Site Selection: Guarding Against Lawsuits
Gone are the days when site selection in the QSR space meant securing a location nearest to McDonald's. FDDs generally contain a description of the types of assistance franchisors will offer franchisees with an explanation of the system standards for site selection. Franchisors should establish system standards for site selection, including training and support that encourage franchisee participation and assure franchisor approval.
In Konold v. Baskin-Robbins, Inc., the offering circular included a discussion of site selection, which stated in pertinent part as follows: "Creamland held the territorial franchise from Baskin-Robbins that included Colorado. It then sold individual franchises within its territory. Creamland exercises its best judgment in selecting a specific site for a Baskin-Robbins store. In determining an appropriate site for a store, the required rental obligation and the market feasibility of such a store are Creamland's primary considerations, with factors such as public accessibility and the surrounding area being taken into account.... A prospective franchisee is encouraged to perform his own investigation and evaluation before entering into a franchise agreement." The court found that the explicit suggestion to franchisees to independently investigate and evaluate the appropriateness of a specific store location eliminated franchisor liability for underperforming stores on the basis of site selection.
In contrast, in Southern Cal. Interveners v. SpeeDee Oil Change Systems, Inc., the plaintiffs alleged that SpeeDee Oil directly operated and controlled the franchises. Further, the franchisees alleged that the franchisor, including individual officers and directors, conspired to and did offer and sell oil change franchises in violation of the Franchise Investment Law. The franchisor's alleged violations included, but were not limited to, oral statements concerning site selection made by various representatives of the franchisor. As a result of the franchisor's representations about site selection for the franchises, the franchisees successfully litigated an action against the franchisor.
Recently, in Yamin v. Moe's Southwest Grill, LLC franchisee plaintiffs asserted claims alleging that the franchisor breached and interfered with their contractual rights to open and operate a restaurant in Albany County, N.Y. The franchisee raised factual issues as to whether the franchisor acted in good faith under the 2005 market development agreement (MDA). Specifically, the franchisee asserted that the franchisor breached the 2005 MDA by not approving locations proposed by the franchisee for a third restaurant, and also by granting an exclusive area to a different company in 2007 that foreclosed the plaintiff franchisee's ability to add a third restaurant in Albany County. Section 7 of the 2005 MDA addressed site selection, and two sentences from paragraph 7.1 were the focus of the dispute. The first stated that "
Franchisors need to carefully address site selection and should:
- document and maintain, as part of their business records, all franchisee communications regarding site selection;
- outline a clear and concise site selection protocol with site selection training;
- mandate the use of real estate brokers;
- maintain authority to approve site locations while assuring franchisees conduct independent due diligence before presenting a location for approval;
- be sure to document the legitimate grounds by which sites are accepted or rejected; and
- have franchisees sign an acknowledgment that they have conducted independent site due diligence and an independent investigation with regard to the proposed site.
If the franchise location underperforms, franchisees will question franchisor approval of the site. Selection standards inclusive of franchisee input while protecting the interests of the brand are the best practice! Location intelligence is no longer optional in today's market. Franchisees and multi-unit operators seek brands with analytical site intelligence supporting the system. The goal is to approve and optimize site selection to maximize unit-level economics.
Anthony J. Calamunci is partner-in-charge in the Toledo, Ohio office of Roetzel & Andress LPA. He practices in a wide range of business matters, with a focus on franchise law and franchise litigation. Contact him at 419-254-5247 or email@example.com.