Kaufmann Gildin & Robbins LLPKaufmann Gildin & Robbins LLP2026-10-02T04:46:30Zhttps://www.kaufmanngildin.com/feed/atom/WordPress/wp-content/uploads/sites/1404180/2023/10/cropped-Kaufman-Gildin-site-icon-32x32.pngby Kaufmann Gildin & Robbins<![CDATA[When Does A Franchisor Cross The Line? Lessons From Manning V. Budget Rent A Car]]>https://www.kaufmanngildin.com/?p=513702026-09-29T06:17:54Z2026-09-29T06:17:54ZFor franchisors, protecting the brand is essential. But when does protecting the brand and maintaining brand standards become exercising too much control over the franchisee's business? A recent New York appellate decision highlights why that distinction matters.
Franchising allows a company to expand its brand without directly owning and operating every location. The franchisee typically establishes and independently operates the business, employs its own personnel and assumes responsibility for day-to-day operations. But when a franchisee’s conduct allegedly causes injury to a third party, plaintiffs may look to the franchisor as the deeper pocket and seek to hold the franchisor vicariously liable for the franchisee’s acts or omissions.A recent decision from the New York Supreme Court, Appellate Division, Second Department - - Manning v. Budget Rent A Car, 241 A.D.3d 676, 241 N.Y.S.3d 295 (2d Dep't 2025) - - provides an important reminder for franchisors: while an independent contractor provision is an essential component of a franchise agreement, it may not, by itself, shield a franchisor from being held vicariously liable for a franchisee’s acts or omissions.The analysis may ultimately depend on what the franchisor actually did.
The Manning Decision
Manning arose from a motor vehicle accident involving a vehicle owned by Tropic Island Trading Company Limited. Tropic had entered into an International Unit Franchise Agreement with Budget Rent A Car.The plaintiffs sued Budget and others for personal injuries arising from the accident. Budget moved for summary judgment, arguing, among other things, that it could not be held vicariously liable for Tropic's alleged negligence.The trial court denied the motion, and the Second Department affirmed.The Appellate Division reiterated the established New York rule that, absent proof of a principal/agency relationship or proof that a franchisor exercised a sufficiently high degree of control over its franchisee, there generally is no basis for holding a franchisor responsible for the franchisee's misconduct. The court cited Friedler v. Palyompis, 12 A.D.3d 637 (2d Dep't 2004), as well as Stern v. Starwood Hotels & Resorts Worldwide, Inc., 149 A.D.3d 496 (1st Dep't 2017), and Fogel v. Hertz International, 141 A.D.2d 375 (1st Dep't 1988).Importantly, however, the court did not hold that Budget was vicariously liable. Instead, it concluded that Budget's submissions failed to eliminate triable issues of fact concerning whether an agency relationship existed or whether Budget exercised the requisite degree of control over Tropic's operations.That distinction is important for franchisors.
The Agreement Is Only Part of the Story
Franchise agreements commonly state that the franchisee is an independent contractor and expressly disclaim any agency relationship. Those provisions are an important part of establishing the parties’ intended relationship and protecting the franchisor from vicarious liability.But when a vicarious liability claim arises, the analysis may extend beyond the language of the agreement. A plaintiff may argue that the parties’ actual conduct demonstrates a relationship different from the one independent contract relationship described in the agreement.The practical question becomes: What did the franchisor actually do?What did it require? What did it monitor? What did it approve? What authority did it retain?And, most importantly, did the franchisor's conduct remain within the legitimate bounds of protecting its brand and maintaining brand standards, or did it cross the line into controlling the franchisee’s day-to-day business operations?
Brand Standards vs. Operational Control
This distinction is particularly important because franchisors necessarily exercise some degree of control over their systems. Brand standards are fundamental to franchising.A franchisor may impose requirements concerning trademarks, customer experience, facilities, equipment, technology, training, quality, safety and legal compliance. These requirements do not, by themselves, transform a franchisee into the franchisor’s agent. The potential problem arises when the franchisor’s involvement moves beyond establishing and enforcing system standards and begins to resemble direct management of the franchisee’s business.For example, there may be a meaningful distinction between requiring a franchisee to maintain vehicles in accordance with specified safety or brand standards and directing the franchisee's employees regarding the day-to-day operation or maintenance of those vehicles. Similarly, there is a distinction between inspecting a franchise location for compliance with system standards and directly supervising the franchisee’s employees or managing the franchisee’s daily operations.Where the line is drawn will depend on the particular facts and circumstances of the franchise relationship.Accordingly, franchisors should not assume that an independent contractor provision will, by itself, resolve the issue. The contractual language matters, but so does the franchisor’s conduct in practice.
