The International Franchise Association’s Annual Convention is always filled with useful take home information for franchise practitioners.  Last week, I attended the session “Proactive Strategies for Franchisors to Prevent Litigation Risks” with panelists Don Fox (Former CEO of Firehouse Subs), Michael Seid (Managing Director of MSA Worldwide) and Bret Lowell (Partner at DLA Piper).  It was a lively and interactive panel with a number of useful risk mitigation techniques and suggestions for franchisors.

First, the panelists discussed how sales brokers can often be a major source of risk for franchisors due to franchisee allegations of misrepresentations and fraud in the offer and sales process.  Franchisor often rely on an integration (merger) clause in a contract, that seemingly “boilerplate” provision often found at the end the franchise agreement. An integration clause states that the signed contract is the final agreement between the parties to avoid claims contradicting the plain terms of the contract.  However, there is no silver bullet in any franchise agreement that will save the day every time. An integration clause will not protect a franchisor from fraud committed in connection with the signing of a franchise agreement.  Therefore, proper training to avoid claims is a critical component of every risk management plan. 

The discussion then shifted to vicarious liability and joint employer risk exposure.  The panelists emphasized the importance of ensuring that trainers and field consultants comprehend the underlying principals of these legal theories, so they understand the “how” and “why” to modify their approach with franchisees.  For example, simple steps like ensuring the owner is present when providing any on-site instruction and providing suggestions instead of instructions can be helpful in reducing vicarious liability or joint employer risk.

Don Fox was asked about how Firehouse Subs succeeded so well in avoiding litigation even while utilizing an area representative growth model known for its potential high turnover rate.  Don explained that default letters should never be a surprise. He did not consider his job done if a franchisee did not see a formal notice of default coming. The panel suggested avoiding email and texting. The means of communication are incomplete thoughts captured during a specific period of time and have potential for easy manipulating in future disagreements.

Finally, the panel discussed how to deal with a franchisee when an issue does arise. The panel suggested direct communications with the franchisee – at the very least you will get a preview of the coming lawsuit.  Starting with “It is obvious you are not happy, it is obvious we are not happy” so how do we find an exit agreeable to both sides? This dialogue can allow a franchisee to leave the system with dignity and reduce the risk of claims.   Always respect that a franchisee invested in the brand and earned the right to be heard.  The franchisor may not like what the franchisee has to say, but by virtue of their investment the franchisee has earned the right to be heard.   

In short, the panel reminded the audience franchising is the world’s largest grapevine and we live in a glass box.  This is a relationship business so foster and protect those relationships.