Franchised brands are increasingly focused on implementing significant system changes. This trend is largely driven by maturing brands whose "makeovers" are necessary to keep the brand attractive and relevant, and by technological advances that are essential to operating efficiencies.
The biggest hurdle to system change often is franchisees who balk at the cost and time involved in making the change. Several recent lawsuits illustrate that when this happens there is a real risk of becoming embroiled in resource-draining litigation.
For example, Wendy's recently brought suit against its fourth-largest franchisee, who had challenged Wendy's right to require extensive remodeling to its restaurants and upgrades to the POS system. After the franchisee's refusal, Wendy's sued to force compliance. The franchisee countered with its own claims against Wendy's and has asked the court to declare that it is not required to perform the upgrades. The case is currently making its way through the courts, and the parties have a long (and expensive) road ahead with trial set for late 2016. A loss for Wendy's could be a serious blow to its ability to maintain system and brand uniformity. But even a litigation victory for Wendy's does not mean that the franchisee will readily comply; they could continue in their refusal and risk termination. Either way, both the franchisor and franchisee will incur significant costs and damage to their relationship as a result of this system change-based litigation.
Another example is the recently decided case of Dunkin' Donuts v. Claudia III where the franchisor terminated the franchisee for failure to remodel its stores, and then sought a preliminary injunction to force the franchisee to stop operating as unlicensed Dunkin' Donuts stores. In 2014, the court refused the franchisor's request for preliminary injunction because it could not show that it would suffer irreparable harm as a result of the franchisee's refusal to timely remodel. Dunkin' and its franchisee litigated the case to summary judgment, and just last month - almost a full year after the initial decision - the court entered judgment for Dunkin' on all counts. The court also entered a permanent injunction preventing the franchisee from operating its stores as unlicensed Dunkin' Donuts shops. While ultimately successful, the franchisor's insistence on system-wide compliance proved time-consuming and costly.
Given the time, expense, and uncertainty inherent in litigation, what can franchisors do to mitigate their risks - and hopefully avoid litigation? Here are some tips.
Which contractual provisions are most useful or relevant depends on the nature of the upgrades contemplated. But some common things to consider are: What do the agreements say about mandatory upgrades? Are specific things such as décor, fixtures, and software, or technology addressed? Are there contractual limitations around timing or frequency, or costs associated with mandatory system changes? Must the franchisor implement the changes first? Does the franchisor have additional rights at renewal or transfer?
Changes to the system are an inherent and necessary part of franchising. They are important to the brand's competitiveness and, as a result, are important to every brand stakeholder. Advanced planning can help avoid missteps that can lead to costly and time-consuming litigation. Assessing respective contractual and statutory rights and obligations and taking steps to mitigate or avoid litigation risks must be key components of the rollout plan for any significant system change.
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