FRANCHISEE 101: All in the Family

Lewitt Hackman
Contact

Lewitt Hackman

Some creativity can help in passing a former franchised business to the next generation, particularly if the franchisor has no part in the franchisee's succession plan.

A federal court in Nebraska preliminarily enjoined two former franchisees of The Maids International, a home-cleaning business, and also the franchisees' daughters and the competing home-cleaning company the daughters established, from continuing to violate post-termination non-compete and non-solicitation provisions of the franchise agreements.

One might think, as the defendants argued, that the daughters and their business could not be enjoined because they didn't sign the franchise agreements and were part of a separate business entity. According to the franchisees, their daughters' business - "Two Sisters" - had a new website, new uniforms, and new phone numbers. But under case law in some states, those acting in concert or privity with signatory franchisees may be bound by an injunction for actions that violate franchise agreements, even if they did not sign the agreements.

The court found several indicators that the former franchisees were in privity with their daughters' home-cleaning business.

The new business operated from the same locations as the former franchise locations. It offered the same services. It kept the franchisor's logo. It used the same email address. It used two of the same vehicles. And one of the former franchisees was listed as the registrant for the website of his daughters' business.

Most tellingly, in the court's view, was that the franchisee's "retirement letter" to customers made clear that the daughters were "ready to take over," that "most everything will remain the same," and that the daughters would continue the franchisees' business, using the same employees (their daughters), cleaning schedule, cleaning products and insurance. The court added that the defendants failed to comply with other post-termination obligations, such as the return of all confidential and marketing material and stopping use of customer lists, proprietary methods and trade secrets.

Family successors to a formerly franchised business should clearly understand what the franchisor has the power to enforce against them, and franchisees should factor the non-compete provisions of a franchise agreement into their succession plans.

Read: The Maids Int'l, Inc. v. Maids on Call, LLC

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.

© Lewitt Hackman | Attorney Advertising

Written by:

Lewitt Hackman
Contact
more
less

Lewitt Hackman on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide