Ronald K. Gardner

My original plan was to write a column about Item 19 of the FDD, and how to interpret this most critical item, and how to maximize getting good information when looking to buy a franchise. But like all my other plans for the month, this one needed to be changed in response to the COVID-19 pandemic.

While no one really knows when or how long the virus will be ravaging the planet, or how long it will take for things to get back to "normal," as of this writing what we do know is that the market is a bear, there is no Madness, and the Green Jacket will be awarded at a later date. In other words, the world we lived in three weeks ago has changed dramatically—and for the foreseeable future.

This sea change will be a challenge for everyone. And as the foot soldiers on the frontlines of our consumer-driven economy, franchisees in certain industries are feeling this impact swiftly and severely. Initially, we will continue to see franchisees in the hospitality business suffer a significant downturn, as meetings, conferences and vacations are postponed or cancelled. Restaurants are also suffering a significant downward shift in demand, which is likely to continue over the coming period. From there, depending on the business of the franchisee, we will likely see continued deterioration of all businesses where direct customer interaction is required (e.g., car repair, gyms and fitness centers, specialty stores, etc.). In short, its going to be a rough ride.

In a perfect world, franchisors and franchisees will all recognize the threat that exists to their businesses and work together for the good of the brand that they both share in protecting. Forward thinking franchisors are doing what good franchisors should do: (1) providing timely and accurate information to franchisees about how the system is handling the health and safety of all constituencies; (2) telling franchisees what to do if someone in the organization is diagnosed with COVID-19, or is required to self-quarantine; (3) securing supply chains in a way that critical goods and services that the franchisees rely upon to operate are not disrupted; and (4) working with franchisees on plans that would allow both entities to even out the financial impact of the pandemic, including issues related to royalty relief, advertising fund holidays, and, in extreme cases, outright financial assistance to distressed franchisees.

Unfortunately, we do not live in that perfect world, and many franchisors do not see their franchisees as partners in sustaining the brand, but more like commodities that can be abandoned and replaced later. For franchisees of these enlightened types, their best hope lies in the concept of force majeure.

As most lawyers know, force majeure is a French term literally meaning "superior force." In sum, a force majeure event is one that neither party anticipated or controlled, but that has the effect of making a contract impossible or impracticable to perform.

In contrast to the covenant of good faith and fair dealing, and stated generally, force majeure is not engrafted into contracts by common law implication. That means that whether the current pandemic is cause for a franchisee to cease performing some or all of its obligations to the franchisor will turn on the precise language of the franchise agreement in play. Depending on the state law that is governing the agreement, an epidemic may or may not be found to be a qualifying event under such a clause.

And even if a force majeure clause exists, and covers the pandemic, one is left to wonder whether the current wave of "social distancing" will be found to qualify as a force majeure event. The fact that people are voluntarily staying away from commerce may or may not be something that a court would find as a "unforeseeable event" as it relates to any particular business. For example, is a boycott of one's business or brand "unforeseeable?" Perhaps. But is it one that is a force majeure? That is an interesting question. One should expect a lot of litigation over these issues in the coming months—assuming both franchisees and their franchisors can avoid bankruptcy courts as the remedy for the economic tsunami that seems to be coming our way. My sense is that as more states and cities move to "shelter in place" orders, a franchisees ability to claim a force majeure (especially if they are in a non-essential business), will increase dramatically.

In representing franchisees, one could also look to the common law doctrines of impossibility and/or impracticability of performance for relief as well. But the same issues will arise here. For example, is it "impossible" for a business to open simply because a city has banned gathering of 250 or more? Unless you're in a business that requires gatherings of that size, the answer may very well b "no."

So, what proactive steps should franchisee representatives be taking?

First, if a franchisee is in a system with an active franchise association, the franchisees should be using that communication vehicle to have an open and frank conversation about what is happening on the ground and whether the franchisor has, or is making, contingency plans around, health and safety, shut downs, supply chain disruptions, and sever financial distress by franchisees.

Indeed, it is times like these when a strong franchisor/franchisee association relationship can help the parties work together as entities with a mutual interest in minimizing harm to the brand and its infrastructure. On the other hand, if the relationship between the franchisor and the association is a hostile one, franchisees need to find a way to try to open a line of communication in this time of potential peril. The virus may prove to be the common enemy franchisors and franchisees can rally around as the look for a way through the coming challenges.

In the event no franchisee association exists, franchisees need to open swift and clear lines of communication with their franchisors about the challenges they are facing in their specific locations. Most franchisors, when given specific and compelling facts that justify some concession, will at least consider those types of request.

Concurrently, franchisee counsel should be researching the terms of the applicable force majeure clause, how such clauses have been interpreted under the applicable state law, as well as reviewing the contours of the concepts of impossibility and impracticability. Assuming a franchisor refuses to move, and franchisees are truly imperiled if they are required to continue to perform, moving aggressively to enforce these contractual or common law rights may be the only real solution—particularly if bankruptcy is not an option (and given the pervasive requirement of personal and spousal guarantees (an another issue I will address in a future column), it often is not).

Finally, franchisee counsel should be alerting their clients to not only the options that they have related to their franchisors, but potentially checking in on the performance of their suppliers and lenders, and urging them to develop a plan related to quarantined staff and management. If the franchisee does have to resort to a claim of force majeure, she should make sure to avoid a claim that it was her inaction in the face of this evolving situation that led to the franchisee's difficulties, rather than the virus we all face.

Stay safe.

Ronald K. Gardner is a partner at Dady & Gardner, P.A. He limits his practice to the representation of franchisees, dealers and distributors when they are in disputes with their franchisors, manufacturers and suppliers.