Franchise Lawyer Blog

What are franchisees supposed to do when a franchisor goes out of business?

Given the current state of the economy, a number of franchisors are either filing or contemplating petitions in bankruptcy or simply ceasing operations (see this Blog's entry of July 30). There are many reasons why this is happening, but the common result is that this event can be devastating for future franchisees. Franchisees are left without any support, having paid thousands of dollars in franchise fees and royalties and getting nothing in return.

The lack of operational support may be most devastating. Franchisees who rely on the franchisor for menu choices, inventory, even scheduling of appointments, may find themselves out of business. When a franchisor simply disappears, the only choice may be to have the franchisees band together in a cooperative arrangment to fund support.

Among other questions, however, is whether or not the franchisees can continue to use the franchisor's trademark. A more sophisticated approach is necessary when the franchisor is a larger company which liquidates in an orderly fashion and whose assets, including the extant franchise agreements and trademarks, are actually sold to a new owner. In that instance, franchisees may choose to look for a white knight with whom they can chart the course of their ongoing business.

Posted by Michael Einbinder | Permalink | Email This Post

Posted In: Franchise Development

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Periodically we will examine recent decisions and statutory developments that relate to the relationships of franchisors and franchisees. The following is a developing case of significance.

Unless the Court of Appeals rules otherwise—and whether the high court of New York State will even hear the issue remains to be seen—a franchisor may not employ a pre-sale questionnaire subscribed by a prospective franchisee to summarily defeat the franchisee’s claims of fraud brought under the New York Franchise Act.

In Emfore Corp. v. Blimpie Associates, Ltd, et al., the Appellate Division, First Department reversed the trial court’s dismissal of a franchisee plaintiff’s claims of fraud in the inducement under section 687 of the NY Franchise Act, holding that subsections (4) and (5), the “anti-waiver” provisions of the Act, preclude such dismissal.

Blimpie, supported by the International Franchise Association as amicus curiae, moved the First Department to reconsider, maintaining that questionnaires are used to root out fraud, not to foster it; the appellate court in May modified its decision and order, but did not alter its general holding. Again with the IFA in its corner, Blimpie most recently moved the First Department for a clarification of its ruling or, in the alternative, leave to appeal to the Court of Appeals. The First Department last week denied the motion in its entirety.

Einbinder & Dunn represents Emfore Corp.
Submitted by Matthew D. Brozik, Esq.

Posted by Terrence M. Dunn | Permalink | Email This Post

Posted In: Franchise Cases

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