Texas Franchise Litigation Lawyer

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Franchises are popular and often lucrative business opportunities for Texas entrepreneurs and other individuals who want to start their own business but who do not want to start it from scratch. However, franchises are not universally successful. When they struggle financially or the parties involved have disagreements about how to move forward with the store or outlet, the franchise disputes can rise to the level where lawsuits get filed.

Franchise litigation is complex, as the business relationship is based on massive franchise contracts that closely control the franchisee and franchisor. The disputes are also often very sensitive affairs that both sides typically want to keep out of the public’s eye.

The franchise litigation attorneys at the national law firm Oberheiden P.C. have represented both franchisors and franchisees in Texas, helping them resolve complex disputes and invoke their legal and contractual rights.

Franchises are Based on Conflicting Interests

One of the most important things for franchisors and interested franchisees to remember is that the franchise relationship is a business partnership between parties that do not always have the same interests.

The franchisee – the individual person who would be operating the store – wants to tap into a major corporation’s business reputation and branding so that they can open their own business without having to worry about setting store policies, doing their own marketing campaigns, or building their company’s brand.

The franchisor – the corporation whose branding would be on the store – wants to spread their company as far and wide as possible, make as much money in royalty payments as possible, and control their customers’ experience in their stores without dealing with any of the day-to-day problems that arise in operating a chain outlet.

These interests and goals are rarely aligned perfectly in a franchise relationship. For example:

• Franchisees want to keep as much of their store’s profits as possible, while franchisors want to earn as much money in royalties as they can
• Franchisees often want to tweak how the store is run in order to tap into local preferences and opportunities, while franchisors want everything to be uniform in all of its stores
• Franchisees want as much territorial exclusivity as possible so they can have the only chain store in the area, while franchisors have no interest in giving them any exclusivity and often want to saturate the market with its stores
• Franchisees typically want to renew the franchise relationship when it expires and the store has been successful, while franchisors will generally use that success as leverage to extract more in royalties in order to renew the agreement

In most franchise relationships, these conflicting interests are not enough to overcome the smooth operations of the storefront. However, they can lead to disputes, particularly when stores are not generating enough revenue to keep everyone happy.

5 Common Triggers for Franchise Litigation

There are certain situations that happen during a franchise relationship that are more likely to bring these conflicting interests to a boil. Among them are:

1. Disclosure
2. The terms of the franchise agreement
3. Royalty payments
4. Franchise encroachment
5. Renewal rights

Disputes about these topics and at these junctures in the business relationship are among the most common to escalate into litigation.

The Disclosure Process

Anyone who is interested in starting a franchise needs to learn as much as they can about the business opportunity in order to make an informed decision about whether to proceed or not. Recognizing that franchisors are in a position to make this difficult for interested franchisees, federal regulations by the U.S. Federal Trade Commission (FTC) governs the disclosure process and requires franchisors to offer information related to the endeavor that is accurate and not misleading. Among these requirements is 16 C.F.R. § 436.5, which lists 23 things that franchisors must disclose in franchise disclosure documents at least 14 days before franchise agreements are signed, including:

• Copies of any contracts that are to be signed
• Whether the franchisor is dealing with any litigation
• Details about the franchisee’s exclusive territory
• Information on how successful other franchisees are doing
• An estimate of how much the franchisee would have to invest up front

It is not uncommon for these disclosures to become the source of litigation if the franchisee is disappointed in their success. They may claim that the disclosures in the franchise disclosure document were misleading.

The Franchise Agreement

The terms of the franchise agreement can also spawn litigation, as it controls how the franchisee runs the store and what the franchisor gets out of the relationship. This litigation can happen at any time during the term of the franchise.

Importantly, the terms of this agreement can often be negotiated by interested franchisees who have specific concerns about their contractual rights.

Royalties

A frequent cause for grievance, and one that can escalate business disputes into full-blown litigation, are royalties.

Royalties are payments that the franchisee has to make to the franchisor. They are effectively a tax for using the franchisor’s brand. Typically a percentage of the franchisee’s sales or revenue, they can end up being a significant cut into the franchisee’s profits.

Encroachment

One of the biggest sources of franchise litigation, though, is encroachment. Encroachment happens when the franchisor brings in another franchisee to run a new storefront close to an existing franchisee. If the new storefront is within the existing franchisee’s exclusive territory, this can violate the franchise agreement. However, most franchisors do not grant any exclusive territory, or only provide an absurdly small one, precisely so they can saturate a region with their stores.

Encroachment often leads to franchise litigation because the new storefront can pose an existential threat to the success of the existing franchisee. New stores rarely increase the number of customers in the market by any great amount, so they generally cut into the existing store’s clientele.

Renewal Rights

The franchise agreement is not permanent, though it often lasts over a decade. When it does expire, the franchisee’s right to renew it becomes a thorny issue, especially if the storefront has been a successful one. In these cases, the franchisor will often try to use the expiration as leverage to extract more value from the franchisee by increasing the royalty rate. The implied threat is a serious one: Accept the new terms or the agreement will not be renewed and a new franchisee will be found to take the store over.

Multiple Layers of Franchise Litigation Make Negotiation Important

While much of franchise litigation revolves around contracts and the breach of them, the field is heavy with layers of dispute resolution requirements that push litigation out of the public’s eye and into mediation or arbitration. While this generally serves the interests of both parties, it also creates an atmosphere where good negotiation skills can resolve the dispute in ways that benefit both sides.

It is crucial to understand that, even though there is a crippling disagreement between the parties, talking things out can fix things and even make the franchise relationship a stronger one.

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 Oberheiden P.C. and Texas Franchise Law

Texas Franchise Litigation Lawyers at Oberheiden P.C.

Whether you are a franchisee or a franchisor, having an effective and experienced franchise law attorney can make a huge difference in the outcome of your franchise business. The franchise litigation attorneys have represented numerous parties in the franchise arrangement throughout Texas. Contact them online or call their national intake hotline at (888) 680-1745.

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