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What Happens When a Franchise Contract Ends? Obligations Upon Termination

Whether you are an active franchisee, successful franchisor, or someone looking for franchise opportunities, something you no doubt are concerned with is what happens at the end of the franchise contract (hint: if you aren’t, you should be). Examine four of the biggest fundamental concerns arising from the termination of a franchise relationship.

De-Branding (and Re-Branding)

It is no secret that franchisors spend substantial sums of money to develop and protect their trademarks (and trade dress, in the case of restaurants and retail outlets). So, it should come as no surprise that franchisors take the end of a franchisee’s tenure very seriously. Most franchise agreements require “immediate” de-branding following termination of the franchise contract.

De-branding covers things like removing (or at least temporarily covering) signage, changing paint colors, ceasing use of uniforms, and other affiliation-erasing duties. However, in this day and age, de-branding requirements typically extend much further into online “property,” and include things like stopping the use of company email addresses and social media activity as a franchisee. While most franchise agreements prohibit franchisees from acquiring branded accounts (e.g., @Franchise_of_DC), tweets and status updates referencing the franchise are likely required to stop, and old posts probably need to be deleted.

Ownership of Phone Numbers

The franchise agreement should also address who gets to use the franchisee’s phone numbers after the franchise agreement expires. Traditionally, this right has belonged to the franchisor, but with home-based businesses becoming the norm, franchisors that allowed franchisees to use their home phones or existing cell phone numbers might have an issue regaining control of this component of their former franchisees’ business presence.

Ownership of Customer Lists

Another critical issue that arises upon termination of a franchise relationship is determining which party (or parties) get to keep the franchised outlet’s customer list. Even in the presence of a non-compete agreement, the customer list is still a valuable asset to the former franchisee. Non-solicitation provisions typically carve out solicitations for non-competitive businesses, so a former franchisee’s access to its old customer list can help jump start a post-franchise business venture. Of course, the franchisor also has an interest in maintaining control of the customer list—particularly if they plan to take over the location or find a substitute franchisee.

Non-Competition Provisions

Where permitted (as some states do not enforce them), non-competition provisions are significant for both the former franchisee and the franchisor following termination of the franchise relationship. In the absence of a non-compete agreement, re-branding of the former franchisee becomes absolutely essential for the franchisor, and the “immediate” compliance obligation is likely to be strictly enforced. When a non-compete obligation is in effect, the franchisee needs to begin planning from the outset what their next move will be after the franchise relationship ends.

As these four points demonstrate, the termination of a franchise agreement should be as well-thought out as the start of a franchise business. For franchisees, failure to negotiate reasonable post-termination rights can have devastating effects as a small business. For franchisors, neglecting to impose and adequately enforce appropriate post-termination restrictions can result in massive headaches, loss of brand control, and prolonged and costly litigation.

Jeff Fabian is a franchise and trademark lawyer who represents both start-up and active franchisors. He can be reached at 866.545.7859, or online at www.fabianlegal.com. You can also follow Jeff on Twitter @jsfabian.

This article is provided for informational purposes only, and does not constitute legal advice.

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Jesse: Ladies and gentlemen, thank you for standing by, and welcome to the FranchiseHelp, Inc. Understanding the FDD for Franchisors Conference Call. During the participation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. If you have a question, please press the 1 followed by the 4 on your telephone. Your line will be briefly accessed from the conference to obtain the information. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Wednesday, May 7th, 2008.

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