FRANCHISEE 101: Recruitment Reprimand

Lewitt Hackman

A Massachusetts state court ruled that real estate franchisor, Re/Max of New England (Franchisor), breached its franchise agreements, the implied covenant of good faith and fair dealing and violated Massachusetts’ consumer protection law in its dealings with its franchisee, Leading Edge (Franchisee).

The Franchisee had six different franchise agreements with the Franchisor and operated nine Re/Max offices. Each franchise agreement had a five-year term, with staggered terminations dates, and in-term and post-term noncompete clauses. In the later part of the terms of the franchise agreements, the parties began arguing over renewal terms, largely over staggered termination dates and non-compete provisions. During the time between these negotiations and termination of the franchise agreements, the Franchisor sought to recruit the Franchisee’s sales agents from both existing and expired Re/Max locations. The Franchisor also tried to get other franchisees to recruit the sales agents even though four of the Franchisee’s locations were still under contract. The Franchisee sued the Franchisor for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair or deceptive acts or practices in violation of Massachusetts’ unfair business practices statute.

The Franchisee pointed to the franchise agreements’ stated policy that prohibited and penalized franchisees for predatory recruitment of other franchisees in the system. The Franchisor argued this policy was between franchisees only and did not apply to the Franchisor. The court disagreed. The Franchisor’s predatory recruitment actions were a material breach of contract. In addition, the Franchisor’s behavior breached the implied covenant of good faith and fair dealing since the Franchisor attempted to recruit the Franchisee’s sales agents while the Franchisee was still performing under valid franchise agreements.

Despite ruling in favor for the Franchisee on these claims, the court limited damages to losses suffered due to the Franchisor’s solicitation of sales agents (none of whom broke their contracts with the Franchisee and left). The court declined a request for $128,826 in costs incurred for the Franchisee’s expedited de-identification and subsequent rebranding of its Re/Max locations, finding that the Franchisee would incur these costs at some point when the franchise agreements ended. However, the court awarded $22,565 for a premium the Franchisee paid for expedited de-identification and rebranding services. The Franchisor was also ordered to pay the Franchisee’s attorney’s fees.

Franchisees whose agreements have staggered terms often try to get the durations aligned so that all expire at or around the same time. Otherwise, they can face unique challenges in negotiating renewals. Franchisees who cannot reach mutually agreeable renewal terms for expiring franchise agreements may be stuck in a system with a franchisor who is wary or suspicious that a franchisee trying to compete post-term. This could hurt the parties’ relationship. Franchisees should seek advice from franchise counsel before, during and after renewal negotiations.

Real Estate Visionaries v RE/MAX of New England, No. 1881-CV-01676 (Mass. Super. Ct. Apr. 16, 2020).

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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