Franchise businesses minimize many initial startup challenges faced by entrepreneurs and investors. Franchisees can tap into existing demand for a brand and acquire a turnkey business opportunity.
Unfortunately, franchise disputes are somewhat common. In some cases, franchisors may send notice of an intent to terminate a franchise or refuse to renew it when the current agreement ends. Franchisees may need assistance understanding their rights under state and federal law and responding effectively to protect their investments.
How New Jersey law protects franchisees
New Jersey state statutes actually provide stronger protections for franchisees than federal statutes regulating franchise businesses. The New Jersey Franchise Practices Act (NJFPA) helps protect franchisees from abusive franchisor conduct. While federal law does not broadly limit the right to terminate franchise agreements, the NJFPA requires that the franchisor have good cause for initiating a franchise termination.
Often, franchisors document a failure to comply with franchise requirements as proof of good cause. Franchisees should receive written notice at least 60 days before a potential termination or non-renewal that explains the exact reason for the termination.
The law protects the right to transfer or sell the franchise and prohibits franchisors from engaging in coercive acts. Franchisees in New Jersey have the right to join or form industry associations without risking termination. The law restricts large capital investments of $25,000 or more and mandatory franchisee relocations to once every five years.
Common reasons for franchise terminations
Franchisors must provide good cause for refusing to renew or terminating a franchise agreement. In some cases, the issue relates to a dispute about fees assessed by the franchisor. The NJFPA generally recognizes fee disputes and non-payment of contractual fees as a valid cause for termination.
Other times, there may be questions about the quality of the goods or services offered by a specific franchisee. Franchisors can enforce quality standards to protect the company brand. However, quality violations are only conditionally valid and depend on the scope of the violations that occurred or attempts to cure the issue by the franchisee.
Franchisors can sometimes terminate contracts when there is a territory conflict. However, it is often the newer franchisee, not the established franchisee, who may face termination or relocation requirements in such scenarios. The franchisor has an obligation to uphold territory protections and prevent encroachment when authorizing new franchises.
Immediate steps to take when facing franchise termination
As soon as a franchisee receives a termination notice or a letter indicating an intent not to renew, they need to take immediate action. The first step is often to review the existing franchise agreement, specifically the termination clause. It may be possible to show that a franchisor did not follow the procedures outlined in the agreement.
The agreement may also have clear provisions regarding a mandatory cure period for fee disputes and quality control issues. After receiving notice of franchisor concerns, the franchisee should have a certain amount of time to remedy the issue before they are at risk of termination.
Franchisees typically need the guidance of an attorney familiar with franchise law. Their attorney can then assist them as they communicate with the franchisor. All communication should be in writing to ensure that it can serve as documentation if the matter results in litigation. The franchisee may need to learn more about the NJFPA and other New Jersey laws that may protect them during their attempts to protect their investment in the franchise business.
Get support quickly to pursue the best resolution
Franchise disputes can endanger a company’s reputation and the investment made by a franchisee. Franchisees facing termination attempts need to understand their legal rights, while franchisors intending to terminate a franchise agreement must ensure that they comply with all relevant federal and New Jersey state statutes. Speaking with our firm can help.
The Law Office of John A. Fialcowitz, LLC has more than 30 years of experience handling complex franchise disputes and contract matters. Concerned parties can schedule an initial consultation by clicking here or calling 973-813-7227.