Fortune Favors the Franchisor: Survey and Analysis of the Franchisee’s Decision Whether To Hire Counsel

The franchisee-franchisor relationship has often been referred to as the little guy against the big guy. Franchising may encompass the seemingly innocuous defining characteristics of distribution, know-how, brand identification, profits, risk, independence, control, and standards, but there is much more to this relational contract. If parties enter into a franchise or licensing agreement rather than some other business agreement, this does not necessarily insulate the parties from liability. For example, simply because the parties have formed a franchisor-franchisee relationship does not mean the parties did not also form an agent-principal (agency) relationship. In addition to the franchise relationship, the latter may be formed, intentionally or unintentionally, if the franchise contract “so ‘regulates the activities of the franchisee’ as to vest the franchisor with control within the definition of agency.” In that case, the agency relationship arises even if a party expressly denies its formation. Assuming that the parties did not form an agency relationship, then case law interpreting the contractual relationship largely governs the franchisor-franchisee relationship. Under contract law, courts have been quite reluctant to find that franchise agreements establish fiduciary duties between the parties. Only a small minority of courts has found that as a matter of law a fiduciary relationship exists between a franchisor and a franchisee. Defining what duties a franchisor potentially owes to a franchisee is essential to understanding the dynamics of the franchisor-franchisee relationship, especially if the franchisee is “David” facing the “Goliath” franchisor. Still, the more perplexing question about those franchisor duties is: Does the franchisor, or even the franchisor’s attorney, owe an unrepresented franchisee an additional duty of care during the negotiation process? This difficult proposition is a focus of this Article