Four Steps Franchisors Should Consider
Manning offers franchisors an opportunity to take a step back and examine not only what their franchise agreements say, but also how their franchise systems operate in practice. A few considerations are particularly important:1. Review the franchise agreement.The agreement should clearly define the parties’ respective roles and responsibilities and expressly address the independent contractor relationship. It should appropriately allocate responsibility for employees, operations, compliance, insurance, vehicles, premises and other matters that belong with the franchisee.2. Compare the contract to reality.A franchisor should periodically consider whether its actual day-to-day practices are consistent with the relationship established in the franchise agreement. Do field personnel make decisions that should belong to the franchisee? Do communications inadvertently suggest that the franchisor is directing employees or managing operations?3. Document the purpose of system standards.Franchisors should be able to explain why particular requirements exist. Whether a standard is designed to protect trademarks, maintain consistency, satisfy regulatory requirements or promote customer safety, documenting its legitimate business purpose can help distinguish brand oversight from operational control.4. Address liability before litigation.Vicarious-liability issues should be considered as part of franchise-system management, not only after an accident or lawsuit occurs. Operating manuals, training materials, inspection procedures, field-support practices and franchisee communications should be reviewed periodically with these issues in mind.
The Bigger Franchise Law Lesson
Manning does not suggest that franchisors are automatically responsible for their franchisees’ negligence. Nor does it suggest that ordinary system standards create an agency relationship. Instead, it illustrates a practical lesson: a franchisor's potential liability may depend not only on what the franchise agreement says, but also on what the franchisor actually does.The goal is not to eliminate franchisor oversight. Effective franchise systems require meaningful standards, monitoring and brand protection. The key is to structure those controls carefully so the franchisor can protect the system without assuming responsibility for the franchisee’s independent business operations.Ultimately, Manning v. Budget Rent A Car is a useful reminder that vicarious liability is not simply a litigation issue - - it is also a franchise system design issue. Accordingly, the best time to examine the line between protecting the brand and controlling the business is before that line becomes the central issue in a lawsuit.
Under the 2020 standard, routine parts of an arm’s-length business relationship do not, by themselves, make you a joint employer. In this type of relationship, each business operates independently. The rule instead focuses on whether you have and use substantial direct and immediate control over essential terms and conditions of employment.
This distinction allows you to establish requirements designed to protect your trademarks, products, services and other elements of your franchise system. Requiring employees to wear approved uniforms, for example, differs from determining their schedules or directing their day-to-day work. Brand standards and employment decisions, however, should remain distinct.
When can control raise joint-employer concerns?
The analysis changes when your involvement reaches the franchisee’s workforce. Under the current standard, essential terms and conditions of employment include:
Wages and benefits
Hours of work
Hiring and firing
Discipline
Employee supervision and direction
Your level of involvement in these matters is important. Direct control may support a finding that you share control over the employees’ working conditions.
Do your agreements and practices preserve the distinction?
Your franchise agreement is only part of the picture. Joint-employer status depends on the facts of each relationship. How you operate in practice also matters.
As you review your franchise system, look at your agreements, operations manuals and field practices. Do they keep a clear line between protecting your brand and managing franchisee employees?
The current standard draws clearer lines than the 2023 rule would have. But those lines still matter. The key question is whether the authority you keep, and the control you actually use, stays within them.]]>by Kaufmann Gildin & Robbins<![CDATA[New Podcast Interviews: Franchising in New Zealand and Australia]]>https://www.kaufmanngildin.com/?p=513602026-10-02T04:46:30Z2026-09-28T05:46:58ZThe KGR Franchise Law Blog has just posted two new podcast episodes, regarding franchising in New Zealand and in Australia, respectively. They can be found here and here, and on all major podcast platforms.
A. NEW ZEALAND: Insights from franchise lawyer Stewart Germann on entering the Kiwi market
In a recent discussion, franchise lawyer **Stewart Germann** shared invaluable insights about franchising in New Zealand, especially for U.S. franchisors looking to expand. With over 50 years of legal experience in New Zealand, Stewart's expertise sheds light on the unique landscape of franchising in this vibrant market.
1. The New Zealand Franchise Landscape
Stewart highlighted that unlike the U.S., New Zealand lacks specific franchise legislation, making it relatively easier for U.S. franchisors to enter the market. He explained, "Because you're in the U.S., you're used to regulation with your mandatory FDD. But when you come to New Zealand, there's no franchise-specific legislation."This absence of mandatory disclosure regimes is a significant advantage, allowing for a smoother entry process. According to Stewart, forming a company in New Zealand can be done in as little as 24 hours, with minimal requirements, making it an attractive option for international businesses.
2. High Demand for Franchising
The appetite for franchising in New Zealand is substantial, with over 546 franchise brands reported in a recent survey, boasting the highest per capita franchise presence in the world. Stewart noted, "The turnover for franchising is over seventy billion dollars, contributing over eleven percent of New Zealand's GDP."He emphasized that franchises in food and beverage sectors are particularly successful, mentioning brands like **Cinnabon** and **Dunkin' Donuts** as examples of thriving franchises in the region. Fitness franchises are also booming, with chains like **Anytime Fitness** and **Snap Fitness** gaining traction. These are just a few examples.
