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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