August 12, 2021
Whether or not you, as a franchisee, can assert claims in a lawsuit against your franchisor is a loaded question. On one hand, the answer is yes; you can sue anyone for anything at any time — it doesn’t mean you’ll win or that the case will go anywhere, but you can. On the other hand, franchisees are often not aware of the myriad of risks that comes with suing a franchisor, including:
- Limitation periods
- Mandatory arbitration provisions
- Possible counterclaims
- The length and costs associated with a lawsuit
- The possibility that you could be on the hook for the franchisor’s costs and legal fees
How Do I Sue a Franchisor?
Limitation periods for suing a franchisor are essentially deadlines by which you have a right to assert claims against a franchisor. These deadlines are generally set by statute and range from one year to six years or more, depending on the type of claim involved and the applicable state law. Unfortunately, some franchisors include in the franchise agreement provisions that limit the time to bring suit even further, often to one year from the date of the wrongful conduct.
Courts will frequently enforce these “contractual limitations periods.” Therefore, it is absolutely imperative that you, as a franchisee, make yourself aware of relevant limitations periods you agreed to when buying a franchise if you think the franchisor has wronged you in some way before choosing to sue a franchisor. A limitations period can preclude any possibility of recovery. There are ways that franchisee lawyers can argue for extensions or “tolling” of limitations periods, but these are tough arguments in a franchisee lawsuit against a franchisor.
Litigation Versus Arbitration
The majority of franchise agreements also contain mandatory arbitration provisions. The distinction between arbitration and litigation is significant and often overlooked by franchisees when considering suing a franchisor. Litigation is what you see on television — lawyers in court arguing their clients’ cases. Arbitration, however, is a private process in which a private third-party neutral (or several third-party neutrals) act as judge and jury. In a sense, arbitration is a shortened, private form of litigation. Because it is private, however, it can come with increased costs.
It is necessary to pay fees to the arbitration organization for administering the process, as well as hourly fees to be paid to the arbitrator(s). The purported benefit of arbitration is that it is quicker than litigation in court — this is often true, but it can still be more costly than litigation when arbitration fees are factored into the equation. It is also very unlikely that a franchisee will be able to avoid an arbitration clause because courts almost always enforce arbitration provisions, and the arguments for avoiding arbitration are narrow and limited in scope. Speaking to a franchise lawyer can help you decide what to do next.
Details to Consider When Suing a Franchisor
Franchisees frequently overlook that whenever they assert claims against a franchisor, the franchisor may assert counterclaims against the franchisee. Franchisees often ask if they can stop a lawsuit if they decide it is not worthwhile to proceed — the answer is usually no. Once a franchisee brings a claim against a franchisor, whether in court or in arbitration, the franchisor will likely bring counterclaims against the franchisee as a form of leverage. Therefore, even if the franchisee wants to move on, cut its losses, and drop the lawsuit, this is often not an option without negotiating some sort of resolution with the franchisor.
Litigation or arbitration is not something a franchisee can start and then cut off at the drop of a hat — once you are in, it can be difficult to extricate yourself from legal proceedings. Additionally, franchisees need to keep in mind that the franchise agreement they entered into was written by the franchisor’s lawyer to protect the franchisor as much as possible and to give the franchisor as much leverage over the franchisee as possible. Therefore, even if a franchisee thinks he or she has done nothing wrong, the franchisor will likely be able to point to something in the franchise agreement or operations manual with which the franchisee has failed to comply. The point is that even if you think you, as the franchisee, have complied and done everything correctly, do not be surprised to hear from the franchisor that you have done something unlawful.
Finally, franchisees often fail to recognize that the cost of litigation or arbitration can be very high and that the length of the litigation or arbitration process is often far longer than one would expect. Additionally, many franchisors include provisions in their franchise agreements that require franchisees to pay the franchisor’s costs and legal fees if the franchisee is not successful in a lawsuit. Therefore, franchisees should consider the possibility of having to pay the franchisor’s lawyers as well as their own before deciding to sue their franchisor.
Get Help Suing Your Franchisor
Can You Break a Franchise Agreement?
When suing a franchisor, arbitration tends to move quicker than litigation but can still take up to a year or more to get to completion. Litigation can take even longer, and if a court is particularly backed up, it may take years even to work through relatively straightforward cases.
For example, we have a client that filed a franchisee lawsuit against a franchisor in May 2016. The franchisor filed a motion to dismiss, and that motion had not been decided nearly a year later. In some cases, it may be a year before the parties even have a scheduling order and can begin discovery. If the franchisee and franchisor have already separated and ended their relationship, this lengthy process can be easier to manage.
Franchisees and franchisors, however, are often in litigation while the franchisee is still operating the franchised business. Since litigation can be so lengthy, you may be stuck in the franchise relationship throughout litigation, making it so you likely should not break your franchise agreement to avoid giving the franchisor the argument that you have abandoned the franchise and breached the agreement.
Next Steps for Suing a Franchisor
Suing a franchisor, which often leads to litigation or arbitration, can be a powerful tool for franchisees to right a franchisor’s wrongs, but it is important to work with experienced franchise counsel to explain the various costs and risks associated with such forms of dispute resolution.
If you are in a position where you think it may be necessary to sue your franchisor, contact us for expert legal counsel for assistance in determining possible risks and courses of action. We can also assist with other franchise-related legal needs, which include getting out of a failing franchise, and encroachment and territorial protection matters.