Franchising has been around for generations in the United States, with both the FTC Franchise Rule and state regulations shaping how courts interpret franchise law in the country.
For both franchisors and franchisees, how franchising fits into the U.S. legal system can seem complex and confusing at times. However, by understanding some landmark franchise law cases and the key legal issues that franchises often face, you can better prepare yourself as an entrepreneur.
Below, we take a look at 8 franchise law cases to know, plus examine the common legal issues that franchises often face and explore some franchise legal help options. Let’s jump right in!
8 Franchise Law Cases to Know
Over the years, a number of franchise law cases have shaped the franchising industry greatly. Here are 8 franchising court cases to help you better understand how franchise law impacts both franchisees and franchisors all across the United States!
1. 7-Eleven v. Grewal
This 2014 case is a prime example of how improper trademark usage can impact franchising as a whole.
7-Eleven found that, following a series of internal investigations, their former franchisee the Grewal Corporation, deprived them of profits. The franchisor estimated that some 18 percent of all transactions between January and June 2014 were fraudulent and subsequently terminated the franchise agreement with them. However, the Grewal Corporation continued to operate under 7-Eleven’s trademark even after this.
The court sided with 7-Eleven, determining it was wrong for the terminated franchisees to continue using the company’s trademark after their relationship ended.
2. Atlanta Bread Co. International, Inc. v. Lupton-Smith
This 2009 case set forth the precedent that franchise relationships should be regarded as standard employment agreements.
The franchise law case centered on a non-compete franchise agreement between Lupton-Smith and the Atlanta Bread Co. International, Inc. When Lupton-Smith opened a coffee shop in Atlanta, the franchisor informed them that they were in violation of their franchise agreement. However, Lupton-Smith sued for wrongful termination of the contract.
Ultimately, the court sided with Lupton-Smith, as Georgia state law prohibits contracts that restrain trade.
3. Avon Hardware Co. v. Ace Hardware Corp.
This 2013 franchise law case reinforced that financial projections of a performance that a franchise might have, and do not necessarily reflect its true statistics.
After two Ace Hardware franchisees were dismissed after they charged that the franchise manipulated its sales projections and historical sales data, they took their case to court. Ace Hardware argued that the figures in question were only predictions. The court ultimately sided with Ace Hardware.
4. Ochoa v. McDonald’s Corp.
This landmark joint-employer case was settled in 2017 and saw some interesting ramifications for franchising in the United States.
The plaintiffs represented a group of non-exempt “crew member” employees at a California McDonald’s, who pressed charges against both the corporation and the franchisee operating it alleging that they had violated numerous wage and worker protection laws, including miscalculating wages, failing to pay overtime, and reporting time cards inaccurately.
This case, the first of its kind, eventually saw McDonald’s settle with the plaintiffs for $3.75 million and may have a huge impact on future legal cases involving issues such as class action lawsuits, employee classification, wage and overtime regulations, and to what degree the franchisee is held liable for damages in addition to the franchisor.
5. Steak ‘n’ Shake Enterprises v. Globex
This 2016 case in Colorado affirmed legal support for maximum and minimum pricing programs.
After Globex, a Steak ‘n’ Shake franchisee with two units and a development agreement for 11 more, refused to comply with a $3.99 maximum-pricing menu due to higher operating costs, the restaurant franchise terminated them. Ultimately, the court sided with Steak ‘n’ Shake, affirming that maximum and minimum pricing policies by franchisors are indeed enforceable.
6. Naik v. 7-Eleven
In this 2014 franchise law case in New Jersey, four franchise owners successfully sued 7-Eleven over minimum wage and overtime claims.
7. Legacy Academy v. Mamilove
This case saw a major victory for a franchisee who brought legal action against daycare franchisor Legacy Academy, successfully prevailing on fraud and racketeering charges.
8. Williams v. Jani-King of Philadelphia, Inc.
This 2016 set the precedent that franchisees should be given employee status if the franchisor retains the ability and right to control how they work.
Cleaning franchisor Jani-King classified its franchisees as independent contracts, despite retaining significant control over them. Two franchisees sued Jani-King, believing they should be classified as employees instead and thus owed more wages. The court ultimately sided with the franchisee who brought the lawsuit against the franchisor.
What are the Main Legal Issues When Owning a Franchise?
For franchisees, owning and operating a franchise offers a path to becoming your own boss and unlocking new financial opportunities. However, like any business opportunity, there are certain legal issues to be aware of. A few of these include:
- The franchisor doesn’t fully disclose the facts about their franchise
- The franchisor fails to offer the support promised in their franchise agreement
- Supplier and vendor regulations that weren’t previously disclosed
- Employee discipline and termination
- Misclassification of employees and franchisees
- Breach of franchise agreement
- Discrimination claims by employees or customers
If you’re looking to own a franchise, it’s important to discuss these legal issues with your franchisor. Understanding how they’re handled and how you’re protected as a franchisee is just as important to succeeding in franchising as understanding your customers and your franchise unit’s day-to-day operations.
Always review the FDD carefully and ask the franchisor for clarification if you have any questions. It may also be useful to talk to a franchise lawyer while reviewing the FDD and ask them for advice and guidance on how any potential legal issues should be handled.
What Franchise Legal Support Options are Available?
Prospective franchisees should always talk with their franchisor about what legal support is available for them before signing a franchise agreement. Be sure to find out how the franchisor represents its franchisees in court, any lawsuits the franchise has faced in the past, and insurance policies available.
In addition, several organizations and associations exist that can help with franchise legal support issues. A few of these include:
Coalition of Franchisee Associations – Help resources for franchisees, including advice on how to work with franchisors.
American Bar Association Forum on Franchising – ABA group that’s focused on franchising and includes many respected attorneys and law firms.
American Association of Franchisees and Dealers – Offers its Franchisee LegaLine, a legal advice and support network for franchisees across the United States.
American Franchisee Association – Offers legal advice and tips, plus an extensive list of legal resources on a state-by-state basis.
International Franchise Association Supplier Forum – Has a list of some of the top franchise lawyers in the country.
Understanding Franchise Law Cases Can Help You Understand Franchising!
Franchise law can often seem complex and overwhelming, even for experienced entrepreneurs. However, understanding these important franchise law cases and the common legal issues franchises deal with can help you have a better grasp of it.
So, the next time you see a franchise’s name pop up in an article about a lawsuit or other legal issue, pay attention. It just might become the next famous franchise law case!