Review of Franchise Agreements
Dolley Law, LLC is experienced in drafting, reviewing, and amending franchise agreements brought to them by clients involved in a variety of industries. The agreement covering the sale of a franchise, with its continuing obligations on both parties, differs in many ways from the sale of a non-franchised business. This requires caution in reviewing and drafting any franchise agreement, along with documents such as a Franchise Disclosure Document (FDD) or Uniform Franchise Offering Circular (UFOC), to determine whether a given franchise opportunity is in your best interests.
When drafting or reviewing a franchise agreement, it is important to consider, among other things, the following items:
- Parties and recitals
- Grant of the franchise
- Initial term and renewal
- Initial franchise fee
- Royalty fee
- Advertising fees
- Franchise accounts, books and records
- Proprietary marks
- Franchise premises
- Operations manual;
- Quality control
- Required and approved purchases
- Confidential information
- Relationship of parties
- Covenants not to compete
- Compliance with laws and regulations
- Disclaimer of retail price control
- Assignment and transfer
- Alternative dispute resolution
- Choice of law
- Franchisee acknowledgements
- Matters of general application
FDD or UFOC. FTC regulations require an FDD or UFOC to be disclosed along with a franchise agreement prior to the sale or purchase of a franchise. The FDD or UFOC contains several items of importance to the franchisor and franchisee, including, among other things, a brief history of the franchise, discussion of franchise fees and royalties, a summary of the officers and executives of the franchisor, and a description of any major litigation involving the franchisor. It is of the utmost importance for a franchisee to carefully review the sections outlining franchisor responsibilities within the FDD / UFOC and franchise agreement. Generally, these responsibilities include providing a training manual, picking a suitable location, training the franchisee and/or an employee, helping plan or attend the grand opening, and offering continuing assistance with advertising and/or managing the store.
Grant of the Franchise, Initial Term and Renewal. The provisions of the franchise agreement that grant the franchise principally cover a franchisee’s right to use the franchisor’s franchise system, including trade names and trademarks. The location of the franchise unit is often inserted, and the franchisor may wish to include information about the nature of the franchise. Many franchisors offer initial terms of five-to-ten years with options to renew for additional periods. However, sometimes franchise agreements feature terms of five-to-ten years with no option for renewal or right to automatic renewal. Prospective buyers of such franchises without such renewal terms should be very careful, as a franchisor may have a significantly superior bargaining position at the end of a term regarding the terms of any renewal of the franchise.
Trademarks and Proprietary Marks. The franchisor’s “mark” is probably the subject of the most protective language in the franchise agreement. The grant of a franchise often includes a grant of a non-exclusive license to the franchisee for the use of the franchisor’s service and/or trademarks. Additional provisions further qualify the parameters of such use, typically reserving to the franchisor the right to strictly enforce restrictions in connection with the sale of goods and services in the franchise system.
Confidential Information. The franchise agreement will typically provide for the protection of confidential information concerning franchise operations during and following the franchise term. The provision for confidentiality may contain the requirements for the franchisee's use or handling of certain items or products which constitute a trade secret owned by the franchisor. When such products are to be purchased or used by non-affiliated parties, the franchisor should expect the franchisee to enter into a non-disclosure or confidentiality agreement with such parties.
Territories and Covenants Not to Compete. Franchise agreements will often include some territorial terms. However, one should not assume that this territory is guaranteed to be exclusive or protected. Many FDD’s will indicate that the franchisor has a policy to not locate another franchise within a certain geographic proximity; however, unless memorialized in a franchise agreement, such a statement does not constitute a legal right of protection against franchises being placed in said geographic proximity, because the franchisor can usually change such policy at any time.
Franchise agreements often contain covenants not to compete. Noncompetition clauses normally cover two periods: during the term of the agreement, and after termination of the agreement. The covenant not to compete by the franchisee during the term of the franchise is usually easier for the franchisor to enforce because it is directed to the franchisee’s connection with the same business activity and/or the sale of the same products. Nonetheless, such terms are still subject to the same laws and rules regarding reasonableness and protection of legitimate business interests, as described in more detail in our Non-Compete pages.
Termination. Issues affecting termination of a franchise may be the most frequently litigated in franchising. Both the FDD and franchise agreement should list the reasons a franchisor and/or franchisee may terminate the franchise agreement before the contract itself expires. Terms surrounding termination of a franchise agreement affect both the rights and business interests of franchisors and franchisees and, as such, are worth reviewing closely with an attorney.
Franchise agreements are complex documents featuring many interacting parts. Dolley Law, LLC specializes in reviewing franchise agreements. Please call us at (314) 645-4100 or email us at firstname.lastname@example.org to set up a consultation regarding your franchising matter.