3. Practical Considerations for U.S. Franchisors
For U.S. franchisors contemplating expansion, Stewart advised on several key points:- **Legal Framework**: Engage with a local franchise lawyer to understand the market and legal requirements.- **Trademark Registration**: It’s critical to begin trademark filings early to avoid potential issues in the future.- **Market Visits**: Stewart encourages potential franchisors to visit New Zealand to gain firsthand experience of the market environment. "Come on out and have a look," he said, highlighting the importance of establishing local connections.Stewart also mentioned the role of the **Franchise Association of New Zealand**, which has a robust code of practice to help maintain standards within the industry.
4. Upcoming Insights
In addition to his legal practice, Stewart is excited to announce his upcoming book on franchising law in New Zealand, set to be published later this year by Thomson Reuters. This book aims to fill a gap in the current literature and will serve as a valuable resource for both students and practitioners in the field.The conversation reinforced the idea that New Zealand presents a dynamic and welcoming environment for franchising, making it a compelling option for U.S. businesses looking to expand internationally.For further insights and a deeper understanding, consider tuning in to the full episode with Stewart Germann.
B. AUSTRALIA: Insights from franchise lawyer Iain Irvine
We dove into some of the intricacies of franchising in Australia with insights from Ian Irvine, a seasoned franchise lawyer with over twenty years of experience. Ian, a partner at Varden Legal, shares his expertise on navigating the legal landscape for franchisors looking to expand into Australia.
1. Understanding the Australian Franchise Landscape
The Australian franchise market is often perceived as highly regulated, but Ian challenges this notion. He clarifies that while Australia does have regulations, the simplicity and federal nature of these laws make it less complex than the state-based regulations in the U.S. Ian comments: "Australia is the most highly regulated franchise market in the world in terms of legal regulation. But it's certainly not as complicated as the United States."He emphasizes that franchisors in Australia need to navigate a federal framework rather than state-specific laws, which streamlines the process considerably.For U.S. franchisors eyeing the Australian market, understanding the initial compliance obligations is crucial. Ian points out that the structure chosen—whether direct franchising, master franchising, or multi-unit development—will dictate the level of regulatory compliance needed. He explains: "How you structure your franchise will impact your compliance obligations under our corporation laws."Franchisors must submit a franchise disclosure document, which includes a 14-day disclosure period. Unlike many U.S. state laws that require state examiner review processes, the Australian system offers a more streamlined approach. The registration process is quick, often taking less than a week, much less information, and it is a federal process without various different provincial / state laws to contend with.
2. Crafting an Australian Disclosure Document
One significant aspect that U.S. franchisors must consider is the creation of an Australian-specific franchise disclosure document. Ian outlines the differences: "The Australian disclosure document requires more detailed disclosure of ongoing operating costs than the U.S. approach, which typically focuses on initial setup costs."This means that franchisors must provide estimates for ongoing expenses, ensuring that potential franchisees are fully informed and not caught off guard by unexpected costs.
In 2009, Westchester Fitness, LLC entered into a franchise agreement with Retrofitness, LLC to operate a Retrofitness gym. Like many franchise agreements, it contained a forum selection clause — here, requiring that disputes be litigated exclusively in New Jersey state or federal court.The agreement expired in September 2019. Retrofitness promptly sued Westchester Fitness and its principal, Holly Wallman, in New Jersey state court over post-expiration obligations. While that suit was pending, Westchester Fitness turned around and sued Retrofitness in New York (Suffolk County) for breach of the same franchise agreement. Retrofitness removed the New York action to federal court, and, notably, the parties spent the ensuing months negotiating what they believed was a global settlement of both the New Jersey and New York disputes. That settlement fell apart in June 2020, and negotiations were unsuccessful in reaching agreement (or at least, the parties did not agree as to whether any agreement was reached).The federal court eventually decided it lacked subject matter jurisdiction and remanded the New York case back to Suffolk County. Once back in state court, the plaintiffs amended their complaint — adding two individual plaintiffs, two additional defendants, and several new causes of action arising out of the failed settlement negotiations themselves. Retrofitness (the franchisor) then moved to dismiss the entire amended complaint under CPLR 3211(a), invoking the New Jersey forum selection clause. The trial court granted the motion in full. The plaintiffs appealed.
The Appellate Division's Holding
The New York State Court Appellate Division’s (Second Department) affirmed in part and reversed in part, drawing a sharp — and instructive — line.
The forum selection clause was enforced for claims arising under the franchise agreement. As to the first through sixth and twelfth causes of action, which sounded in breach of the franchise agreement itself, the court held the forum selection clause fully enforceable and dismissed those claims from the New York action.
The clause was not enforced for claims arising from the failed settlement. The seventh through eleventh causes of action — which arose out of the parties' separate, later settlement negotiations, not out of the original franchise agreement — fell outside the clause's scope. The court reinstated those claims, holding that a forum selection clause's reach is defined by "the language of the forum selection clause itself," not by the general subject matter of the underlying dispute. Because those causes of action did not arise out of the franchise agreement, the New Jersey forum selection clause simply did not speak to those causes of action.
