How to Avoid Litigation in Franchising

There is a host of issues that can arise in a relationship between a franchisor and a franchisee. If not properly addressed, some of these issues can mushroom into legal sparring or even full-blown litigation.

Common issues include the enforcing of system standards, franchisees performing below their and/or the franchisor’s expectations, adapting to changes in the marketplace, diverging values and principles, or compliance with federal and state laws that regulate the franchise relationship.

No matter what the particular catalyst, there are several critical steps a franchisor can take to help assuage – or even avoid – legal issues.

Secure Your IP Rights.

One of the very first steps business owners should take is to invest in a registered trademark. Your marks represent your business – and brand – to the world, and so it is important to secure those marks right when you initially launch and brand your business. As a franchisor, the key benefit you give to franchisees (and the key to the value of your system) is the right to use your marks through a license. Make sure you register your marks early to avoid any third-party competitors who may lay a claim to your mark. Federal registration provides the strongest protection nationwide. State-specific registration is also an option. Some jurisdictions have a “first-to-file” system when it comes to trademark registration, so be sure to consult your attorney about the specific rules in your jurisdiction.

Your intellectual property, or IP, does not just refer to your company trademarks, however. The term also encompasses copyrights, design rights, and business systems and processes. The key is that before you license your IP, confirm that you own it. Tremendous legal issues can arise if you do not take this vital step. For example, an area where IP battles often arise is copyright ownership. Copyrights must be assigned, by the author, in writing. For instance, if you hire a third party to write your operations manual or create marketing materials, but the terms of your agreement don’t cover copyright assignment, you may end up taking ownership of IP that has not actually been granted to you.

Comply with State and Federal Regulations.

One of the most significant regulations franchisors face is the set of rules governing FDDs – Franchise Disclosure Documents. The FTC mandates that franchisors provide their prospective franchisees with the FDD well in advance of executing a franchise agreement so that the franchisees can weigh the risks and benefits of investing in the franchise system. Your attorney can ensure that the FDD is compliant and that you follow the FTC rules regarding your relationship with your franchisees.

 

Develop A Relationship of Trust with Your Franchisees.

Involve your franchisees in the development and management of your business. Franchisees who feel like partners in the business will naturally prove more willing to work hard and implement positive changes in the business. There are numerous ways to involve franchisees in the running of the business, from spearheading a pilot program at franchise locations, to inviting them to serve on an advisory board, to providing incentives like royalty rebates. Also, be sure to communicate with them when implementing substantial system changes. By involving them in these ways, you will foster a relationship with your franchisees that is based on clear, honest communication, mutual respect, and trust.

Work with an Experienced Franchise Attorney.

While many business owners attempt to navigate the process alone, this is ill-advised. The best practice is to engage an attorney who has demonstrated experience working specifically with franchises. This area of the law is complex and specialized, and as such, it is advisable to engage a firm or practice group that specializes only in franchise law, rather than trying to get away with cobbling together templates or utilizing a family attorney with generalized experience. A franchise attorney who is well-versed in what makes a franchised business successful – as well as the risks that can rupture businesses and cause legal problems – will be able to spot risk from miles away and help you adequately protect your business.