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Form 2.01[2]—Annotations to Franchise Agreement *
ANNOTATIONS FOR UNIT FRANCHISE AGREEMENT
The ABC Unit Franchise Agreement in Form 2.01[1] is written from the perspective of the
Franchisor, based on the assumption that the Franchisor will normally have prepared the initia l draft
of the franchise agreement which is included in the Offering Circular. The agreement m ay or may
not be subject to negotiation, depending on state law and the current business practices of the
Franchisor. For a comprehensive discussion about negotiating franchise agreements, see Franchisee
Chapter 2. The following annotations are numbered to coincide with the Paragraph numbers of t he
agreement.
Note: No standard form of agreement exists. This form is intended to be a sample only.
Note also: The International Franchise Association (IFA), a trade association of franchisors and
franchisees headquartered in Washington, DC, has adopted a Code of Ethics available a t the IFA’s
website, www.franchise.org . Counsel should be aware of this Code in connection with the
preparation of franchise agreements.
TABLE OF CONTENTS
1. PARTIES AND RECITALS 2012-4
2. GRANT OF FRANCHISE 2012-5
3. TERM AND RENEWAL 2012-10
4. OPERATING ASSISTANCE 2012-14
5. FEES 2012-15
6. LICENSED MARKS 2012-16
7. STANDARDS OF OPERATION 2012-18
8. CONFIDENTIAL OPERATING MANUAL 2012-25
9. ADVERTISING AND MARKETING 2012-25
10. STATEMENTS, RECORDS AND FEE PAYMENTS 2012-28
11. COVENANTS 2012-28
12. TRANSFER AND ASSIGNMENT 2012-32
13. DEFAULT AND TERMINATION 2012-36
14. POST TERM OBLIGATIONS 2012-38
*
The authors wish to thank R. Samuel Snider of Paul, Hastings, Janofsky & Walker LLP for substantial assistance
in the preparation of these annotations.
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15. INSURANCE 2012-42
16. TAXES, PERMITS AND INDEBTEDNESS 2012-42
17. INDEMNIFICATION AND INDEPENDENT CONTRACTOR 2012-42
18. WRITTEN APPROVALS, WAIVERS, FORMS OF AGREEMENT AND AMENDMENT 2012-43
19. ENFORCEMENT 2012-43
20. NOTICES 2012-43
21. GOVERNING LAW AND DISPUTE RESOLUTION 2012-43
22. SEVERABILITY AND CONSTRUCTION 2012-45
23. ACKNOWLEDGMENTS 2012-45
24. MISCELLANEOUS 2012-47
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Preliminary Notes:
Because the franchise agreement attempts to codify an evolving relationship, the fra nchise agreement
should create a system flexible enough to incorporate any adjustments that the franchisor m ay need to
make to its system. For instance, franchisors often demand the flexibility to add ne w functionality to
the system or the franchised business, to distribute products via other distribution channels (groc ery
stores, mail order catalogs, home delivery systems, the Internet, etc.), and to add additi onal concepts
or operate additional systems. Most effective franchise counsel can provide the legal fle xibility to
allow franchisors to engage in best business practices whether such practices exist or are i mplemented
at the time an agreement is signed. These annotations provide alternative langua ge to that found in
the form agreement, and try to reflect the need for system flexibility combined wi th contractual
clarity, as well as possible alternative approaches to an issue.
A number of commentators have noted a growing trend among franchisors to utilize simpler, shorte r,
more “user-friendly” franchise agreements written in plain English and designed to be underst ood by
franchise owners that do not have a substantial business background. This is primarily a marketi ng
tool, and franchisors should consider the target franchise owners to determine whether such an
agreement is worth the time and expense required to redraft a “user-friendly” franchise a greement.
For instance, as an alternative to Section 8(a) of the Franchise Agreement, Franchisors may consider
using language such as:
You agree that strict compliance with the Confidential Operating Manual is essenti al to this Agreement.
Compliance with the Confidential Operating Manual means compliance with the sta ndards, procedures and
policies contained in this Agreement and in the Confidential Operating Manual, as though all were
specifically set forth in this Agreement.
Similarly, as an alternative to Section 8(c) of the Franchise Agreement, a Franchisor may consider
language akin to the following:
We have the right to change the content of the Confidential Operating Manual in our di scretion. If we
change the Confidential Operating Manual or our products, we will notify you and you must impleme nt the
changes within a reasonable time that we specify.
