New York Franchise Litigation Lawyer

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Franchises are complex business relationships with lots of potential conflicts of interest. The franchisee wants to tap into the reputation and familiarity of a major brand name, while the franchisor wants to control its image while also spreading its business and earning royalties from its store owners. From before a franchise opens its doors to well after its term expires, the franchise process can spawn numerous different types of costly litigation.

The franchise lawyers at the national law firm Oberheiden P.C. have handled lots of different franchise disputes in the state of New York, and have represented both franchisees, franchisors, and even master franchises in these sensitive disputes.

Potential Conflicts of Interest in Franchising

Establishing a franchise relationship can be lucrative for both the major corporation and the entrepreneur who wants to represent it. Many franchise arrangements go smoothly and make money for both sides of the relationship, leaving everyone satisfied and happy. If negotiating franchise agreements did not work out well or led to litigation, then franchising would not be as common as it is today. Its popularity is a testament to its success.

However, this does not mean that the very nature of the franchise arrangement is not filled with conflicting interests that can lead to serious disputes at various points during the relationship. The reality is that a franchise relationship is a long-lasting agreement between two businesses that rarely share the other side’s best interests.

On the one hand, there is the franchisor – a large corporation with a well-established brand, a product that is familiar to lots of people, and a particular way of doing business. Just a few examples are:

• Burger King
• Ace Hardware
• Domino’s Pizza
• Jiffy Lube
• Pet Supplies Plus
• Dunkin’ Donuts
• Marriott International Hotels

These massive companies want franchisees to open new stores under their brand name. However, they also want to control how those franchisees operate so that customers have the same experience in all of their stores or chains.

On the other hand, there is the franchisee – an individual who wants to open their own business but who does not want to do it completely on their own. Instead, they want to make use of the familiarity that the public has with a large company, as this can be a less risky option than starting a business that no one knows about and working from the ground up.

This arrangement, creating franchise business programs, can lead to friction between the franchisor and the franchisee. Just a few examples of the competing interests between these parties are:

• The franchisee may want to change business operations in order to appeal to local customers and increase their revenue, while the franchisor wants all operations in its stores to be uniform
• Franchisees want to be the only chain store in their area, while many franchisors want to aggressively saturate it with as many stores as possible
• Franchisees want to keep as much of the profit from the store as possible, while franchisors want to collect as much in royalties as possible

These potential conflicts can boil over into litigation.

3 Common Sources of Franchise Litigation in New York

The potential for litigation rises substantially at certain pivotal moments during the franchise relationship, especially:

1. Disclosure
2. Encroachment
3. Renewal

Even outside of these important junctures, though, litigation is possible.

Disclosure

Potential franchisees need to learn a lot about the business venture before they can make an informed decision about whether to sign the franchise agreement. Aware of the potential for franchisors to abuse their position and withhold important information about the franchise arrangement, the U.S. Federal Trade Commission (FTC) has promulgated regulations that govern what franchisors must disclose to interested franchisees. Chief among these regulations is 16 C.F.R. § 436.5, which lists 23 things that the franchisor must include in its franchise disclose documents, such as:

• Whether there is any pending litigation against the franchisor
• Details about the franchisee’s exclusive territory
• Estimated up-front costs or the franchisee’s initial investment
• Restrictions on how the franchisee can operate the store

The franchise disclosure document must be provided to the franchisee at least 14 days before the franchise agreement is signed. This is supposed to give the potential franchisee enough time to review them. However, given their length and complexity, this is not always feasible. Additionally, the information proffered in the franchise disclosure documents may be misleading or outright false. Franchisees who sign the agreement and who then become disappointed with how things are going will often turn to the disclosure documents and claim that they misrepresented the risks and rewards of the venture.

Franchise Encroachment

Another common source of litigation in the franchise relationship is when there is encroachment.

Encroachment happens when the franchisor, in an attempt to saturate a market with stores and get more revenue and royalties, approves a new franchisee near an old one. This is particularly common in dense urban areas like New York City and its surrounding boroughs, where you might even be able to see one franchise store from the windows of another.

From the position of the franchisor, encroachment is an opportunity to get more customers and also to create another source of royalties to collect. Even if the new franchise does not get any new customers, and instead only takes some from the old franchise outlet, the franchisor still wins.

From the position of the franchisee, a new storefront nearby can dramatically cut into the store’s revenue and can even imperil the store’s existence.

This is why territorial exclusivity is such an important aspect of the franchise disclosure documents. If the encroachment violates a franchise’s exclusive territory, the franchisee could take legal action to enforce the agreement. For this reason, though, many franchisors do not give any territorial exclusivity.

Renewal

Franchise agreements tend to last for a long time, typically over a decade. When it does expire, though, franchisors often use it as leverage to extract more concessions from lucrative franchise outlets. This is generally in the form of a higher percentage of the profits. Franchisees who do not agree to the new terms risk seeing their successful franchise business taken away from them.

Put our highly experienced team on your side

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

Government Consultant

Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

4 Frequently Asked Questions About Franchise Litigation Law in New York and Oberheiden P.C.’s Legal Services

New York Franchise Attorneys at Oberheiden P.C.

Franchise arrangements can be smooth and lucrative endeavors, or can be full of conflict and disagreements between the parties. When there is friction, it can lead to litigation.

The franchise litigation lawyers at Oberheiden P.C. have law offices in New York City and across the rest of the state to provide effective legal representation to franchisees and franchisors throughout New York. Contact them online or call their national intake hotline at (888) 680-1745.