Wrongful Termination of Franchisees or Distributors

Franchise and distribution agreements are cornerstones of many small and large businesses. They allow companies with well-known brands, as franchisors, to expand their reach without committing to massive expansions of their own resources. They allow small and start-up companies, as franchisees, to make use of an established brand and its associated business goodwill. If a dispute arises between a franchisor and franchisee, though, the deck is often stacked in favor of the franchisor. The wrongful termination of a franchise or distribution agreement is likely to destroy a small business by removing its primary, or perhaps its sole, revenue source. Challenging a wrongful termination is possible with the assistance of a Chicago wrongful termination attorney, who will carefully review your contract and provide smart, aggressive legal representation.

A franchise or distribution agreement binds both the franchisor and franchisee to certain conditions. The definition of a franchise under Illinois law has three elements: a common marketing plan for distribution of goods or services, use of the franchisor’s trademark, and direct or indirect payment of a fee by the franchisee. Distributors may qualify as franchisees under various states’ franchise laws if the distribution agreement sufficiently resembles a franchise agreement.

Based in the Chicago area, our wrongful termination lawyers have represented closely-held private or family businesses and large corporations in all types of industries:

• Fast food
• Coffee shops and casual dining
• Retailers
• Alcoholic beverage and soft drink companies
• Auto products and services
• Vending machines
• Cosmetics and personal care
• Hotels and motels
• Hair salons
• Gyms and fitness centers

A franchise or distribution agreement should establish procedures for termination of the franchise by either party, with notice of an alleged breach and an opportunity to remedy the breach prior to termination. The agreement should include a clear definition of a “breach.” Termination by the franchisor is only permissible for acts that constitute breach by the franchisee under this definition. A franchisor must follow any and all procedures for termination established in the agreement, and may be liable for damages to the franchisee if it fails to do so.

Certain provisions in a franchise or distribution agreement may not be valid or enforceable, and termination of an agreement based on such an invalid provision could allow a franchisee to recover damages. A court could declare a provision or an entire contract invalid if it constitutes false pretenses, retaliation, or a violation of state law. The Illinois Franchise Disclosure Act (IFDA), for example, establishes requirements for franchisors and franchise brokers doing business in the state, with the goal of protecting prospective franchisees. The failure of a franchisor to disclose information required by this law could be grounds for invalidating the contract.

Many state franchise laws, including the IFDA, prohibit termination of a franchise without good cause, which might include poor performance or insolvency by the franchisee, or substantial noncompliance by the franchisee with its contractual obligations. State law also prohibits termination of a franchise agreement if a franchisee fails to meet unreasonable demands by the franchisor, such as unconscionable fees or sales quotas that the franchisee cannot reasonably meet. For example, a provision in a franchise agreement that requires a franchisee to purchase more product from the franchisor than it could sell within a given time period may not be grounds for termination if the franchisee fails to meet the unreasonable benchmark.

Franchise and distribution agreements are enforceable under state contract law. In situations where termination is threatened, or is in process but not yet complete, we can act quickly to try to stop a planned or pending termination. This allows time for the franchisee to challenge the alleged grounds for termination. In cases where a court has made a finding of wrongful termination, we have helped our clients recover damages for the financial consequences, including years of lost future profits. We represent franchisees in litigation, arbitration, and other forms of dispute resolution. We have also challenged contractual provisions forcing franchisees into out-of-state litigation or unfair arbitration arrangements.

Lubin Austermuehle, P.C.’s Chicago wrongful termination lawyers represent franchisees and distributors throughout Illinois, Indiana, and Wisconsin, particularly in the Chicago area and DuPage County. We have offices in Elmhurst and Chicago, Illinois. To schedule a consultation with a wrongful termination attorney in the Chicago area, contact us via email, at 630-333-0333.