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Legal strategies to enforce system standards: suing for injunctive relief and attorneys' fees and costs. (IFA's 36th Annual Legal Symposium).

Traditionally, there were two approaches to standards enforcement. The company representatives could attempt to coach and counsel franchisees into compliance, perhaps even sending warning letters or legal notices. The result of this approach is typically a file full of warning letters and default notices that go nowhere. The message this approach conveys is that there is no real cost to noncompliance.

At the other end of the spectrum, the franchisor could terminate the franchise. However, frequently there are enough standards problems in a system to make termination of every noncompliant franchisee an unrealistic and undesirable option. Due to its serious nature and potential implications, termination should usually be reserved for situations that involve egregious violations or repeat offenders.

A system wide policy of filing actions for injunctive relief provides a middle ground between idle threats and termination that is effective and cost-efficient. After the requisite notice and reinspection, if standards problems continue to exist, a motion for preliminary injunctive relief accompanying a complaint is filed. In many cases, a hearing can be conducted on the motion within days of filing the action. Moreover, once served with the legal papers, a franchisee realizes that the franchisor is serious about standards compliance and often quickly comes to the table seeking the most expeditious and inexpensive method possible to resolve the action.

The Advantages of Suing for An Injunction

Speed is a vital component to standards enforcement. As part of a system-wide approach, standardized pleadings can be developed which permit a case to be on file within days of conducting an inspection. This not only facilitates quick resolution of the standards violations, but also lowers the eventual cost of the litigation to the franchisee. The typical cost of the entire injunctive relief action should be no more than a few thousand dollars.

An action for injunctive relief and attorneys' fees is the least severe of the legal remedies available to the franchisor. Presented properly, the court will realize that more severe options were available to the franchisor but were not chosen in favor of a course that emphasized curing the standards violations. A growing number of cases support the use of injunctions to enforce system standards. See, e.g., Dunkin' Donuts, Inc. v. Albireh Donuts, Inc., 96 F. Supp. 2d 146 (N.D.N.Y. 2000).

A critical component of the injunction program is the payment of the franchisor's attorneys' fees and costs by the franchisee. No franchisor could afford to operate a system if it had to incur thousands of dollars of legal costs every time a franchisee was in default of the franchise agreement. Most franchise agreements provide for payment of fees when the agreement is breached. A franchisor should expect to recoup all or virtually all of the attorneys' fees expended on standards enforcement. Although standardized pleadings lower the cost of the litigation significantly, collecting fees sends an important message to the franchisee about the cost of noncompliance.

Building Evidence

The best way to enforce standards is through random, unannounced inspections. The field inspectors should document the conditions observed during an inspection on standardized forms prepared by the franchisor. Following the inspection, the results should be discussed with the franchisee and the franchisee's signature should be obtained on the forms, thereby eliminating any questions of notice. Most critically, to avoid a "he said, she said" scenario, photographs should be taken of the standards violations. The field staff should label the photographs with standardized information, including the franchise identification number, date, and any explanation that may help clarify the nature of the violation for the court.

SUING FOR TERMINATION

While injunctive relief actions are effective in curing temporary problems and sending a message regarding the need for future compliance, some franchisees are unwilling or unable to comply with system standards. The question then becomes, "when is termination appropriate?" One of the factors that should be considered in deciding whether to terminate is the franchisee's history of noncompliance. When terminating a repeat offender, the entire franchise file should be used to demonstrate that this is not an isolated incident but rather is symptomatic of a franchisee who is simply unwilling or unable to comply with standards. Whatever the reasons for termination, it is well settled that failure to maintain operational standards constitutes good cause for terminating a franchise relationship. See, e.g., McDonald's Corp. v. Robertson, 147 F.3d 1301, 1309 (11th Cir. 1998) (repeated failure to follow McDonald's quality, safety and cleanliness standards "constituted material breaches of the franchise agreement warranting termination").

David E. Worthen, a shareholder with Schmeltzer, Aptaker & Shepard, P.C.
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Author:Worthen, David E.
Publication:Franchising World
Geographic Code:1USA
Date:Jul 1, 2003
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