Franchisors of 14 leading brands all give themselves the ability to terminate franchisees virtually at will, according to a Service Employees International Union analysis. This power comes from four provisions, common to the franchise agreements of major franchisors across several industries, from McDonald’s to Jazzercise, from 7-Eleven to Holiday Inn.
The four provisions, contained in SEIU’s recent petition urging the Federal Trade Commission to investigate the franchising industry, are:
Catchall provisions, which essentially allow franchisors to terminate franchisees for any violation of the franchise agreement. For example, Pizza Hut’s agreement states that it may, “subject to the notice and cure provisions described below, terminate this Agreement if…Franchisee breaches any term, covenant, duty or condition of this Agreement…”
Failure to follow the manual: In all 14 agreements, franchisors may terminate for deviating from any of the rules or standards contained in hundreds or even thousands of pages of operating standards, policies, procedures, and manuals. For example, Subway’s franchise agreement states, “we may, at our option and without prejudice … terminate this agreement if: … (v) you fail to comply with your duties under this Agreement or the Operations Manual” after 90 days’ written notice.
Unrestricted manual changes: Not only must franchisees adhere to policies, procedures and manuals, but franchisors can change those rules unilaterally with few, if any, limits. For example, McDonald’s agreement states that “Franchisee agrees to promptly adopt and use exclusively the formulas, methods and policies contained in the business manuals, now and as they may be modified from time to time.”
Unrestricted Inspections: All 14 franchise agreements give the franchisor the unrestricted right to inspect a franchisee’s premises. For example, Holiday Inn’s agreement states “…Licensee will at its sole cost and expense … permit inspection of the Hotel by Licensor’s representatives at any time and give them free lodging for such time as may be reasonably necessary to complete their inspections…
In sum, franchisors can inspect whenever they want to look for violations of rules they can change unilaterally, and any violation they find could be grounds for termination. Franchisors’ abuse of their termination power is also the reason franchisees are seeking stronger protections against termination, for example through the California Small Business Investment Protection Act.