General Notes: Franchisor’s counsel should consider including language in the recitals (or in particular segments of
the agreement) outlining the principles considered when drafting the agreement, includi ng
background or explanatory language in sections that on their face may appear to be harsh t oward, or
unduly one-sided against, the franchise owner. This approach allows the franchisor to educate not
only the franchise owner, but also judges, juries or arbitrators as to the purpose of each provision
from within the framework of the agreement itself, and may help to prevent decision make rs from
applying arbitrary standards of review to the agreement.
To further clarify the terms of the agreement, many franchisors include a definition sec tion setting
forth the meanings of all defined terms found in the Agreement.
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1. PARTIES AND RECITALS
(a) Sometimes the Effective Date may be established as the date the Franchise opens for business, in
which case the Agreement may refer to an Exhibit which will be signed by the part ies designating the
Effective Date and then be attached to the Agreement or incorporated therein.
The form agreement contemplates a restaurant franchise, sometimes referred to as a business format
type of franchise. Examples of recitals which may be relevant to a product franchise are set forth
below:
( ) In connection with those words/marks (the “Licensed Marks”) more fully set forth on Exhibit “1” hereto, Franchisor has developed a proprietary plan and system (the “ABC System”)
relating to the operation of outlets under the name and mark, outlets operated under the ABC
System (the “ABC Units”), which are authorized to distribute, install service and m aintain
various glass-faced structures and component parts thereof which are used as greenhouses,
room-additions, solariums, and related functions as well as other building and remodeling
products and/or services as may now or hereafter be manufactured, designated, developed or
authorized for use by Franchisor (collectively the “ABC Product Line”) which are
manufactured according to standards, specifications and designs prescribed by Franchisor and
well known for their high quality and reliability. The ABC System includes site sele ction
guidelines, store layout, equipment and product selection, patented and proprietary products
distributed under the Licensed Marks, purchasing and inventory guidelines, accounting
methods, merchandising, advertising, installation, maintenance, sales and promotional
techniques, construction design, planning services and general contracting, personnel training
and other matters relating to the efficient operation and supervision of those ABC Units and
the maintenance of quality standards.
( ) To prevent customer confusion or deception, maximize promotion of the Licensed Marks, limit warranty claims, and reinforce consumer acceptance of the ABC Product Line, this
Agreement restricts the sale by Franchise Owner of any product(s) or service(s), either in
whole or in part, which, in Franchisor’s sole judgment [consider using concept of Reasonable
Business Judgment—see Form 2.01[1], Paragraph 1(c)], are the same as or similar to any
element or component of the ABC Product Line then currently manufactured or distributed by
Franchisor or its affiliates (“Competing Product(s)”). Subject to Franchisor’s prior approval
and Franchise Owner’s compliance with the terms and conditions of Paragraph ____ hereof,
Franchise Owner may sell and distribute product(s) and service(s) which, in Franchisor’s sole
judgment [consider using concept of Reasonable Business Judgment—see Form 2.01[1],
Paragraph 1(c)], are not the same as or similar to any element or component of the AB C
Product Line then currently manufactured or distributed by Franchisor or its affiliates (“Non-
Competing Product(s)”). The terms “Competing Product(s)” and “Non-Competing
Products(s)” may sometimes hereinafter be collectively referred to as “non-proprietary
products.” Franchise Owner desires, upon the terms and conditions set forth herein, to obtain
a license to operate a business which will utilize the Licensed Marks and t he ABC System (the
“Franchised Business”). Franchise Owner acknowledges that it is essential to the maintena nce
of the high standards of authorized ABC System franchise owners and to the preservation of
the integrity of the Licensed Marks and goodwill of Franchisor, that each franchise owner in
the ABC System maintain and adhere to certain standards, procedures and policies desc ribed
herein.
(b) The form agreement applies the Reasonable Business Judgment standard to the Franchisor’s
actions. Note that different standards may be more applicable in certain situations. For instance, it
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may be reasonable to allow the Franchisor to act “in Franchisor’s sole discretion” when c onsidering
issuing credit or authorizing the franchise owner to stray from the Franchisor’s standards of operation.
