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1 J. F. Comm. Franchising 1 (1980-1981)

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Survey of Private Remedies
by Harold Brown
Boston, Massachusetts

In the multi-party relationships
of franchising, there are unlimited
opportunities for, and risks of,
S     private litigation. To allay the ap-
*      prehension of both laymen and
'     their counsel, it should be noted
that all marketing methods carry
with them the risk of private suits.
Perhaps the very nature of fran-
chising makes that risk a standard
component of the system. Much of this arises from the fact
that franchising involves so many categories of independent
C    preneurs. While franchising should provide the fran-
cui.ee with a reasonable opportunity to succeed, there can be
no guarantee either immediately or for the indefinite future.
Ultimately, there will predictably be some percentage of
failures. Given the substantial investment required in many
Yranchised businesses, it is foreseeable that such losses will
lead to litigation.
The two most ordinary causes for complaint will be
fraud or contract. The former may be grounded in the ex-
aggerated pitch in the sale of the franchise, while contract
matters will usually arise from gross deficiencies in the
franchisor's performance of express covenants or of the
, implied covenant of good faith and fair dealing.' However
unspectacular such litigation may appear, it can be severely
,compounded by the risk of punitive damages,2 collateral
estoppel,3 repercussions among other franchisees, registra-
tion disclosure requirements,' and geographic debilities.
Substantively, there has been considerable expansion in
,the law of deceit, contract, and equitable claims. During
the early part of the decade, there were numerous attempts
to have a franchise classified as an investment contract
,so that the liberal anti-fraud provisions of the Securities
Act would apply.5 Except for pyramid selling schemes,
that effort failed.6 The alternative has been a federal
disclosure regulation by the FTC' and pre-sale registra-
tion laws in twenty states, with more in the offing. With
,   y state now having some form of little FTCA,9 both
teuLeral and state law declare illegal all commercially un-

fair or deceptive acts or practices.' All of those statutes
provide a radical expansion of the substantive law govern-
ing deception, trickery, schemes, predictions, and non-
Similar efforts were made to recognize the many
fiduciary aspects of the franchise relationship.'2 However
varied acceptance there has been for that concept, a similar
standard of conduct arises from the implied covenant of
good faith and fair dealing3 as well as in the FTCA's
declared illegality of unfair acts or practices.'4 In the
private remedy authorized by the little FTC Acts,'5 the
Massachusetts Supreme Judicial Court has found an un-
fair practice where a licensor required a minimum fee for
the transfer of a tenancy in a mobile home park.'6 In con-
demning the charging of a fee for no service what-
soever, the court relied on a common law decision of the
New Jersey Supreme Court holding invalid a contract in
which although the purchaser received something of
value, the value received was unconscionable dispropor-
tionate to the price paid.'7 In one of the first reported
cases of its kind, that concept has been used by New
York's Attorney General in the attack on Carvel Corpora-
tion, asserting that the franchise fees are grossly dispropor-
tionate to the value of the services provided to the fran-
chisees.' Since no court will essay an advance definition of
good faith or unfair practices, 9 there is an unlimited
opportunity for judicial reyiew of the entire range of fran-
chise misconduct both at the inception and during the en-
tire relationship.
(continued on page 4)
Elsewhere in This Issue
Trademark Licensing and the FTC
Franchising  Rule  .....................................  3
Negotiating and Protecting the
International Royalty  .................................  5
Franchising Currents .................................  9
(Including: FTC Franchising Rule; McDonald's Required
Deposit Not An Illegal Tying Arrangement; Arbitration Clause
Enforced; and others.)

'Copyright © 1979 American Bar Association

ee                     ZZZ

Volume 1, Number 1

ABA Forum Committee on Franchising

Winter 1980

Produced by the ABA Press

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