Franchise Agreements and Franchise Disclosure Documents: What You Need to Know

 

The following Q&A with Barry M. Heller, senior franchise litigation partner of DLA Piper, is excerpted from Credibly Business Journal Vol. 1: Grow Your Business Through Franchising, which features advice and insights from 14 franchising executives and thought-leaders. Click here to download it for free.

CREDIBLY: What are the main things covered in a franchise agreement/contract?

BARRY M. HELLER: There are many items covered in a franchise agreement, but probably the most significant ones are:
– what is the franchisee being granted;
– what rights are the franchisor reserving to itself;
– what will be the franchisee’s territory (if there are territories);
– what are the franchisee’s obligations (e.g., are there minimum performance requirements; what products, if any, must the franchisee purchase from the franchisor or its affiliate; what discretion does the franchisee have with respect to pricing of the goods or service being offered, etc.);
– what is the required royalty fee, as well as other fees (e.g., marketing);
– what is the term of the agreement, is it renewable, and what are the conditions to renewal;
– what is the in-term and post-term covenant against competition;
– what are the termination rights;
– can the franchise be transferred and what are the requirements (e.g., does the franchisor have a right of first refusal; is the approval of the franchisor for the transfer required);
– how and where will disputes, should they arise, be resolved (e.g., arbitration or litigation).

What’s a Franchise Disclosure Document, and how is it different from a franchise agreement?

A Franchise Disclosure Document (called an “FDD”) is a document that is generally required by law to be provided to a prospective franchisee to inform the franchisee of key provisions of the franchise agreement and certain information about the franchise and the franchisor, such as who the officers and directors are, prior litigation, financial condition, list of existing franchisees, etc.

Related: 3 Reasons to Franchise Your Business

Are there any contract provisions that can be negotiated between franchisors and franchisees?

It depends upon the particular franchise offering. This is more likely to be the case when a franchise system is in its early stages of development.

Which contract provisions are most often violated by franchisees?

In my over 30 years of experience doing franchise law, I have probably seen most, if not all, of the contract provisions violated by some franchisee at some time. The ones typically violated are the duty to pay royalties, sale of unapproved product, failure to maintain system standards, misuse of the trademarks, and violation of the in-term non-compete provision.

When it comes to choosing a franchise attorney, which qualifications or attributes are most important?

When looking for a franchise attorney, one should look for how much experience they have in the franchise field, including the number of years of practice in the area, the percent of their time devoted to franchise law issues, whether they have written and/or lectured on franchise issues, and in how many different industries have they dealt with franchise issues. Look for whether they have been recognized by Franchise Times as a Legal Eagle (i.e., the top franchise attorneys in the field), Best Lawyers and comparable sources.

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barry heller dla piper franchise attorneyBarry M. Heller is the most senior franchise litigation partner at DLA Piper. For over 30 years, Barry’s practice has consisted almost exclusively of representing clients in franchise and distribution disputes throughout the country, both in litigation, arbitration and mediation.

Much of Barry’s practice has focused on franchise termination matters, as well as on more complex franchise cases involving issues affecting the entire franchise system. He has handled cases involving, among other issues, termination, transfers, rights of first refusal, implied covenant of good faith and fair dealing, alternative distribution channels, covenants against competition, trademark infringement, product sourcing and approval, advertising funds, acquisitions of other systems, antitrust and unfair competition.

Barry has been involved in both domestic and international franchise matters. He has represented franchisors in actions involving individual franchisees, franchise associations, class actions, group actions, the Federal Trade Commission and suppliers.

Connect with DLA Piper online:

Official site: https://www.dlapiper.com/en/us/
Twitter: @DLA_piper
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  1. […] do is contact the company that you’re interested in becoming a franchisee with, and get their franchise disclosure document, which lays out all the information that comes with the franchise agreement. You’ll want to study […]

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