Franchisors: How to Approach the Enforcement of Your Restrictive Covenants When Negotiating a Franchisee Renewal
When a franchise agreement expires, franchisors and franchisees, many times, enter a decision making period to determine, discuss and negotiate whether or not the the franchise agreement will be renewed. Although not preferred, this post-termination negotiating period is sometimes necessitated by on-going negotiations and delayed decisions. During this critical negotiating period - one where the franchisee is, most likely, operating the franchised business without a franchise agreement - franchisors, many times, unnecessarily jeopardize the protection of their trademarks and trade dress by failing to require the Franchisee sign what should be a mandatory acknowledgment.
- The Scenario - Franchise agreement expires and franchisor and franchisee negotiate the potential renewal. During the "post-termination negotiations" the franchisee continues to operate the franchised business and continues to utilize the franchisor's trademarks and trade dress. Although the Franchisor does not expressly acknowledge the franchisees continued operation, the franchisor does not continue with the enforcement of the franchise agreement's post-termination restrictive covenants.
- The Problem that Arises - By permitting the franchisee to continue operations - without the benefit of an on-going franchise agreement - the franchisor is legally acquiescing to the franchisees technical infringement of the franchise systems trademarks and trade dress. In doing so, the franchisor weakens its marks and makes later enforcement of the franchisee's post termination restrictive covenants more difficult. While this "problem" is, typically, not fatal, it is nevertheless costly. Especially where negotiations break down and the franchisee continues to violate the restrictive covenants.
- The Solution - During this gap negotiating period, insist that the franchisee sign an agreement whereby the franchisee acknowledges that the franchisor is withholding enforcement of the post-termination restrictive covenants for a limited period of time, i.e., two weeks
The foregoing "problem" is not that great but it is an issue that "muddies the water" in franchisor and franchisee litigation and results in unnecessary legal fees and time. That is, rather than advancing the franchisors right to restrict the former franchisees future business operations, the franchisor is exposed to the frivolous defense that, somehow, the franchisor acquiesced and waived its right to enforce the post-termination covenants.
When it comes to "franchise litigation" and disputes between franchisors and franchisees almost, inevitably, the issue of injunctive relief is raised. Franchisors typically seek injunctions involving (a) the turn-over of the franchise location, (b) the de-identification of the franchise location, (c) specific performance requiring the franchisee to protect the franchisors marks, and/or (d) the enforcement of non-competition covenants where the franchisee establishes a competing business. Franchisees typically seek injunctive relief focused on the franchisee's preservation of its franchise location, enforcement of protected territories and specific performance as to the franchisor's on-going obligation to support the franchisees business and to maintain access to proprietary products and services.
In the State of New Jersey any determination as to the existence or non-existence of a franchise relationship requires a a factual evaluation of the legal rights and obligations between the parties.
As franchise counsel, like many of my colleagues and clients, maintaining an updated and current database of state specific franchise laws, registration requirements and regulatory entities is a critical task that we continuously work on and improve. After recently launching our internal client accessed database - and receiving some extremely positive feed back - we thought that starting a "public" database of "state specific franchise links and information" would be a helpful resource for our readers and the franchise community. At the very least, it could serve as a time-saver.
(Part two of a
Can you expand your business in the State of New Jersey through a "license agreement" without triggering New Jersey's franchise relationship laws? (This is not a simple question and, unfortunately, the answer involves an evaluation of both "objective" and "subjective" factors.).jpg)
Although the State of New Jersey is not a 

