Franchisor 101: Defaults Sink Bathroom Remodel Franchisee

Lewitt Hackman

On competing motions for a temporary restraining order (“TRO”) by ReBath – a nationwide bathroom remodeling franchisor, and its terminated franchisee, ReBath prevailed in restraining the ex-franchisee’s further operations. A federal court found the unambiguous franchise agreement language, and the franchisee’s failure to timely pay royalties and for product purchases, allowed termination.

In the franchise agreement, the franchisee agreed to pay monthly royalties on sales, purchase a yearly product quota from the franchisor and, on termination, not operate or engage in a business offering similar products or services within a 20-mile radius of the franchisee’s territory.

ReBath had a nationwide agreement with Lowe’s hardware store for franchisees to provide installation services. The franchisee participated voluntarily in the Lowe’s program, which provided up to 40 percent of the franchisee’s sales. Lowe’s and the franchisor received customer complaints about the franchisee’s performance and timing to complete bathroom renovations. Lowe’s ultimately cancelled the arrangement with the franchisee.

Concerned with the franchisee’s exclusion from the Lowe’s program, loss of associated sales, and also its national relationship with Lowe’s, the franchisor sought to replace the franchisee with a new franchisee in the territory. While the franchise agreement did not require participation in the Lowe’s program, the franchisor ultimately terminated the franchisee based on its failure to pay past-due royalties and past-due product purchases. The termination came after a default notice, although the franchisee believed it cured the past-due amounts in response to the notice and continued to operate.

The franchisor then sued for trademark infringement, breach of contract and other claims. The franchisee counterclaimed for breach of contract and breach of implied covenant of good faith and fair dealing, among others. Each party filed motions for a TRO.

The court granted a TRO in favor of the franchisor and denied the franchisee’s TRO request. The court found the franchisor met its burden of showing it was likely to succeed on the merits based on the franchisee’s late payments and resulting termination, even though the franchisee cured the default. The court noted, “Harsh as this approach may be, it was specifically permitted by the Franchise Agreement,” which allows for termination when a franchisee fails to make timely payments on three or more occasions in a 12-month period, regardless of cure.

Prior to terminating a franchise agreement, a franchisor should work closely with franchise counsel to confirm the best course of action permitted under the franchise agreement and consult on potential claims that may be raised by franchisees in response to termination. Doing so places franchisors in a strong position to stave off counterattacks should litigation ensue.

ReBath LLC v. Foothills Service Solutions Company, No. 21-cv-00870-PHX-DWL, 2021 WL 2352426 (D. Ariz. June 9, 2021)

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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