The definition of Reasonable Business Judgment in the form agreement is a relatively short form
definition. It may be appropriate to utilize a more thorough definition that includes t he justification
for utilizing the Reasonable Business Judgment standard and an explicit recognition by the Franchise
Owner that the Reasonable Business Judgment standard is critical to the success of the relationship.
An example is set forth below:
( ) Reasonable Business Judgment. Reasonable Business Judgment (as defined herein) shall be applied in all circumstances involving or requiring Franchisor’s approval or consent, unless
provided otherwise in the Agreement. Reasonable Business Judgment means that
Franchisor’s determinations or choices shall prevail, even if other alternatives are a lso
reasonable or arguably preferable, if Franchisor intends to benefit or is acting in a way tha t
could benefit the ABC System by, for example, enhancing the value of the Licensed Marks,
increasing customer satisfaction, minimizing possible customer confusion as to the Lic ensed
Marks or location, or increasing the financial strength of Franchisor. Except where otherwise
indicated in this Agreement, Franchisor agrees to use Reasonable Business Judgment when
discharging its obligations and exercising its rights and discretion. Franchise Owner has
agreed to this concept of Reasonable Business Judgment in recognition of the fact that
Franchisor should have at least as much discretion in administering the ABC System a s a
corporate board of directors has in directing a corporation and because the long-term int erests
of the System and all Franchise Owners in the ABC System, and Franchisor and its
shareholders, taken together, require that Franchisor have the latitude to exercise Rea sonable
Business Judgment. Franchisor shall not be required to consider Franchise Owner’s particular
economic or other circumstances or to slight its own economic or other business interests
when exercising its Reasonable Business Judgment. Franchise Owner acknowledges that
Franchisor has a legitimate interest in seeking to maximize the return to i ts shareholders and
the fact that Franchisor benefits economically from an action will not be relevant to showing
that Franchisor did not exercise Reasonable Business Judgment. Neither Franchise Owner nor
any third party (including but not limited to any third party acting as a trier of fact) shall
substitute its judgment for Franchisor’s Reasonable Business Judgment. Franchise Owner
agrees that it shall have the burden of establishing that Franchisor failed to exerci se this
Reasonable Business Judgment.
In other instances, it may be more appropriate to expressly disclaim the “harm” sta ndard, as set forth
below. Inclusion of this language reinforces the concept that the franchisor and franchise owner are
not in a fiduciary relationship, exposes the “harm” standard to scrutiny and expressly reject s it, may
prevent a judge from attempting to base a decision on the quantum of harm to the Franc hise Owner of
any of Franchisor’s decisions, expressly acknowledges the legitimacy of Franchisor’s pursuit of its
own business interests, and disclaims any duty to subordinate those interests to the Franchise Owner.
( ) Franchisor is free to pursue its own business interests as it sees them, and is not oblige d to do
or refrain from doing anything except as expressly set forth in this Agreement, regardless of
any adverse effect of whatever degree on Franchise Owner’s business and without any duty to
consider such effect.
2. GRANT OF FRANCHISE A. Sometimes the location of the Premises will not be known at the time the Agre ement is signed
and the Agreement should contemplate the use of an Exhibit to identify the address of the Premises,
which Exhibit will be signed by the parties and added to the Agreement.
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B. The language in (a) and (b) set forth below may be preferred if territorial protection is granted by
the Franchisor, but will need further appropriate modification if the Franchise Owner is grant ed an
exclusive territory.
(a) Subject to all of the terms and conditions herein, Franchisor grants to Franchise Owner the
right to operate one ABC System facility (a “Unit”) from within the territory being more
particularly described in Paragraph 3 of Exhibit 1, (the “Protected Area”), which is atta ched
hereto and made a part hereof by reference. The rights herein granted are sometimes referred
to in this Agreement as the “Franchise.”
(b) Franchise Owner expressly acknowledges and agrees that this is a license only for the operation of one ABC System Unit within the Protected Area and that Franchisor may it self
construct and/or operate and/or grant to others the right to construct and/or operate ABC
System units within the Protected Area. Franchisor intends to grant a limited number of
additional licenses for the operation of ABC System units in the Protected Area; provided,
however, Franchisor agrees that it shall not grant more than one ABC System franchise for
every __________ within the Protected Area from time to time. Franchisor’s calculation of
the number of units in the Protected Area shall be derived from sources of pertinent
information and generalized knowledge not reasonably subject to dispute, including, by way
of example, but not limitation, U.S. Census data, other reliable sources of more up-to-date
census data showing changes in population since the last U.S. Census, and pertinent
publications of governmental agencies, and non-governmental entities, or other reasonable
data bases. Franchisor’s determination of the Protected Area shall be final and binding.