Litigating elsewhere did not waive the clause. The plaintiffs also argued that Retrofitness had waived its right to invoke the forum selection clause by removing the case to federal court and otherwise participating in the New York litigation. The Second Department rejected that argument outright, holding that participation in litigation — including affirmative steps like removal — did not waive the forum selection defense.
The Legal Standard the Court Applied
The court's forum-selection-clause analysis tracks well-settled New York law, and is worth restating because it is the standard franchisors will typically face whenever a franchisee tries to avoid a contractually chosen forum:
A forum selection clause is documentary evidence that can support dismissal under CPLR 3211(a)(1).
Such clauses are prima facie valid and enforceable.
To defeat one, the resisting party must make a "strong showing" that the clause is unreasonable, unjust, contrary to public policy, the product of fraud or overreaching, or that litigating in the chosen forum would be so gravely difficult that the party would, for all practical purposes, be deprived of its day in court.
General, unparticularized allegations of fraud relating to the underlying contract are not enough to invalidate a forum selection clause embedded in that same contract. The fraud has to go to the clause itself (or otherwise meet the demanding standard), not merely color the franchisee's broader grievance against the franchisor.
Westchester Fitness showed none of these factors, held the court. It did not show unconscionability, did not show unequal bargaining power or high-pressure tactics, did not tie its fraud allegations to the forum clause specifically, and offered no evidence that litigating in New Jersey would functionally deny it a forum at all. That is a fairly typical failure pattern, and it is why forum selection clauses tend to survive challenge: the bar to defeat them is high, and courts are reluctant to let a franchisee's general dissatisfaction with the franchise relationship do the work of invalidating a freely negotiated contract term.
Why the Scope Ruling Matters More Than the Enforcement Ruling
Franchisor's counsel will find the enforceability holding reassuring but unsurprising — courts routinely enforce forum selection clauses against franchisees who cannot clear the "strong showing" bar. The more practically significant part of the decision is the scope holding: the clause did not reach claims arising from the parties' post-dispute settlement negotiations.That result follows logically from the reasoning the court relied on — a forum selection clause's applicability does not depend on the "nature of the underlying action" as a category (e.g., "this is a franchise dispute, so the clause covers everything related to it"); it depends on the actual language of the clause and whether the specific claim arises out of the agreement containing it. Settlement negotiations conducted after the franchise agreement expired, over a settlement agreement that was never actually executed, are a different animal from a breach-of-franchise-agreement claim, even though they grew directly out of the same underlying relationship and even the same litigation.This is a distinction franchise litigators see recur in other contexts too: disputes over side letters, subsequent amendments, verbal modifications, releases, or freestanding settlement agreements can easily fall outside a forum selection (or arbitration) clause drafted only to cover "this Agreement," even when the parties and the underlying commercial relationship are identical to those in the franchise agreement.
Lessons for Franchisors
Draft forum selection (and arbitration) clauses to reach beyond the four corners of the agreement, if that's the intent. If a franchisor desires that its chosen forum govern any dispute connected to the franchise relationship — including disputes over settlement of franchise disputes, post-termination negotiations, or ancillary agreements — the clause needs broader language than "disputes arising under this Agreement." For example, one might consider language capturing disputes "arising out of or relating to" the franchise relationship, the franchise agreement, "or any amendment, side agreement, or settlement thereof." Standard-form clauses drafted decades ago (the subject franchise agreement was signed in 2009) often use narrower "arising under" language that, as this case shows, will not automatically follow the parties into every subsequent dispute connected to the franchise relationship.
You can litigate defensively without waiving a forum selection clause — but do not assume that's true everywhere or in every posture. Retrofitness (the franchisor) removed the case to federal court, participated in the resulting jurisdictional fight, and, it seems, only after remand moved to dismiss based on the forum clause. The New York state court found no waiver. That's a favorable and useful data point, but franchisors should still move to enforce a forum selection clause at the earliest practical opportunity. Waiver arguments are fact-specific, and a franchisor who litigates on the merits for an extended period, files affirmative claims of its own in the "wrong" forum, or otherwise engages substantively before raising the clause runs a real risk that a different court reaches a different result.
Settlement negotiations are not "off the books" for litigation risk — document them carefully. The claims that survived here (the seventh through eleventh causes of action) arose because the parties negotiated toward a settlement, allegedly reached one, and then one side told the court no settlement existed. Whatever actually happened in those negotiations, the case is a reminder that failed settlement talks can generate an entirely separate, independently litigable dispute — one that won't necessarily be covered by the underlying agreement's forum selection or dispute-resolution clauses. Franchisors negotiating settlements of franchise disputes should consider using written settlement term sheets or agreements that contain their own forum selection and dispute-resolution provisions, rather than relying on the original franchise agreement's clause to cover a later, distinct settlement dispute.
A forum selection clause remains one of the most durable protections a franchisor can build into a system-wide agreement. Litigating dozens or hundreds of franchisee disputes in the franchisor's home jurisdiction (or another consistent, chosen forum) is a significant efficiency and cost benefit, and this decision confirms that New York courts will hold franchisees to that bargain absent a genuinely strong showing of unfairness — general fraud allegations about the franchise relationship won't cut it.
