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The Importance of Adhering to a Franchise Agreement

Business Finances / Business Litigation / Business Productivity/Practices / Legal Agreements / Sticky Situations / Unexpected Business Risks

These days, many people are reinventing their work lives by investing in a franchise.  Franchises offer the benefit of a proven business model, making them attractive to new business owners who seek to manage risk and protect their investment.

However, franchise agreements are not forever and there are circumstances when a franchise owner chooses — or is asked to — exit the business.  It is important that franchise owners recognize that they cannot continue to operate a business once the franchisor terminates the use of the trademarks or service marks of that franchise.

Under the federal Lanham Act, the continued use of such marks and/or names can subject your company to liabilities that could, at the discretion of a judge, equal as much as three times the amount of profits garnered by the company during the period in which the company has infringed the trademark or service mark.

In some instances, franchisors may allow extensions.  Almost all extensions will require a new contract to be signed to reflect the extension; sometimes a letter of agreement may be used and, in rare cases, there can be ambiguity about if and when an agreement actually ended.

In many instances, a franchise agreement is terminated because a franchisee breached the agreement through:

  • Failure to pay regular franchise fees or accompanying assessments.
  • Failure to abide by quality control standards set by the franchisor and established in the franchisor’s operating manual.
  • Damaging the reputation of the franchise by using its marks improperly or allowing illegal activities on the premises.

In these situations, the franchisee may seek to claim that the franchise agreement was not terminated prematurely as a defense to the Lanham Act claims.

In many cases where delinquent franchisee fees are owed, the franchisor may sue for breach of franchise agreement for those damages and also trademark infringement for unauthorized use after the termination of the agreement.

If you own a franchise or are considering an investment in a franchise business, reach out to one of our Creative Business Lawyers® today to schedule your LIFT™ (legal, insurance, financial and tax) Foundation Audit, where you can learn more about legal protection strategies for your business and how we work with you as a partner in protecting your company.

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