C. Consider the appropriate category, such as people, households or registered motor vehicles in
order to fill in the blanks in the foregoing optional Paragraph 2(b). If people are used, will the y be
residents, business population or some other population segment? Also consider the provisions
relating to the System Expansion set forth in Section IV, Paragraph 7 of the IFA Code.
D. Sample clauses relating to relocation of a Franchised Business are set forth below:
( ) Franchise Owner may relocate the Franchised Business within its protected area only after
notifying Franchisor of the proposed new location and the reason for the change, and
submitting the proposed location and lease for approval in accordance with Franchisor’s then
current standards, and securing Franchisor’s written approval, which shall not be unreasonably
withheld.
( ) Pursuant to any relocation approved by Franchisor, Franchise Owner may request a change of Franchise Owner’s protected area. However, Franchisor, in its sole discretion [consider using
concept of Reasonable Business Judgment—see Form 2.01[1], Paragraph 1(c)], may deny
such a request. In the event Franchise Owner does not request such a change or Franchisor
denies Franchise Owner’s request, the protected area shall remain the same as describe d in this
Agreement.
( ) If Franchise Owner relocates the Franchised Business, Franchisor shall conform the new store location to Franchise Owner’s then current standards for store design.
( ) If Franchise Owner relocates the Franchised Business, Franchise Owner agrees to close the old location simultaneously with the opening of the new location so that only one ABC
System Unit is open and operating under the terms of this Agreement within the protected area
at the same time.
( ) Franchise Owner agrees, at Franchise Owner’s expense, to remove from and around the old store location and obliterate any visible indicia of all signs, graphics and advert ising materials
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displaying the ABC names, licensed marks and slogans immediately upon relocation of t he
Franchised Business.
( ) Notwithstanding any other provisions herein to the contrary, Franchise Owner shall have the right to relocate the Franchised Business within its protected area in the event the premises
shall be rendered inoperable by any casualty, or the premises shall be taken in conde mnation
or by eminent domain, or the principal highway access to the premises shall be termi nated or
so changed as to reduce access to the premises substantially, or if the premises ca n no longer
be used for the operation of the Franchised Business for similar reasons beyond the control of
Franchise Owner, provided Franchise Owner notifies Franchisor thereof within 30 days of the
occurrence of any of the foregoing events, Franchise Owner obtains a new location for the
Franchised Business within 12 months of such occurrence, such new location is approved in
advance by Franchisor, and Franchise Owner will move all signs and distinctive designs of the
ABC System so that the abandoned premises does not resemble an ABC System unit.
E, Sample clauses relating to Franchisor’s rights to service national accounts are set forth below: ( ) Franchisor shall retain the exclusive right to sell the ABC Product Line within t he Granted
Territory to national accounts, which shall be defined as interstate restaurants, hotels and other
similar multi-state businesses purchasing the ABC Product Line as end-users and not as re-
sellers. Franchisor reserves the right:
(i) To redefine such national accounts in writing or in the Confidential Operating Manua l
(as hereinafter defined) or otherwise to include a reasonably similar group of businesses;
(ii) To allocate any business related to the installation and maintenance of national accounts
among ABC System franchise owners, as Franchisor in its sole discretion shall
determine; and
(iii) To market products other than __________ within the Granted Territory under a different brand name or mark through other distribution methods.
F. A sample clause reserving rights to modify the product line is set forth below: ( ) Franchisor reserves the right, in its sole and absolute discretion [consider using concept of Reasonable Business Judgment—see Form 2.01[l], Paragraph 1(c)], to make modifications,
improvements or changes to the ABC Product Line at any time during the term hereof, to
introduce new products, or to discontinue the sale or distribution of existing products, without
incurring any liability whatsoever to Franchise Owner or others as a result of any Product Li ne
discontinuation. If Franchise Owner is offering any product with Franchisor’s prior approval
which is deemed by Franchisor to be similar to any such addition, modification or
enhancement to the ABC Product Line, Franchise Owner shall have a reasonable period of
time (but in no event more than six months) following any such ABC product introduction to
deplete its existing inventory of such nonproprietary product(s).
