visit www.duelllawfirm.com.
About the Author
Mr. Hunt’s primary areas of practice include franchising, intellectual property law copyright and trademark. He has represented clients in trademark registrations and dispute resolutions.
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