It's not as simple as it seems, we have different philosophies on how to do it, and our efforts result in quite disparate work product. I am referring to the preparation of a franchise agreement.

I have struggled for years over the question of what is the proper approach in preparing or negotiating a franchise agreement:  Does the agreement have to be long, drawn-out and highly detailed?  Or can it be more stream-lined, leaving the detail to the operations manual, or simply leaving out much of the detail altogether?  Even today, I am unable to answer this question to my own satisfaction, irrespective of whether I am representing franchisor or franchisee.  The Model Rules of Professional Conduct may require us to represent our clients zealously, but feverish protection of our clients' rights does not necessarily equate into a one-sided agreement that gives our client undue, and possibly unnecessary, protection without taking into account the legitimate interests of the other party.  If that were the case, then even the simplest of promissory notes would require a ten-page document for fear of failure to satisfy our professional responsibilities to our client.

Let's start the analysis with a basic premise:  a franchise agreement must protect the rights of the franchise system.  It does not a priori have to be truly balanced, as some franchisee advocates might contend.  In fact, it is in both the franchisor's and its franchisees' interests to allow the franchisor to enforce the standards of the franchise system decisively.  For example, if the franchisor cannot compel a franchisee to operate its unit in accordance with applicable health standards, then the whole system may be threatened if death or other injury results from this inability of the franchisor.  Similarly, a franchisee who fails to abide by the provisions of its agreement should not be permitted to shut its unit without justification, reopen under a different name, and use secrets learned from its former franchisor to operate the new business.  Even the most ardent of franchisee advocates should agree with these statements. 

The problems from the franchise lawyer's perspective are two-fold:  (1) how much protection is necessary to achieve the desired result, and (2) to what extent market considerations affecting franchise sales should be taken into account in constructing the agreement to achieve the franchisor's objectives? 

In the early days of business-format franchising, franchise agreements were quite short.  The earliest franchise agreements in the KFC and Dairy Queen systems were literally one page.  Life was simple-much like the situation in the Garden of Eden before the serpent arrived on the scene.  Then, as franchise businesses became more complex, franchise agreements became longer out of necessity.  The franchised business, for example, might now cover a broader range of activities; the franchisor might have become a supplier to the system; territorial rights became issues; and technology, such as the Internet, created a need for contractual provisions that could not have been envisioned when the system's first unit opened decades before.  All in all, life became more complex.

The courts have further complicated the situation.  As franchising has matured as a method of doing business, we have started to see the development of a body of law that reflects franchising as a distinctive way of doing business.  While most judicial decisions-irrespective of one's inclination to be franchisor or franchisee protective-are fairly predictable under established principles of contract, trademark and antitrust law, there occasionally comes the situations where the application of traditional judicial principles would lead to results that are difficult for courts to accept.  The California courts seem to be a frequent source of these decisions1, but other states, such as New Jersey, have also become noted for their courts' variance from the "tried and true" when an application of traditional legal principles to facts might lead to harsh results.2  Lawyers have responded to these aberrational judicial decisions by drafting provisions that eliminate the leaks in the dike created by the courts.  The classic example of this phenomenon can be seen in the case that, in my opinion, generated the most controversy in franchise law in the last decade-Scheck v. Burger King Corp.3  In Scheck, the trial court held that Burger King Corporation's refusal to grant its franchisees territorial protection did not mean that the franchisor could place a restaurant right next door to an existing franchised unit and thereby destroy the franchisee's business.  As a result of this decision, franchisor lawyers began adding language to their agreements by which the franchisee expressly acknowledged the franchisor's right to place units anywhere it wanted-even right next door.4  Although the precedential value of Scheck has been mostly eradicated5, its legacy lives on in the language many franchisors have included in their agreements.

The franchise agreement's growth in length during the last three decades can also be attributed in part to the zeal of our colleagues.  Perhaps adhering a little too closely to their professional obligation to represent clients zealously, some attorneys have added both defensive and offensive measures to their agreements to provide an arsenal of weapons that deprive franchisees of common law rights.  Waiver of jury trial rights, no set-offs against royalty payments, litigation in distant locations, indemnification for the franchisor even for its own negligence, one-sided arbitration clauses, and waiver of required bonds in order to obtain injunctions are only a few.  I have seen of late a confession-of-judgment provision, such that the franchisor merely had to appear in court and recite the breach, and the franchisor would be entitled to "justice."  It was reported a couple of years back that one chain even went so far as to provide that the franchisor could buy back the franchise at any time for a nominal premium.  Presumably, this would allow the franchisor who, rightly or wrongly, found franchisor-franchisee litigation on the horizon to cap its liability and avoid an expensive dispute.  A clever means of damage control!  However, this provision, it was also reported, ultimately made the franchise most difficult to sell and was consequently abandoned.

