Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.
There is a process through which small businesses/franchisees pass on their way to failure. What can be done to be of assistance in alleviating their difficulties changes and actually comes to the point of impossibility substantially before they close the doors and go into bankruptcy. It is a critical issue for any attorney considering the prospect of representing franchisees with major predation issues emanating from franchisor financial terrorism.
Better franchisors don't become financial terrorists. The normal franchise agreement is mostly a universal template that is designed to accommodate every option a franchisor might ever want or need. In a successful franchise system with a franchisor that is willing to allow the franchisees to make a decent living on a sound business concept most of the provisions of the franchise agreement never come into play in any enforcement sense. On the other hand, a predatory franchisor frequently calls upon every clause in the agreement as his franchisees fall by the wayside in an inexorable march to oblivion.
With this latter category of franchise, it is always true that the franchisees could have taken steps to prevent/blunt the predation, but failed to commit themselves or the requisite resources to achieve that. Here is how that works in reality.
There is pervasive belief that their franchisor is over reaching in respect of major financial choke points. The exact manner and progress of the predation varies, but the overall impact of the process always ends up at the same failure point when timely joint defensive action is not taken. In the early stages there is collective discussion about it, including communications with the franchisor, to no avail. That morphs into the desire to establish a franchisee association, but the desire to do that is not coupled with the competence to do it. A small group of "rabble rousers" as they are called attempts to recruit the whole population to join together for the obvious purpose. This is always handled in such a manner that the rabble rousers get painted into a corner and are targets for retaliation. They usually pay mightily for their effort. Their fellows will not support the effort with economic resources, and several/many of them become Judas franchisees, informing the franchisor of every communication and consideration in the hope of obtaining favorable consideration.
While this happens the franchisor is digging in his heels and becoming more convinced than ever that the relationship will never again be normal and that he must harden the target. He calls in attorneys to advise regarding how to do this, and he and they come up with programs that accelerate the predation. The result is that the period from there to failure or outright warfare is telescoped into a much smaller period of time.
On the franchisees' side a search for legal resources begins as well. However, the franchisees always look for free legal services which they don't get in any effective mode. They always begin every discussion with every attorney by saying that they cannot afford to pay for major projects/services. Usually, at this stage, they can afford anything needed if they effectively organize and support the effort. That rarely happens. Circumstances become worse.
The next step is the fantasy that what is needed is a contingent fee lawyer to bring a class action lawsuit for damages. There are fewer than ten law firms in the United States with a positive track record for doing this. But most of the lawyers they talk with, understanding little about how reality works in franchise relationships think that if they can get an adequate deposit for costs (always incorrectly called a retainer in the retention agreements), they will try to do this. These almost always end in disaster. This is what comes of trying to get valuable resources without paying for them.
Having done little homework, these lawyers send a scathing demand letter to the franchisor, accusing him of everything but blasphemy. The response is inspections, audits, secret shoppers, notices of default and terminations of the identified ring leaders. The inept lawyers do not know what to do next in almost every instance, and the entire project starts to fall apart. Now the franchisees are talking about legal malpractice actions against the lawyers. Predation becomes more acute.
Sometimes there actually is an attempt at a class action lawsuit. This almost always fails for the following reasons.
The franchise agreement forbids class action dispute resolution proceedings. The franchise agreement calls for individual mediation and arbitration coupled with a limitation of the kinds of damages that may be sought (no exemplary damages; no lost goodwill value damages; no indirect damages, for instance). There is no ability to get into an actual court. These clauses are always enforced. Without those clauses (now hardly ever the situation), courts are very reluctant to certify groups of identifiable affinity plaintiffs as a class for purposes of the class action rules. Class action status is denied. In the extremely rare situation where there is a certified class action, the resolution is almost always the payment of the legal costs by the franchisor with little or nothing for the franchisees.
Franchisees become less financially productive at each stage of this process until at some point they really cannot afford competent representation. They are now beyond help by any attorney, except in some extremely rare circumstance that could only be speculated about at this juncture. Many are already in the zone of insolvency and any retainer paid may be clawed back by the creditors in his bankruptcy proceedings.
By now they are on some franchise gripe Internet blog lamenting their circumstances, calling names, and still refusing or unable to coalesce for possible meaningful assistance. In a few recent cases there have been franchisee suicides. There have also been bar grievances and malpractice suits filed against the lawyers they hired to go after damages in a class action mode. In at least one very visible malpractice case the court excoriated the lawyers for unethical conduct.
If you want to see a complete actual history of a predatory franchisor and how the affected franchisees never became willing or able to take effective action - mainly for reasons of stinginess and cowardice - go to www.BlueMauMau.net and look at the history of the Quiznos franchise system. Just type in Quiznos on the search facility there and it will all come up. Now the Quiznos predator has moved to another franchise system, and it is not expected he will change his spots there. The only question is whether those franchisees learn anything from the Quiznos experience. What then is the best mode for any law firm when first contacted by representatives of disgruntled franchisees?
The first issue is whether those calling you are serious or just having conversations. The way to sort it out promptly is to tell them what will be required and give them a critical path plan to the establishment of a competent resistance group. If they understand that there is no easy road forward, they may begin to get real in their later discussions with the other franchisees. Offer to meet them in your hometown without charge or elsewhere for expenses and a small flat fee. If they do not do that, write them off. If they don't see the value of remediation and only look at the cost, they will never become clients capable of effective representation. You would just be wasting your time, their money, and setting yourself up for retaliation because everything will be your fault in their eyes. Notions about helping the downtrodden are simply silly and dangerous to you and to them. Nothing good comes of trying to be someone's knight in shining armor. You are just a lawyer, not their friend and not their parent. They have to be reality grounded throughout if anything is to be accomplished. If they ever think they can get you hooked, they will stop providing the funds for the work and threaten you if you then tell them you are resigning. When they sign on to an agreement that all work and all expenses have to be prepaid, then you may have their attention where it belongs.
You have to get large chunks of money in front and at every quarterly assessment of position. You would be amazed at how little $50,000 will cover. Where the evidence of an impending conflict is easily observable and you don't get enough to accommodate the emergency needs you will be toast. $300,000 to $400.000 is not out of line when spread across a client population of 50 to 100 people. You cannot send them monthly bills and expect to be paid. They will give excuses for not paying and the entire effort will collapse. Financial discipline has to be maintained.
This takes some management guts. If you are not willing or able to enforce the requisite disciplines you will not be able to accomplish anything and should not get involved in the first place. This work is not a garden party.
Any potential client group that cannot or will not sign on to this agenda is not a client group. Turning down "business" that will only get you into trouble and hurt your reputation calls for courage. Money is hard to turn down, but you have to be at least as tough as the franchisor you are contending with.
Of course, you have to know how to do more than just raise money. You have to be able to sort out the rights and wrongs of all the folks. Some will have behaved so badly that to allow them into the group will hurt the interests of the rest. Identifying those folks is job one. If you don't know what to do and how to do it - you're just winging it - you are headed for disaster. Not everything will be in support of your positions. You must sort that out very quickly - before you initiate any contact with the franchisor about anything other than the fact that you are now their lawyer and will be involved in everything that transpires from there on out. Since the franchisor will know exactly what resources you have and your prospects for getting more if necessary, you won't be able to bluff. They will simply run you out of money and tell you to go to hell.
How to draft the retainer agreements for this work is another tutorial altogether. There is a tutorial about that on the web site of our www.FranchiseRemedies.com division.
Based on what I know from other lawyers' past experiences who asked me to bail them out, this whole article could be an understatement of the issues.