Takeaway
Westchester Fitness v. Retrofitness does not break new legal ground, but it is a powerful illustration of two principles franchise counsel should keep close at hand: forum selection clauses are strongly enforced under New York law, and their reach is governed strictly by their text. Franchisors that desire broad, durable forum protection — covering not just the franchise agreement itself but everything that flows from the franchise relationship, including its eventual unwinding or settlement — should make sure their agreements state that explicitly, rather than relying on courts to read that intent in after a dispute has already fractured into multiple, only partially related, claims.
Noncompete Restrictions Do Not Mean the End of Post-Termination Protections
Traditionally, franchisors have used post-termination noncompete provisions to prevent former franchisees from leveraging the knowledge, goodwill, customer relationships, and operational insight gained through the franchise relationship to compete with the franchisor. But preventing competition and protecting the franchisor’s legitimate franchise system interests are not necessarily the same objective, particularly as the enforceability of post-termination noncompetes comes under increasing scrutiny.Even when a franchisor cannot prevent a former franchisee from competing, it continues to have legitimate interests to protect - - including its trademarks, trade dress, confidential information, proprietary systems, customer information, digital assets and other components of its franchise system. The answer is not to simply replace a noncompete with another broad restriction or rely on a single restrictive covenant to protect these distinct interests. Instead, franchisors should assess whether their franchise agreements are structured as a coordinated framework addressing the protection, use and disposition of these assets and relationships when the franchise relationship ends.
California Has Long Been a Warning Sign
California has long served as a cautionary example for franchisors relying on post-termination restrictions. California Business and Professions Code §16600 broadly provides that contracts restraining a person from engaging in lawful profession, trade, or business are void, subject to specified exceptions. While California courts have recognized distinctions between franchise relationships and traditional employment relationships when applying these restrictions on trade, and there may be exceptions in some situations, California’s longstanding public policy against restrictive covenants remains an important consideration for franchisors. For franchisors operating nationwide, California demonstrates why a provision that may be enforceable in one state cannot be assumed to be enforceable in another. It also illustrates the importance of structuring franchise agreements around the franchisor’s legitimate interests rather than simply relying on broad restrictions against competition.
Virginia Changes the Drafting Equation
Virginia’s 2026 legislation takes the issue a step further by expressly addressing the inclusion of post-termination noncompetes in franchise agreements. Effective July 1, 2026, Virginia’s Retail Franchising Act generally prohibits franchisors from offering or entering into franchise agreements that restrict a franchisee’s ability to engage in the retail business of offering, selling, or distributing goods or services at retail after the termination or expiration of the franchise agreement. The statute contains a narrow exception for certain voluntary franchise sales, under which a post-sale noncompete may be imposed for a period of up to two years. For franchisors, the implications extend beyond simply removing the noncompete from their Virginia form (or excluding/narrowing it via a Virginia state-specific addendum). The franchisor should consider how the remainder of the agreement addresses the legitimate interests that the noncompete historically helped to protect.
Rethinking the Franchise Agreement’s Post-Termination Framework
When a traditional post-termination noncompete is unavailable, franchisors should resist the temptation to recreate the same restriction through a series of increasingly expansive provisions. Instead, franchisors should take a step back and evaluate whether their franchise agreements are structured as an integrated framework for protecting the franchisor’s legitimate interests during and after the franchise relationship. Among other things, franchisors should consider whether their agreements appropriately address:
Debranding and deidentification: What must the franchisee do immediately after termination to remove trademarks, signage, trade dress and other brand identifiers?
Confidential and proprietary information: What information does the franchisor legitimately need to protect, and are those protections appropriately defined?
Customer and business information: What rights does the franchisor have with respect to customer information and data generated through the franchise system?
Digital assets: Who controls websites, domain names, social media accounts, telephone numbers, online listings and other digital assets following termination?
Return and destruction obligations: How are proprietary materials returned, deleted or disabled?
Transition obligations: Does the agreement provide a practical mechanism for an orderly transition following termination?
Transfers and continuity of protections: Does the agreement preserve the franchisor’s legitimate post-termination protections when a franchise is transferred, including by clearly addressing which obligations and protections carry forward and which apply upon a subsequent termination?
Survival provisions: Which obligations continue after the franchise agreement ends, and for how long?
The objective should not be to disguise an impermissible noncompete as another contractual provision, Rather, each provision should serve a legitimate and identifiable purpose and operate as a part of a coherent framework for protecting the franchise system.
Looking Beyond the Noncompete
As states increasingly adopt different approaches to restrictive covenants, franchisors should consider whether their existing agreements and state-specific addenda adequately address those differences. This does not necessarily mean that franchisors need entirely separate agreements for every state. It does, however, mean that franchisors should no longer assume that a provision in a national form will be appropriate - - or enforceable - - in every jurisdiction. The changing noncompete landscape therefore presents an opportunity to take a broader view of the franchise agreement: What is the franchisor actually trying to protect and does the agreement provide an effective and legally appropriate framework for doing so?The question is no longer whether a franchisor can stop a former franchisee from competing. The more important question is whether the franchise agreement has been thoughtfully designed to protect the franchisor’s legitimate interests when the franchise relationship ends.
