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In Franchise Agreements Simpler Might be Better

by Ed Teixeira

Some existing franchise agreements are complex and the recent NLRB ruling coupled with the amount of franchisor control over their franchisees could result in simpler franchise agreements.

I was visiting with a client recently and they had just launched a new franchise program and wanted to discuss launching their franchise development strategy. A few days before the meeting, they emailed me their new Franchise Disclosure Document that included the franchise agreement. After reviewing the documents, prior to the meeting, I was struck by the simplicity of their franchise agreement, although it contained the necessary protections, provisions and covenants. It reminded me of franchise agreements from the past. I've always been a proponent of the fact that the more legalese in an agreement, the more scrutiny and request for changes it invites.

From a franchisor perspective, I recognize the necessity that a franchise agreement and its related documents provide a franchisor as much protection as possible while being a "saleable" document. On the other hand, I've found that when it comes to "belt and suspenders" (The term often used to describe cautious bankers who demand loan policies be strictly adhered to can apply to legal contracts with strict covenants and protections) contracts, some franchise agreements would certainly qualify.

At the risk of annoying some of my closest franchise attorney friends I believe that some franchise agreements simply don't require all of the provisions and covenants they contain. Now, the recent NLRB ruling regarding joint employer status could provide a compelling reason to "clean" up and simplify franchise agreements.

Ted Pearce, a corporate attorney at Nexsen Pruet in Charlotte, NC believes that since courts and agencies like the NLRB have recently gotten into the nature of the franchise relationship. Some have considered that a franchisor requiring their franchisees to adhere to certain rules regarding their relationships with employees indicated overall control of franchisee employment practices. See the article in this newsletter.

The bottom line is that the more control a franchisor exercises over their franchisees there is the possibility that the franchisor would be considered a joint employer, by ruling that they have indirect control over the franchisees employees. As Ted Pearce states: "It may now be more propitious for the franchisor to encourage compliance with system standards through the language of "should" rather than "must." By issuing recommendations instead of edicts, a franchisor may weaken the argument that it is controlling the business of its franchisees."

Regardless of the final outcome of the NLRB McDonald's ruling, I would maintain that many of the current franchise agreements attempt to control too many activities of the franchisees. My best example is where the franchisor requires the franchisee to attend the annual meeting or convention and requires the payment of a fee. During my role in various franchise organizations, I've been involved in numerous conventions and we never had mandatory franchisee attendance. If we did, we wouldn't charge our franchisees, who we considered our customers an attendance fee.

When franchise attorneys draft franchise agreements, franchisor management has to play a role in that process to make sure that the legal protections are in place, while avoiding overly complex and controlling agreements. In other words, try to strive for simplicity.

 

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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