This last point raises a most interesting question:  where does the marketplace fit into the picture?  A basic assumption of contract law is that two individuals should be free to enter into whatever contractual arrangement they may choose-subject to a few public policy restraints-without government intervention.  Thus, if a prospective franchisee does not like the proposed franchise agreement, he or she may walk from the negotiating table and look at other alternatives available in the marketplace.

But does the marketplace work in the franchise context?  A standard lawyer's response (yes and no) is probably called for here.  While prospective franchisees can always decide not to buy franchises, many of the provisions franchisee advocates find objectionable have become "industry-standard."  As a result, it matters not whether franchisee buys Franchise X or Franchise Y; the agreements for both will provide, for example, that a jury trial will not be permitted.  In other words, there is no competition with respect to the legal-rights aspect of a franchise.

This problem (if one accepts the notion that this is a problem) is further acerbated by the fact that legal rights are not high on the list of a prospective franchisee's concerns when franchise-purchase negotiations take place.  Franchise fees, royalty and advertising fee rates, location, exclusivity, and the term of the agreement, are only a few of the many terms that will be of more importance to the prospect.  Limitations on discovery, one-sided arbitration provisions, an overly broad non-compete and liquidated damages that do not truly approximate actual damages, are all issues that are contingent in nature-they may never come into play-as distinguished from the amount necessary to purchase the franchise and the initial investment to become operational, which are real-time issues.

Franchisee advocates are also concerned that many franchisees do not read the franchise agreement in advance.  It is difficult to have sympathy for this class of prospects.  A more persuasive argument, however, is that the franchisee who reads the agreement may nevertheless not understand the full import of all of its provisions.  A covenant not to compete, for example, in a franchise requiring a special-use building, not only means that the franchisee must find another occupation upon expiration or termination of the franchise, but, in addition, that the uses to which the real estate may be applied upon termination of the franchise will be limited; this will result in a lower value for the premises.  The subtleties of franchise relationships are points that many competent lawyers who occasionally represent franchisees-as well as those who are more experienced in dealing with franchise relationships-may either not appreciate or may not adequately address with their clients.

At the end of the day, the franchisor attorney finds himself or herself in a difficult dilemma.  Can he or she say to a franchisor client with a straight face that the client should not include in its franchise agreement an aggressive provision if that provision will not adversely affect the client's ability to sell franchises?  Should the attorney be concerned about the client's "image" in its industry?  Will a franchisor be viewed as an ogre if its franchise agreement is too draconian?  Does that matter?

From a professional liability standpoint, I hope courts will stay clear of this dilemma and not impose their view of the world, with 20-20 hindsight, in judgment of what an attorney must decide in the heat of practice.  Otherwise, an attorney may feel compelled to be overly aggressive in his or her drafting if, for no other reason, to avoid being second-guessed later on in a malpractice suit.  Rather, it would be better in my view-both for lawyers and for franchising-for the courts to create an atmosphere that will allow attorneys to recognize that in the scheme of the world the most one-sided, longest, detailed agreement may not be the one best suited for their clients.  Zealousness and effectiveness are two quite different standards, and in pursuing the first, an attorney may be sacrificing the second, to the client's detriment. 

1 Bolter v. Superior Court, 104 Cal. Rptr. 2d 888 (Cal. Ct. App. 4th Dist. 2001), declined to extend, Bradley v. Harris Research, Inc., 275 F.3d 884 (9th Cir. 2001); Foodmaker, Inc. v. Quershi, [1998-2000 Transfer Binder], Bus. Franchise Guide (CCH) at ¶ 11,780 (Super. Ct. Dec. 1, 1999); Postal Instant Press, Inc. v. Sealy, 51 Cal. Rptr. 2d 365 (Cal. Ct. App. 2d Dist. 1996).

2 See, e.g., Kubis & Perszyk Assoc., Inc. v. Sun Microsystems, Inc., [1996-1997 Transfer Binder] Bus. Franchise Guide (CCH) ¶ 10,980 (N.J. July 23, 1996).

3 756 F. Supp. 543 (S.D. Fla. 1991), reconsideration denied, 798 F. Supp. 692 (S.D. Fla. 1992).

4 Indeed, in the 1992 Scheck decision, the trial court literally drew the roadmap as to how a franchisor could avoid the problem the trial court judge found present in the facts of that case.

5 See Burger King Corp. v. Weaver, 169 F.3d 1310 (11th Cir. 1999).

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.