Franchisor 101: Court Remediates Damage to Restoration Franchisor

Lewitt Hackman

A federal court in Nashville granted summary judgment on breach of contract claims in favor of a damage restoration franchisor’s lawsuit with a former California franchisee.

A Servpro franchisee had a territory in Los Angeles. Servpro terminated the franchise agreement due to customer complaints, including price gouging, overbilling, excessive demolition, charges for work not performed and intimidation. The franchisee continued its business practices even after being notified of the complaints.

The franchisor sued the franchisee for violating post-term obligations, including failure to transfer client phone numbers, social media accounts and confidential company information to Servpro, and continued use of Servpro’s trademark on a van. The franchisee countersued.

The franchisee challenged Servpro’s right to terminate the franchise under a clause that let Servpro terminate if it determined in good faith that the franchisee’s actions had “a materially unfavorable effect on Servpro’s reputation.” The court dismissed this claim, holding that the contract’s plain meaning permitted Servpro to terminate.

Based on the frequency and severity of customer complaints, including threatened litigation and complaints from national and regional accounts, the court concluded Servpro adequately established reputational damage.

Next, the court looked at Servpro’s breach of contract claim for the franchisee’s failure to honor post-termination obligations, which required the franchisee to stop using the trademark, de-identify and return confidential documents. The court rejected the franchisee’s argument that its use of the van with Servpro’s logo was personal, not for business, finding that driving the van in public with the logo equated to an advertisement for services. The court granted summary adjudication for the franchisee’s failure to transfer a phone number and confidential information after the franchisee admitted breaching these requirements. The court found material issues of fact regarding another phone number and social media account allegations.

Franchisors must protect their brand’s reputation. When a franchisee’s business practices threaten the brand’s reputation, the franchisor should document complaints and request the franchisee to correct its damaging behavior. If the behavior continues and termination is necessary, the franchisor may need to rigorously police post-termination obligations of the ex-franchisee to continue to protect the brand.

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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