G. Sample clauses regarding conduct of business in a particular area of primary responsibility are set
forth below:
( ) This Agreement pertains exclusively to Franchise Owner’s ABC Franchised Business to be conducted, in accordance with the requirements of the ABC program as set forth herein, i n the
Area of Primary Responsibility shown on the map attached hereto and made a part here of as
Schedule A.
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( ) Franchise Owner shall use its best efforts to promote and sell the products covered by this
contract within the Area of Primary Responsibility described in Schedule A and acknowledges
that failure to do so shall constitute grounds for termination in accordance with Paragraph
____ hereof.
( ) Nothing contained in this Agreement shall preclude Franchise Owner from selling or solici ting
the sale of the products covered by this Agreement outside of such area (but not in any ot her
Franchise Owner’s protected area), provided the effectiveness of Franchise Owner’s services
to branded ABC dealers within the area is not impaired. Nothing herein shall confer upon
Franchise Owner exclusive marketing rights for any such product within such area.
H. Sample clauses regarding specific location, non-exclusive franchise and reserving right to
develop other systems are set forth below: ( ) The franchise granted to Franchise Owner by this Agreement shall include the right, privile ge
and obligation to use the complete ABC System, including the non-exclusive right, privilege ,
and obligation to use the Licensed Marks only in connection with the operation of the AB C
System Unit at the location described herein, as such System presently exists or may be
hereafter supplemented or modified during the term of this Agreement. Franchisor reserves
the right, among others, to develop systems other than the ABC System franchised hereunder,
under any service mark, trademark or trade name belonging to Franchisor, without granting
Franchise Owner any rights therein.
( ) Franchise Owner understands that the Franchisor, its affiliates, its parent corporation and its
parent’s other subsidiaries operate and franchise, and may in the future operate and franchise ,
restaurants and food establishments other than ABC Restaurants, and Franchise Owner agrees
that the Franchisor, its parent corporation and its subsidiaries and affiliates ma y do so at any
location, including within the Territory, provided that such restaurants and food
establishments are not operated under the name “ABC” or similar trade names. Franchi se
Owner further acknowledges and agrees that this franchise is solely for the Premises and
affords Franchise Owner no right, title or interest in any additional franchise to be operate d at
any other location. Neither this Agreement nor the franchise issued hereunder obligates the
Franchisor in any way to sell or issue, nor entitles Franchise Owner to purchase, any other
franchise.
( ) Franchise Owner understands and agrees that its license under the Licensed Marks is nonexclusive to the extent that Franchisor has and retains the right under this Agreement:
I. Sample clause providing an exclusive territory:
( ) During the term of this Agreement, Franchisor shall not establish nor license another to establish
within the Territory, except under the conditions set forth herein, an ABC Restaurant. Franc hise
Owner acknowledges and agrees that, subject only to the preceding sentence [and to Paragra ph ____]
Franchisor retains, among others, the right to sell any product under the Franchisor’s marks or any
other name or mark to any purchaser within the Territory.
J. Sample clause contemplating new concepts:
( ) During the term of this Agreement, Franchisor may develop one or more new methods of distributing food items similar to items approved by Franchise Owner for sale in ABC
Restaurants using Franchisor’s Marks (hereinafter called “New Concepts”), which may or
may not involve restaurants. Company may, at its sole discretion [consider using concept of
Reasonable Business Judgment—see Form 2.01[l], Paragraph 1(c)], permit Franchise Owner
to participate in testing and/or utilizing a New Concept.
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K. Sample variations on territorial clauses and provision for acquisitions by Franchisor of systems
with similar businesses are set forth below:
( ) After the Effective Date, neither Franchisor nor its affiliates will operate or license any other
person or entity to operate an ABC Restaurant (other than a license to the ma nagement
company which will operate Franchise Owner’s Unit, in the Protected Area, during the Term
[except to the extent set forth in Paragraphs ____, ____ and ____ below]. There are no other
territorial rights that arise or will be inferred under this Agreement and Franchisor expre ssly
reserves the right to operate or license any other person or entity to operate an ABC System
Restaurant or any other restaurant except as expressly restricted herein. Franchisor is not ,
under this Agreement, granting Franchise Owner a license in any of Franchisor’s property
rights, except as expressly stated herein, and Franchisor retains all property rights, intel lectual
property rights and all other rights not expressly licensed herein.
