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17 Franchise L.J. 1 (1997-1998)

handle is hein.journals/fchlj17 and id is 1 raw text is: F......c.... LAW JouRA AMERICAN BAR ASSOCIATION QUARTERLY JOURNAL OF THE FORUM ON FRANCHISING VOLUME 17, NUMBER I - SUMMER 1997 One Royalty Strike and You're Out!: A Franchisor's Independent Right to Terminate a Franchise Agreement for Nonpayment of Royalties and the Remedies Available Under the Lanham Act By HOWARD S. WOLFSON franchisor's right to con- tractual royalty payments and advertising contribu- tions is, to the success of a fran- chise system, what a reliable pitching staff is to a winning base- ball team. For franchisors, there is perhaps no greater danger than the possibility that its franchisees will purposefully withhold contractual royalty payments and advertising contributions. In the absence of Howard S. Wolfson royalty income, the franchisor may be unable to provide the necessary support to fran- chisees in critical areas such as operations, field support, expansion, and product development. Similarly, without the franchisees' advertising contributions, the franchisor may be in no position to fund and carry out the necessary advertising and marketing activities which are so vital to a franchise sys- tem's growth and success. In the words of one court, royal- ties are the 'lifeblood' of a franchise system.' Unfortunately, just as in any other business relationship, franchisors and franchisees at times find themselves at odds, whether it be due to matters involving the proper interpreta- tion of the parties' franchise agreement, alleged encroach- ment, allegations of misrepresentation, or a variety of other disputes. Theorizing that the withholding of royalties, adver- tising contributions and other contractual payments can pro- vide enormous leverage, in a number of cases franchisees have refused to make royalty payments in an attempt to pres- sure franchisors to resolve or settle their complaints, either before or during litigation. Mr. Wolfson is a partner with Whitman Breed Abbott & Morgan LLP in New York City. Ellen M. O'Toole, a litigation associate with the firm, assisted him in preparing this article. Mr. Wolfson represented Burger King Corporation in many of the actions discussed herein. These so-called royalty strikes are extremely serious matters for franchisors, particularly if the dispute involves a large group of franchisees or even a single franchisee with a significant number of franchises. In these circumstances, the potential for damage is enormous if a franchisor fails to insist that its franchisees continue to abide by their contractual obligations and pay royalties if they wish to remain in and benefit from the franchise system. While the franchisor and franchisee attempt to resolve their differences, whether by litigation, arbitration, mediation, or otherwise, the fran- (con tinued on page 17) In This Issue One Royalty Strike and You're Out!': A Franchisor's independent Right to Terminate a Franchise Agreement for Nonpayment of Royalties and the Remedies Av ailable Under the Lanhamn Act............................... I The Economic Espionage Act: New Criminal Penalties for Trade Secret Misappropriation.............. ............. 3 U.. Chair's Column ...............................- Editor-in-Chief's Column........................ 2 Letter to the Editor........................... .8 Division Notes................................ 9 Franchising Bookshelf ......................... 23 Franchising Currents......................... .30 (Including cases on.- arbitration clauses; p)rotecting trade secrets/non-comnpetition clauses; vicarious liability; good cause for termnination; good faith and fair dealing; release of claimis; and others) Twentieth Annual Forum Program ................ 14 Comprehensive Guide to the Franchise LawJournal .. .. 25 1 1 L'lk

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