A Franchise on Sleepless Nights

Buying into a global chain should mean that head office won't encroach on your market with new outlets. Right? Not always

By Karen E. Klein

Q: I operate a business franchise with a multinational franchisor. The franchisor has decided to purchase a large number of the franchised stores and will be rebranding them under a different name. I feel the outfit is setting itself up in competition with the remaining franchisees, as he is providing the same products and services. What recourse do I have to protect the viability and the saleability of my business? -- C.S., Kempton Park, S. Africa


First off, determine whether the rebranded stores will be competing in the same geographic region as your store. If the franchisor will be opening in a totally different area, it's unlikely that your business will be able to prove that it is being harmed or get a legal remedy, experts say.

However, if the franchisor is opening in your area with a system that will compete with your store, you do have some potential remedies that are worth investigating.


  Look at the "covenants against competition" section of your written franchise agreement, advises Michael Dady, senior partner at Dady & Garner, a Minneapolis law firm that represents franchisees, distributors, and dealers. "Some franchise agreements say that the franchisor will not compete with you in this concept or a similar concept. Others say simply that nobody else will compete in your area using the same trademark. Others are silent on the matter."

Next, find out if there is any legal protection against your franchisor's conduct. In the U.S., some states have statutory protection against "encroachment," Dady says. Other states have laws that say franchisees cannot be terminated without good cause. Says Dady: "We can argue that if the encroachment is severe enough to put you out of business, that's a violation of the 'no termination without good cause' provision."

Another avenue is the concept of "good faith and fair dealing" recognized by most U.S. jurisdictions. "The courts recognize that the franchisor cannot act in a way that deprives the franchisee of the expected fruits of the relationship, because that violates good faith and fair dealing," Dady says.


  Find an attorney who specializes in franchise litigation and have him or her help you identify the contract, statutory, and common-law protections. Your franchise agreement may also have a "choice of law" provision that states that the laws of a certain jurisdiction will prevail in the event of an international legal dispute.

U.S.-based franchisors very commonly also include venue clauses in their franchise agreements, Dady says, so that if franchisees want to sue they have to do it in the state where the franchisor is based. South African law, however, may have a statute that overrules such a clause. "Statutory law could state that venue provisions are unenforceable against South African citizens, which would mean that the choice of law clause would be overruled, and you wouldn't have to fight the case in U.S. courts," he says. Good luck!

Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Before it's here, it's on the Bloomberg Terminal.