( ) Within the Protected Territory, Franchisor and its affiliates shall have the absolut e right
without regard to the economic impact on Franchise Owner to operate or to license any other
person or entity to operate an ABC Restaurant, or a restaurant in a system owned by
Franchisor or its affiliates, if any such restaurant is an existing restaurant (meaning a
restaurant that is as of the Effective Date (i) presently in the System, (ii) unde r contract to be
in the System, or (iii) in any other system owned by Franchisor or its affiliates). Franchisor or
its affiliates shall have the absolute right without regard to the economic impa ct on Franchise
Owner to extend or renew the agreement for an existing restaurant or license or operate as a
replacement for an existing restaurant in the Protected Area a restaurant facilit y of any brand
(with a seating capacity not greater than [30 percent] of the existing facility). Fra nchisor and
its affiliates shall also have the absolute right without regard to the economic impact on
Franchise Owner to: (x) license or operate an ABC Restaurant anywhere, other than within
the Protected Area; (y) license or operate any business not identified as an ABC R estaurant at
any location other than the Premises, including locations within the Protected Area; and
(z) otherwise be involved in the licensing or operation of any other restaurant or business.
( ) Franchisor or its affiliates may own and operate other restaurant chains or brands and Franchise Owner acknowledges that such chain or brands may have a location within the
Protected Area. Franchise Owner acknowledges and agrees that in the operation of other
restaurant chains or brands, as well as any other form of business activity, Franchisor may use
or benefit from common systems, hardware, software, communications equipment, services,
administrative systems, license application procedures or committees, marketing a nd
advertising programs, personnel, central purchasing, approved supplier lists, independent
licensed sales representatives, other independent sales contractors, or by other means.
L. Sample clauses regarding Franchisor’s ability to act in its own business interest and to operate
other franchise systems:
( ) Franchisor or its affiliates may acquire an existing restaurant chain or brand of [four] or more
restaurant facilities through merger, acquisition or otherwise. If one or more of the unit s of
such chain or brand is located within the Protected Area, Franchisor or its affiliates shall have
the absolute right without regard to the economic impact on Franchise Owner to license or
operate such unit as an ABC Restaurant or as another brand. If Franchisor or any of its
affiliates operates or licenses any ABC Restaurant within the Protected Area pursuant to this
Paragraph 2(__), Franchise Owner shall be entitled to terminate this Agreement pursuant to
Paragraph 13(__).
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M. Provision granting broad rights to Franchisor to prevent Franchisor from being restricted by the
Franchise Agreement:
( ) Franchise Owner acknowledges and agrees that Franchisor has business interests which are not the subject of, nor restricted by, this Agreement, and that, except as expressly provided in
this Agreement, Franchisor may pursue those interests for its own purposes without obligation
to, and irrespective of the impact of its actions upon, Franchise Owner or its business. Those
interests of Franchisor include, without limitation, all aspects of Franchisor’s dealings wit h
other franchise owners of the ABC System; Franchisor’s ownership or disposition of its own
ABC System units; Franchisor’s business decisions regarding the administration and direction
of the ABC System; and Franchisor’s ownership, operation, and development of competing
systems which operate under marks other than the Licensed Marks.
N. Dual operation provision (attempting to identify specific issues of potential controversy): ( ) Except as expressly provided herein, Franchise Owner acknowledges and agrees that Franchisor may own, operate and license the operation of any other business (an “Other
Business”) operating under marks other than the Licensed Marks, whether the Other Business
is competitive or non-competitive with the Licensed Business. In that regard, Franchisor or its
affiliates may (1) acquire, develop or license units of any Other Business within or outside of
Franchise Owner’s exclusive territory; (2) offer goods and services through the Other
Business which are the same as or similar to those offered in the Licensed Business;
(3) devote time, attention and resources to the operation and success of the Other Busi ness;
and (4) otherwise operate the Other Business without any obligation to Franchise Owner
irrespective of the impact that the Other Business or its franchise owners may have upon the
Franchised Business.
O. Dual operation provision (general reservation of rights): ( ) Nothing express or implied in this Agreement shall in any way limit Franchisor’s right t o own,
operate, or license any business which operates under marks other than the Licensed Marks at
any location.
