Franchise Relationship Law Goes Beyond Franchising

Sometimes laws can have effects beyond the problem they were enacted to solve. The franchise laws are an example. Distribution of services and goods through franchising expanded in the 1960s and 70s. At the time, unsavory franchisor practices led state legislatures to enact protections for franchisees to benefit franchisees in their ongoing relationship with franchisors by limiting a franchisor’s ability to terminate or refuse to renew a franchise agreement without cause. These laws can have significant impacts in other practice areas. 

Family Law

Family law practice often involves valuing assets. Valuations assist in ensuring equitable division of property. If a divorcing couple owns a franchise that one spouse will keep, the other spouse wants money or other property of equal value. See example, Hawksley v. Gerow 10 A.3d 715 (Maine 2011), concerning the valuation of a divorcing couple’s two H&R Block tax franchises. 

The valuation of a franchise can be significantly impacted by the lifespan.  Some lawyers simply look at the franchise agreement’s stated term but the franchisee’s statutory right to renew at the end of the term (as interpreted in some jurisdictions) may be deemed to lengthen the duration, and thus enhance the value, of the franchise. 

In several jurisdictions, a franchisee has an automatic right to renew the franchise agreement, in perpetuity, unless the franchisor can show that there is good cause to terminate the agreement. In New Jersey, the good cause analysis is limited to the conduct by the franchisee. Once a franchise relationship begins, all that a franchisee must do is comply substantially with the reasonable terms of the agreement. In return for which the franchisee receives the benefit of an “infinite” franchise, the franchise cannot be terminated or refused renewal. See for example, Dunkin' Donuts of Am., Inc. v. Middletown Donut Corp., 495 A.2d 66, 76 (1985). 

The New Jersey franchise statute also means franchisees (and dealers and distributors with arrangements that meet the definition of a franchise under New Jersey law) have the right to sell or transfer their franchise to a qualified buyer without being restricted by the fact that the agreement is limited by its terms to a specified period. The franchisor cannot “unreasonably” withhold its consent to the transfer of a franchise, and the remedy for specific performance is available should it do so. 

The franchise relationship laws’ protection against termination or non-renewal can increase a franchise’s value by providing a longer period of predictable income streams to potential buyers. Conversely, less favorable renewal rights and the franchisor's right to terminate can decrease the franchise’s value. 

For these reasons, the franchise relationship laws are of interest to family law practitioners whose clients own franchises or are franchise companies. Family law lawyers need to be aware of this franchise law benefit (although depending on the client, it might be a detriment) and tool. 

Estate Planning and Estate Administration Practice

In estate planning and administration, it is also necessary to value assets. See example, Estate of Blouin 490 A.2d 1212 (Maine 1985) (the decedent’s Dairy Queen franchise needed to be valued). The same considerations discussed above may increase or decrease the value of a decedent’s interest in a franchise. Thus, estate planning and estate administration attorneys can also benefit from being knowledgeable of the franchise relationship laws. 

The franchise relationship laws have another impact on estate law. Many franchisors and franchisees believe that with the death of a franchisee or principal of a franchise, the agreement ends. But in some jurisdictions, these laws assure surviving spouses, heirs and estates of deceased franchisees (also deceased majority shareholders of franchisee entities) the chance to own the franchise. The franchisor must give the spouse, heirs or estate a reasonable time to either qualify for ownership or transfer the franchise to someone who qualifies. Trust and estate planning attorneys whose clients own interests in a franchise, need to be aware of this estate planning benefit and tool. 

Estate planning may require the awareness and consent of the franchisor to be effective in states that do not have specific franchise laws relating to inheritance. The issue of what occurs with the franchise interest at death is controlled entirely by the contract and estate planning cannot always be done unilaterally by the franchisee. 

It is also possible that intestacy will force a sale of the franchise because the franchise cannot be divided among multiple heirs. Even if the ultimate disposition of the franchise could be sorted out with the probate court and the franchisor, there can be a more immediate concern with an intestate estate: the franchise may have no clear operator in place during the pendency of the estate, which could risk termination because a trained franchise operator is necessary under the franchise agreement.

For these reasons, the franchise relationship laws are of interest to probate and estate planning practitioners whose clients own franchises.

Conclusion

Many lawyers do not concern themselves with franchise laws, either never considering them or assuming they apply only to branded chain stores where a royalty is paid, or arrangements labeled as franchises. These laws impact a wider range of practice areas than many practitioners and clients expect, and each can benefit from being familiar with franchise laws.