Franchising is a growing business model in the U.S. As franchising grows, however, franchisors can compete with their franchisees over the right to goodwill generated by the franchisee. I have recently completed a dissertation in Temple\u2019s doctoral program that examines legal mechanisms to address expropriation of goodwill generated by franchisees, and proposes an alternative solution.<\/p>\n
The franchising model permits the franchisor to impose strict terms and conditions to protect and enhance its brand name. As a result, franchise contracts are often standard form contracts drafted by the franchisor and presented on a “take it or leave it” basis. Although these typically one-sided contracts may be necessary to prevent franchisees from harming the franchisor\u2019s brand name, in practice, the franchisors\u2019 contractual power can lead to franchisor-opportunism, in particular through wrongful terminations, onerous transfer restrictions, and so on.<\/p>\n
Currently, U.S. law struggles to provide appropriate solutions to deal with this problem. In most states, courts have developed common law policies that limit particular franchising practices to prevent the franchisor\u2019s appropriation of the franchisee\u2019s investment. Nevertheless, courts are reluctant to override express contract provisions with common law principles. Hence, federal and state legislatures have enacted franchise laws in order to balance potential power imbalances and to protect franchisees from opportunism.<\/p>\n
While comprehensive \u201cdisclosure requirements\u201d have been the highlights of the regulatory efforts, a number of states have passed \u201cfranchise relationship laws\u201d that considerably restrain franchisors\u2019 contractual power. These statutes typically require franchisors to show \u201cgood cause\u201d for terminations and non-renewals, in some cases before making any adverse decision. Nevertheless, state relationship laws have been criticized for being harmful to the franchising sector as they restrict franchisors\u2019 termination power, and thus, encourage franchisee-opportunism. Accordingly, the majority of the states have not enacted franchise relationship laws.<\/p>\n
As current laws fail to provide a fair solution for both parties, my dissertation offers an alternative theory drawn from the European concept of \u201cgoodwill recoupment.\u201d<\/p><\/blockquote>\n
Under the proposed approach, once a franchise comes to an end, the franchisee would be entitled to a payment for goodwill lost to the franchisor. This solution differs from existing theories in the U.S. legal system mainly because the recovery does not depend on the franchisor\u2019s intentional wrongdoing. If and to the extent that a franchisee has positive local goodwill, the transfer of this value to the franchisor upon cessation justifies the payment. Unlike existing U.S. laws, however, the payment aims to recoup only a limited expected period of time in which the franchisor\u2019s extra earnings might still be traced back to the franchisee\u2019s efforts. Therefore, the recoupment doctrine offers a narrow but relatively precise protection for franchisees\u2019 goodwill. Moreover, because the proposed solution targets the economic effect of franchisor-opportunism, there is no need for strict termination restrictions.<\/p>\n
While I do not expect courts or legislatures to enact this proposal immediately, my hope is that it provides a basis for a richer discussion of the balance of power between franchisors and franchisees. The proposed approach is a more tailored solution to franchisor opportunism than those currently used in the U.S. legal system. It would allow the franchisee to receive a fair return for its intangible investment without constraining the franchisor\u2019s monitoring power and flexibility. Ultimately, this approach would reduce both franchisee and franchisor opportunism, and incentivize investment and cooperation.<\/p>\n","protected":false},"excerpt":{"rendered":"
Franchising is a growing business model in the U.S. As franchising grows, however, franchisors can compete with their franchisees over the right to goodwill generated by the franchisee. I have recently completed a dissertation in Temple\u2019s doctoral program that examines legal mechanisms to address expropriation of goodwill generated by franchisees, and proposes an alternative solution.<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[31,36,38,17],"tags":[],"coauthors":[37],"class_list":["post-65","post","type-post","status-publish","format-standard","hentry","category-contracts","category-intellectual-property","category-regulated-industries","category-student-authored","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\n
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