Practice Note: The concept of impact or encroachment has created much concern among the franchise bar. Refer to
the Scheck, Vylene and Camp Creek Hospitality cases (citations at Practice Note following Paragraph
7(n), see Form 2.01[1]) for examples where the franchise owner was successful. For cases where the
franchisor was successful, see VICORP Restaurants, Inc. v. Village Inn Pancake House of
Albuquerque, Inc. , Bus. Franchise Guide (CCH) ¶ 10,994 (D.N.M. Aug. 16, 1996); Chang v.
McDonald’s Corp. , Bus. Franchise Guide (CCH) ¶ 111,078 (9th Cir. Dec. 19, 1996); Payne v.
McDonald’s Corp. , Bus. Franchise Guide (CCH) ¶ 11,140 (D.Md. Feb. 13, 1997); Burger King Corp.
v. Agad , 941 F.Supp. 1217, Bus. Franchise Guide (CCH) ¶ 11,159 (N.D. Ga. 1996); Barnes v. Burger
King Corp. , 932 F.Supp. 1420, Bus. Franchise Guide (CCH) ¶ 11,932 (S.D. Fla. 1996); and Harford
Donuts, Inc. v. Dunkin’ Donuts, Inc. , Bus. Franchise Guide (CCH) ¶ 12,100 (U.S. Dist. Ct. Md., April
10, 2001).
3. TERM AND RENEWAL A. The area of renewal is often overlooked, but may cause severe problems to Franchise Owners in
the future, especially in cases where post-term non-competition provisions are included in t he
Agreement. Typically, a renewal provision requires the Franchise Owner to execute the “the n-current
form of agreement.” Since this can often mean that many substantive changes can be m ade as the
Franchisor updates its agreement after a 10, 15 or 20 year term, the royalty rate may cha nge, a
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renewal fee may be imposed which could be significant, provisions taking into account statut ory and
judicial changes may be incorporated, all of which could make the Franchise Owner prefer t o exit the
System. Counsel to the Franchise Owner should carefully consider the renewal provisions of the
Agreement and attempt to negotiate this area, perhaps by providing that the non-competit ion
provisions will not remain if the Franchise Owner elects not to renew in the case of a n agreement
where significant substantive changes have been made. From the perspective of the Franchisor, it
may be best to provide a specific term for the Agreement and to provide that no renewal rights are
contemplated or expected, so that the Franchise Owner may make its plans on the assumpt ion that the
Agreement will, in fact, be limited to the initial term (subject to state laws restricting eac h provision).
B. Counsel may wish to consider the optional paragraphs set forth below. The first paragraph grant s
automatic renewal, on the same terms as the initial agreement, and could be substituted for Paragraph
3(b). The second option is another sample of a renewal clause that could be used as Paragraph 3(b).
(b) If Franchise Owner is not in default under this Agreement, and has complied in all m aterial
respects with all of its provisions during the initial Term, including the time ly payment of all
fees, and further provided that Franchise Owner has the right to continue to occupy the
Premises, this Agreement shall be extended automatically without notice for an a dditional
term of years (the “Renewal Term”), without the payment of any further initial or re newal
franchise fee, on the same terms and conditions as set forth herein, unless Franchise Owner
notifies Franchisor in writing pursuant to subparagraph (c) below that it wishes to allow this
Agreement to expire at the end of its current term. [However, there shall be no right t o an
additional Renewal Term without the mutual agreement of the parties.]
or
(b) If Franchise Owner is not in default under this Agreement and has complied in all mat erial
respects with all of its provisions during the Initial Term, including the timely payment of all
fees, and further provided that Franchise Owner has the right to continue to occupy the
Premises, Franchise Owner may renew this Franchise for one additional term of [15 years]
(the “Renewal Term”). Prior to the start of the Renewal Term, Franchise Owner shall pay to
Franchisor a renewal fee in an amount equal to [25 percent] of the greater of (i) the the n-
current initial franchise fee offered by Franchisor to prospective franchise owners for the right
to enter into new franchise agreements, or (ii) the initial franchise fee most recent ly charged
for a single unit, licensed in accordance with Franchisor’s standard then-current terms and
conditions for granting renewal franchises, which may include: (x) execution of a new and
modified agreement containing no further renewal rights with a different fee structure,
increased fees, or both; (y) executing a general release under seal; and (z) a requireme nt that
Franchise Owner refurbish the Unit to conform to Franchisor’s then-current standards.
