The fluid nature of franchise law

State and federal laws regarding franchise agreements, along with a tough economy, has prompted many recent legal disputes. For example, the National Labor Relations Board recently held that McDonald’s could be named as a defendant in lawsuits aimed at labor violations alleged by its workers. McDonald’s had claimed that workers in franchised stores could only sue the franchisee, not McDonald’s itself. This is only one example: Generally, franchise litigation increases in a competitive business environment, when it is more likely for a franchise operation to fail and workers to feel the effects of a bad economy.

The stakes in litigation are high for most franchises. The majority of U.S. franchises have less than 50 U.S. locations, according to FranchiseGrade. That means both franchisor and franchisee have a large amount of skin in the game when it comes to litigating disputes. Even large franchises such as McDonald’s and 7-Eleven are vulnerable when it comes to litigation.

The number of litigated claims involving franchises in New York and elsewhere is hard to quantify, since the majority are resolved out of court. However, enough franchises are facing litigation that some insurance companies have begun to provide insurance for franchisors worried about the costs of operating in a litigious environment.

With the frequency and volume of franchise litigation in the state, it is no wonder that some aspects of franchise law can be fluid.

Recent case illustrates changing nature of franchise law in the state

A recent decision out of the U.S. District Court for the Southern District of New York illustrates how franchise law can evolve in just a matter of months. In Governara v. 7-Eleven, Chief Judge Loretta A. Preska reversed an earlier decision regarding whether a franchisee can sue for reliance on financial performance data, when the franchise agreement specifically includes a disclaimer that such information will not be relied upon by the franchisee.

Judge Preska held that:

  • A franchisee cannot sign an agreement that waives a financial performance representation and then later sue on the basis that it did receive an oral representation of financial performance, and
  • Such waivers regarding financial performance do not violate the New York Franchise Act

Attorney David J. Kaufmann, who represented 7-Eleven in the case, wrote in his column in the New York Law Journal that this decision reversed a months-old decision issued by the same court. Previously, the U.S. District Court for the Southern District of New York had held that disclaimers regarding non-reliance on materials regarding financial performance were illegal, as they violated the NYFA’s “anti-waiver” provision. In this case, the court disagreed, finding that “refusing to enforce non-reliance disclaimers would violate the sanctity of contracts and discourage their use.”

Experienced representation matters

Current federal and state regulations regarding franchise agreements means that experienced counsel is paramount when legal disputes arise. Franchisors and franchisees in a dispute should contact the experienced law firm of Kaufmann Gildin & Robbins to discuss their legal options moving forward.