FRANCHISOR 101:  STILL UNDECIDED AFTER ALL THESE YEARS

In 1996, a California state court held that a franchisor could not recover future royalties because it was the party that terminated the franchise agreement, so the loss of future royalties was caused by the franchisor's termination of the Franchise Agreement, rather than by the franchisee's breach. 

In 2003, a federal court concluded that under California law, a franchisor may be entitled to recover future royalties if the franchisee, rather than the franchisor, terminated the franchise agreement. Also, in 2003, a federal court held that under Michigan law, a franchisor was entitled to recover future royalties, while a state court held that under Michigan law, a franchisor was not entitled to recover lost future royalties.

In 2010, a federal court held that under Missouri law, a franchisor could not recover future royalties unless the franchisor and franchisee contemplated recovery of these damages when the franchise agreement was formed, while a federal court applying Tennessee law found that a franchisor might recover future lost royalties where a franchisee had abandoned the franchise.

These cases reveal that the issue of future royalties is still uncertain. To avoid any doubt on the intention of the parties, however, every franchise agreement should acknowledge the franchisor's right to recover future royalties and provide that the franchisee's obligation to pay these royalties survives the termination of the agreement.

FRANCHISEE 101:  IF YOU DON'T ASK, YOU DON'T GET 

Contrary to popular belief, all franchise agreements may be freely negotiated before they are signed. Many franchisors-especially large franchisors-have a policy of limited or no negotiation, but franchise law does not prohibit negotiation of franchise agreements. State franchise laws generally permit negotiation by their general lack of statutory roadblocks to doing so.

California, on the other hand, took steps several years ago to encourage the negotiation of franchise agreements by providing franchisors with a much-needed and compliance-friendly exemption from registration of negotiated terms. The principal drawback to franchisors' use of this exemption is the requirement that they disclose a description of each material term negotiated during the previous 12 months to potential franchise candidates in their Franchise Disclosure Document, which they believe will encourage on-going and endless negotiation of their Franchise Agreements in the future, which is exactly what the exemption was intended to accomplish.

While economic terms such as the amounts of initial franchise fees and royalty fees are likely to remain non-negotiable, there are many other opportunities for a franchise candidate to use this valuable tool to improve his or her position with the franchisor by a thorough discussion and negotiation of material terms.