FRANCHISEE 101: A Perpetual Franchise

Lewitt Hackman

When a franchisee "buys into" a franchise system by paying an "initial franchise fee," the franchisee is typically purchasing the right to use the franchisor's trademarks and business system for an initial term that lasts a certain number of years (usually between 5 and 20).

The franchisor may hope to continue its relationship with the franchisee far beyond this initial term, but nevertheless limits the term in this way so that it can periodically revise the details of the relationship with an updated agreement. The franchisee, by contrast, would understandably prefer that those details remain known and consistent as long as possible.

In H&R Block Tax Services, LLC v. Strauss, Strauss, an H&R Block franchisee, claimed that her Franchise Agreement was effectively "perpetual" and not subject to the kinds of revisions described above. The Franchise Agreement between stated that its term was 5 years and that, unless Strauss was in default, the Franchise Agreement would be "automatically renewed for successive Renewal Terms [of 5 years each]." Strauss operated for 30 years under this agreement until H&R Block told her that it would not renew, but invited Strauss to sign its "current form" of Franchise Agreement. Strauss claimed that the franchisor could not decline to renew the agreement and therefore had effectively just breached the agreement.

A federal court determined that relevant Missouri precedent required that "a contract which purports to run in perpetuity must be adamantly clear that this is the parties' intent." The language in the Franchise Agreement did not meet this standard, and therefore the court found that H&R Block was within its rights to decline to renew it perpetually.

A franchisee that is interested in a "perpetual" Franchise Agreement should be sure that the language in the agreement is explicit on the subject, and should consult with legal counsel before signing to verify that the language meets the standards of relevant state law.

Read: H&R Block Tax Services, LLC v. Strauss


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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