Longer regulator enforcement window. The Maryland Securities Commissioner's authority to pursue enforcement actions for violations of the Maryland Franchise Law now extends from three years after a violation to five years after the violation occurs (§14-210(c)). Franchisors should expect a longer look-back period for state enforcement exposure.
Scope clarification for Section 14-227. A new §14-227(a) clarifies that this section — which addresses franchisee rights (including rights to sue their franchisor in certain situations) — applies only to a franchisee who resides in Maryland, or to a franchised business that operates or will operate in the state. The remaining subsections of the former §14-227 are renumbered accordingly.
Longer private civil action window. The limitations period for a franchisee to bring a private civil action changes from three years after the grant of the franchise to the earlier of: (i) four years after the franchise is granted, or (ii) two years after the franchise opened to the public (§14-227(f)). This is a substantive change that directly affects franchise agreement and disclosure document language, discussed below.
New trade-association / free-association rights. Amended §14-233 (with the former §14-233 renumbered to §14-234) now guarantees franchisees the right to join a trade association made up of other franchisees of the same brand and to participate in it for any lawful purpose. Franchisors — and their officers, agents, or employees — are prohibited from directly or indirectly restricting or inhibiting that right, or otherwise prohibiting free association among franchisees. Critically, the amendment creates a private cause of action for violations, meaning franchisee associations (or individual franchisees) can sue over restrictive conduct or contract language that runs afoul of this provision.
Statutory Fast-Track renewal program. The Franchise Disclosure Document (FDD) Renewal Fast-Track Review Pilot Program, which the Securities Division in Maryland ran informally during the 2026 renewal season, is now formally codified (§14-219.1). Franchisors renewing in Maryland should confirm whether they qualify for and can meet the deadlines (including audited financial statement deadlines) for expedited review, and confer with their franchise counsel as to whether such expedited review is likely to make much difference for them in their specific case.
How the Securities Division Will Handle the Transition
Importantly, the Maryland Securities Division is not requiring registered franchisors to immediately amend their filings on October 1, 2026 solely because of these statutory changes. Under the Interpretive Opinion/No-Action Position appended to the Notice recently issued by the Maryland Securities Division, a franchisor may continue offering and selling franchises in Maryland after the effective date without filing a post-effective amendment — and without pausing sales — provided that the FDD and related agreements (or addenda) actually being used with prospective Maryland franchisees have already been updated to comply with the new amendments. Formal review by the Division of the updated language will happen at the franchisor's next renewal or amendment filing, whichever comes first.In short: the filing deadline is flexible, but the substantive compliance deadline is not. A franchisor cannot keep using pre-amendment disclosure and agreement language in live Maryland offers past October 1, 2026, even if its registration itself is not due for renewal.
What Franchisors Should Do Now
Update the Maryland statute-of-limitations disclosure / addendum language. This is the one change the Notice specifically flags as requiring conforming document language. Franchise agreements, area development agreements, and/or the Maryland-specific state-law addenda in the franchisor’s FDD should be revised to state:"Any claims arising under the Maryland Franchise Registration and Disclosure Law must be brought by the earlier of: (i) four (4) years after the franchise is granted; or (ii) two (2) years after the date the franchise opened to the public."Such change becomes effective October 1, 2026, so framing the above disclosure in a manner so as to be clear about the time period when it begins to apply may be advisable.Review non-solicitation, non-disparagement, and communication-restriction provisions. With the new trade-association and free-association protections in §14-233, franchisors should scrutinize any contract language, franchisee-communication policies, or informal practices that could be read as discouraging franchisees from joining or participating in a franchisee association. Given the new private right of action, this is a real litigation risk area, not just a disclosure formality. For many franchisors this may not present any issue or any need to change documents, policies or practices, but the question should be examined by each franchisor in the context of their particular system.Confirm your enforcement-exposure runway internally. The extended five-year Securities Commissioner enforcement window does not require document changes, but compliance, legal, and franchise development teams should factor the longer look-back period into recordkeeping and internal compliance review practices.Time your Maryland FDD update to your renewal cycle — but do not wait past October 1 for the substantive language. Because the Maryland Securities Division states that it will not force an off-cycle amendment to address these changes, franchisors can bundle these changes into their next scheduled renewal or amendment to their FDD filed with Maryland. However, the underlying agreement / Maryland addendum language must already reflect the new limitations period for any Maryland offer or sale made on or after October 1, 2026.Evaluate Fast-Track eligibility for your next renewal. With the pilot program now a permanent statutory feature, franchisors renewing after October 1 should ask counsel whether their filing qualifies for expedited review, whether participating in the “fast track” program makes sense and is likely to make much difference for them, and plan renewal timing accordingly.
