So your (former) franchisee is refusing to close

You've sent them the termination, but they refuse to close up shop

If you have decided to expand your company using a franchise model, then you know that franchising is not a walk in the park. It is not kicking your feet back and collecting royalty payments while sipping a piña colada on the beach. On the contrary, scaling through franchising means that you have dozens, hundreds, or even thousands of relationships to manage with your franchise owners. 

Franchise owners are not all created equal, and the day will come when you need to cut some of them loose. The story often goes like this: you realize that one of your franchise owners is in default. Maybe they have stopped paying royalties, or you suspect that they are fudging their numbers and not sending your completely truthful reports. Or maybe you are requiring all franchise owners to make certain upgrades or system changes, and they are refusing to do so. 

Eventually, their breach becomes untenable and you terminate their franchise agreement. But instead of closing up shop, they ignore your termination notice and refuse to close down. 

So you find a lawyer and try to work things out by sending cease and desist letters. They still ignore you. They are making a lot of money at your expense, and they see no reason to stop. You’re left with no choice but to sue. 

You should have a slam dunk case, right? The answer turns on your legal foundation. A salty former franchisee is going to look for any possible reason to get off on a technicality. Here are some common tactics they might try:

Your franchise agreement did not really require them to follow your instructions

A franchise owner may try to argue that your franchise agreement doesn’t really say what you think it says. Having a buttoned-up franchise agreement is crucial because whether the contract says they “must” make certain changes or they “may” make certain changes can make or break your legal case. You want a franchise agreement that clearly gives you the power to dictate the nitty-gritty details of how each location should be run. 

You don’t actually own your trademarks

Another tactic is to try to argue that you don’t actually own your trademarks, and therefore you can’t force them to stop using them. Good trademark hygiene means having USPTO registrations for all important trademarks and keeping those registrations renewed and up to date. In addition, it means consistently policing and enforcing your trademarks to ensure that you are exerting the correct amount of legal control over them. Failure to do any of these things could leave you vulnerable in a fight with a former franchisee. 

We’re not really using your trademarks

Sometimes a former franchisee will make a half-hearted attempt to stop using your brand. Imagine that instead of formally having all of your signage and branding removed, they simply spray-paint a big, ugly red “X” where your business name used to be and put a handwritten sign underneath with their new business name. Instead of actually removing a cut-out of your mascot, they just throw a sheet over it to cover it up. 

Now you have a former franchise location that not only isn’t paying royalties, but also is actively hurting your brand by looking dingy and sketchy. Your customers are confused - is this a legitimate location or not? Your former franchisee claims that they have “rebranded”, but their half-hearted remodel only further dilutes your brand. Proving this in court often requires an in-person trip to gather evidence of what they have done. 

You breached the franchise agreement first

Finally, a former franchise owner may try to argue that you (the corporate parent company) breached the franchise agreement first by failing to provide them with support and services. If you have committed to providing certain support and/or services in your franchise agreement, it is crucial that you follow through on these promises. This is why having an expert craft a strong and realistic franchise agreement is key. 

If you ever need to take legal action against a former franchise owner, you want your legal case to be a slam dunk. The foundation for a strong legal case is laid at the beginning - when the franchise agreement is first negotiated and when you first begin to get your trademarks registered. With the right legal foundation, courts are typically happy to help you cut that former franchise owner loose.  

Thanks for reading the Bevel Law Blog! While this information is hopefully helpful to you, nothing in this blog is intended to be legal advice. Always consult a lawyer before making any legal decisions based on topics in this blog.

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