Franchisors entering into settlement agreements with current or former franchisees must be certain that the agreements give the franchisors the right to make required FDD disclosures without breaching the settlement agreements.
Leaders, LLC, a company owned by Jana Caudill, purchased a franchise from Keller Williams Realty, Inc., Caudill's former employer. After purchasing the franchise, Caudill filed a lawsuit against Keller Williams for claims arising from the termination of her employment, Keller Williams terminated Leaders' franchise agreement and Caudill amended her complaint to include a claim for wrongful termination of her franchise. In December 2012, the parties signed a confidential settlement agreement and mutual general release that, among other things, provided that they would keep the terms of the settlement, including the existence of the settlement, the allegations made by the parties in the lawsuit and the settlement amount paid by Keller Williams to Caudill and Leaders, in strict confidence and not disclose those terms to anyone "except to the parties' tax professionals , insurance carriers, attorneys who represented the parties in the lawsuit,  and to governmental agencies or regulatory authorities, as required by law." The settlement agreement also contained a liquidated damages clause that required a party violating the confidentiality provision in the settlement agreement to pay the other party $10,000 per violation. After the settlement agreement was signed, the case was dismissed.
In March 2013, Keller Williams began to distribute its current Franchise Disclosure Document (FDD) that included the name of the case, a history of the litigation and the settlement amount. Caudill and Leaders filed suit in federal district court claiming Keller Williams breached the settlement agreement by disclosing the terms of the settlement agreement to prospective franchisees. Keller Williams argued that its disclosure did not amount to a breach of contract because Keller Williams was required under federal and state law to disclose the terms of the settlement in its FDD and that its failure to expressly include an exception in the settlement agreement for the FDD disclosure was merely a drafting error. The court disagreed and ruled that the franchisee's breach of contract claim was plausible on the facts presented and could proceed to trial.
Proper drafting of a settlement agreement with any current or former franchisees is critically important. The FTC Rule and registration states' guidelines require franchisors to disclose all material terms of a settlement arising from litigation involving the franchise relationship if, as a result of the settlement, the franchisor is required to pay money or other consideration, reduce any indebtedness, waive any of its rights, or take any action adverse to its interests. The drafting error proved to be a costly mistake for Keller Williams. To read the entire case, click here.