Bottom Line
Maryland's amendments extend both regulatory and private enforcement windows, add new franchisee association protections with real teeth (a private cause of action), and formalize a faster renewal track — all without forcing an immediate registration amendment. The practical trap is the gap between the filing grace period and the substantive compliance deadline: franchisors need updated Maryland addendum and agreement language in place for any offer or sale on or after October 1, 2026, even if their next formal renewal is months away. Franchise counsel should audit Maryland-facing FDDs and agreements now to avoid using stale disclosure language in the interim.This post is a general summary of recent legal developments and does not constitute legal advice. Franchisors should consult counsel regarding their specific Maryland compliance obligations. If you have questions about this or any other franchise matters, please call David B. Ramsey, Esq. at [nap_phone id="LOCAL-REGULAR-NUMBER-1"] or email him at dramsey@kaufmanngildin.com. ]]>On Behalf of Kaufmann Gildin & Robbins<![CDATA[Court Halts Former Franchisee’s Competing Restaurant: Key Lessons for Franchisors]]>https://www.kaufmanngildin.com/?p=513282026-08-17T21:47:22Z2026-08-17T21:47:22ZKaufmann Gildin & Robbins LLP recently secured a significant victory for its client, Bonchon Franchise LLC, one of the nation’s leading Korean fried chicken franchise systems. On May 28, 2026, Judge Colleen McMahon of the United States District Court for the Southern District of New York granted Bonchon’s motion for a preliminary injunction — halting a former franchisee’s competing restaurant and ordering immediate compliance with post-term non-competition and confidentiality obligations. The ruling in Bonchon Franchise LLC v. Xiao Cheng Zhou et al., No. 26-cv-3973 (S.D.N.Y.), is a strong reminder that franchise covenants not to compete carry real teeth, and that franchisors who move decisively can obtain swift judicial relief.
Background: A Franchisee Who Didn’t Miss a Beat
Mr. Xiao Cheng Zhou operated a franchised Bonchon restaurant at 170 College Street in New Haven, Connecticut under a 2015 Franchise Agreement. The ten-year term expired on October 30, 2025. The Complaint alleged that Mr. Zhou closed the Bonchon location on October 29 — one day early — and promptly opened a new restaurant called “MAMA SHIM” at the exact same address. According to the Complaint, MAMA SHIM’s menu mirrored what Mr. Zhou had been serving as a Bonchon franchisee: Korean style fried chicken, complementary appetizers, side dishes, and beverages.The Franchise Agreement’s post-term covenant prohibited Mr. Zhou, his spouse, and any entity he controlled from engaging in a Competitive Business — defined broadly as any business offering products or services authorized for sale under the Bonchon system — within ten miles of the former location for two years following expiration. Mr. Zhou had also signed a separate Confidentiality/Non-Competition Agreement reinforcing those obligations. Despite having received the moving papers and contacted Bonchon’s counsel, neither Mr. Zhou, his wife Eileen Zhou, nor their entity Stamford Brother, LLC appeared in court or opposed the motion.
How Kaufmann Gildin & Robbins Secured the Win
Our team filed suit on May 13, 2026 and moved for a preliminary injunction the same day. We successfully demonstrated each of the required elements: (1) a likelihood of success on the merits, based on the unambiguous covenant language and the undisputed fact that MAMA SHIM was operating in direct competition with Bonchon’s system; (2) irreparable harm, supported in part by the franchisee’s own contractual acknowledgment in Section 12.04 of the Franchise Agreement that violations of the non-compete would cause irreparable injury for which no adequate legal remedy exists; and (3) that the balance of hardships and the public interest favored relief. As a result, the Court issued a preliminary injunction enforcing the non-compete provisions of the Franchise Agreement.The Court also extended the injunction to Mrs. Zhou and the corporate entity Stamford Brother, LLC — neither of whom signed the franchise agreements — by applying the well-established principle that non-signatories “closely related” to a dispute may be bound by forum selection clauses and the obligations those agreements impose. The ruling confirms that franchisors can and should draft their non-compete provisions to expressly cover spouses and affiliated entities, and that courts will enforce that language.The injunction runs through October 30, 2027, or the final resolution of the litigation — whichever comes first — and prohibits defendants from operating MAMA SHIM or any competing restaurant within the ten-mile radius depicted in the map attached to the Court’s order. Defendants were also ordered to immediately return all of Bonchon’s confidential information, including the Operations Manual.After being served with the Order of Preliminary Injunction, Defendants retained counsel and provided Bonchon with evidence that they sold the Restaurant and were not operating it in violation of the Order. Having received a sworn statement of compliance with the Order, Bonchon voluntarily dismissed the action, without prejudice.
Implications for Franchisors
This case highlights several practical lessons for franchisors considering or already dealing with post-term competition from former franchisees:
Draft broadly and specifically. Define “Competitive Business” to capture any product or service authorized under your system, not just direct brand lookalikes. Cover the franchisee, their spouse, and any entity they control.
Include a contractual irreparable harm acknowledgment. Provisions like Section 12.04 in the Bonchon agreement — where the franchisee acknowledges violations will cause irreparable injury and that no adequate legal remedy exists — are valuable tools when seeking emergency injunctive relief.
Act quickly. From filing to hearing took just two weeks in this case. The faster a franchisor moves, the sooner the bleeding stops.
Use a forum selection clause. Mr. Zhou had agreed to venue in the Southern District of New York, enabling Bonchon to litigate in a forum of its choosing even though the restaurant was in Connecticut.
A Note for Franchisees
This decision is equally instructive for franchisees. Post-term non-compete obligations are real, and courts take them seriously. Opening a competing restaurant at the same address, with the same menu, the day after a franchise expires is unlikely to be treated as a close call. Franchisees who are approaching the end of their term — or who are contemplating a business pivot — should seek legal counsel well in advance to understand what restrictions apply and for how long.
At its core, the American Franchise Act would establish that a franchisor and franchisee are separate and independent employers unless the franchisor both possesses andexercises substantial, direct, and immediate control over essential terms and conditions of employment. Those employment-related factors generally include decisions involving hiring, termination, discipline, supervision, direction, compensation, benefits, and work schedules. The proposed legislation is intended to draw a clear distinction between legitimate franchise system oversight and actual control over a franchisee’s employment decisions.That distinction is fundamental to the franchise business model. Franchisors rely on systemwide operational standards to protect their trademarks, preserve brand consistency, and ensure that customers receive a uniform experience across franchised locations. To achieve these objectives, franchisors routinely establish brand standards governing the use of trademarks, operating manuals, product specifications, technology platforms, training programs, marketing and advertising initiatives, customer service expectations, cleanliness requirements, and periodic brand-compliance audits, among other things. The Act is designed to recognize that these types of brand protection measures, standing alone, do not transform a franchisor into the employer of a franchisee’s employees.At the same time, if a franchisor regularly and meaningfully controls core employment matters—such as making hiring decisions, setting wage rates, approving terminations, directing day-to-day supervision, or controlling employee schedules—the franchisor could still be deemed a joint employer. In that sense, the proposed legislation does not immunize franchisors from joint-employment exposure. Instead, it attempts to define the line between protecting a franchise brand and controlling a franchisee’s employees.
Why the Joint-Employer Standard Matters
The franchise relationship occupies a unique space in commercial law. Franchisees operate local businesses under a licensed brand, but they are not branch offices of the franchisor. They typically sign leases, employ staff, manage payroll, purchase supplies, and make day-to-day operational decisions. Franchisors, meanwhile, protect systemwide goodwill by setting the standards that customers associate with the brand.A broad or ambiguous joint-employer rule can pressure franchisors to reduce support to franchisees for fear that training, guidance, technology, compliance assistance, or operational recommendations could be characterized as evidence of employment control. That result can be counterproductive. Franchisees often choose franchising precisely because they want access to a proven system, brand resources, operational guidance, and ongoing support. If franchisors pull back from those functions, franchisees may lose tools that help them compete and grow.At the same time, employee protections remain a critical consideration. Workers should not lose rights simply because an employer operates within a franchised network or system. The legal question is who has actual authority over the employment terms at issue. The Act attempts to preserve that accountability by focusing on direct and immediate control over essential employment conditions rather than indirect influence or ordinary brand oversight.
Where the Act Stands Now
The American Franchise Act continues to advance through the legislative process. After several markup sessions, on July 21, 2026, the House Committee on Education and the Workforce voted 18-15 to report the amended bill favorably to the full House of Representatives, marking the first significant legislative advancement of the proposal. During those markup sessions, the committee revised the language of the Act to establish that a franchisor can only be deemed a joint employer if it possesses and directly exercises “substantial, direct, and immediate control” over essential employment terms, such as hiring, wages, or scheduling. The committee vote does not enact the legislation, but it signals meaningful momentum and places the Act in the next stage of congressional consideration. The bill will now proceed to the House floor for consideration, where it must be approved by the full House before advancing to the Senate. If the bill passes the full House, the Senate must take up and pass its companion measure (or the House bill) before it can move to the President's desk. Industry groups are targeting major lobbying pushes, such as the International Franchise Association Advocacy Summit in September, to drive further momentum.
For franchisors, protecting the brand is essential. But when does protecting the brand and maintaining brand standards become exercising too much control over the franchisee's business? A recent New York appellate decision highlights why that distinction matters.
Franchising allows a company to expand its brand without directly owning and operating every location. The franchisee typically establishes and independently operates the business, employs its own personnel and assumes responsibility for day-to-day operations. But when a franchisee’s conduct allegedly causes injury to a third party, plaintiffs may look to the franchisor as the deeper pocket and seek to hold the franchisor vicariously liable for the franchisee’s acts or omissions.
A recent decision from the New York Supreme Court, Appellate Division, Second Department - - Manning v. Budget Rent A Car, 241 A.D.3d 676, 241 N.Y.S.3d 295 (2d Dep't 2025) - - provides an important reminder for franchisors: while an independent contractor provision is an essential component of a franchise agreement, it may not, by itself, shield a franchisor from being held vicariously liable for a franchisee’s acts or omissions.
The analysis may ultimately depend on what the franchisor actually did.