C. Consider in lieu of subparagraphs (b) and (c) in form agreement, the following: (b) Upon the expiration of the term of this Agreement, Franchise Owner shall be entitled to the
issuance of a new franchise agreement with respect to the Franchised Business subject to the
following conditions: (i) Franchise Owner at the expiration of this Agreement and within 12
months prior thereto shall not be or have been given notice by Franchisor that it is in de fault in
the performance of any material obligation under this Agreement [and such default ha s not
been cured in accordance with the provisions of this Agreement], (ii) Franchise Owner shall
have modernized or contracted to modernize the Premises, including building, signs,
equipment, furnishings and decor so as to reflect the then-current image of ABC System units;
(iii) Franchise Owner shall have duly made written application to Franchisor for such new
franchise agreement not less than 180 days prior to the expiration date and shall have dul y
executed and returned to Franchisor for final approval and execution the new franchise
agreement within 30 days of receipt; and (iv) Franchise Owner shall have duly tendered to
Form 2.01[2]
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STP FF 3/02
Franchisor in lieu of the franchise fee specified in the new franchise agreement an
administrative fee equal to [ten percent] thereof prior to the expiration date of t his Agreement.
The new franchise agreement to be issued to Franchise Owner shall be the Franchisor’s
standard form franchise agreement then-current as of the __________ anniversary date of this
Agreement and may contain terms and conditions substantially different from those contained
herein, including without limitation, increased fees and/or required advertising contributi ons,
duration and renewal terms.
D. Sample variation of renewal clause: ( ) Franchise Owner may renew his right to operate the Franchised Business at the expirati on of
the initial term, if Franchise Owner executes Franchisor’s then-standard form of franchise
agreement in use for new franchise owners, except that the terms of the new agreement sha ll
provide that Franchise Owner’s protected area as described in Paragraph ____ shall remain
unchanged, Franchise Owner shall not pay an initial franchise fee; the term of the agre ement
shall be ten years without further renewal options; the monthly royalty and advertising fee
shall remain as specified in this Agreement; and no continuing fees in any type or a mount
which are not provided for in this Agreement shall be included in the new agreement.
E. Sample clause providing no renewal: ( ) The term of this Agreement is for a single 20-year term with no promise or representation as
to the renewal of this Agreement or the grant of a new agreement.
F. Sample explanatory clauses:
The following sets of renewal provisions require the Franchisor and Franchise Owner to acknowledge
certain realities regarding renewal of the franchise agreement. Such clauses have the advantage of
articulating the reasons why renewal will be granted in certain situations and refused in others, and
can aid a judge or arbitrator in interpreting the agreement as the parties inte nded at the time the
agreement was signed.
( ) Automatic Renewal 1. In recognition of the fact that Franchise Owner entered into the Franchised Business during the early stages of the ABC System and will be an important contributor to t he
development of the ABC System, the Franchisor hereby grants the renewal rights
described in the following Paragraph.
2. If Franchise Owner is not in breach of this Agreement, and has complied in all mate rial
respects with its provisions during the Initial Term, including the timely payment of a ll
fees, and further provided that Franchise Owner has the right to continue to occupy the
premises, this Agreement shall be extended automatically without notice for an
additional term of ten years (the “Renewal Term”), without the payment of any furt her
initial or renewal franchise fee, on the same terms and conditions as set forth here in,
unless Franchise Owner notifies Franchisor in writing 12 months prior to expiration that
Franchise Owner wishes to allow this Agreement to expire at the end of its current term.
( ) Renewal Upon Notice 1. Franchisor acknowledges that if Franchise Owner operates the Franchised Bsuiness during the Initial Term as contemplated herein, Franchise Owner may wish to continue
to operate the Franchised Business for an additional period of time thereafter. Franchise
Owner acknowledges that the Franchisor must retain the right to modify the ABC
Form 2.01[2]
FF 3/02
STP 2012-13
System, using its Reasonable Business Judgment, and that market demands and other
circumstances may cause Franchisor to determine that its form of agreement should be
modified, perhaps substantially. Franchisor is willing to protect Franchise Owner
against fee increases and reduction of its protected area, but reserves the right to m ake
any other changes. Thus, the Franchisor grants the renewal rights described in the
following Paragraph.
2. Franchise Owner may renew its right to operate the Franchised Business at the expiration of the Initial Term, if Franchise Owner notifies Franchisor in writing 12
months in advance of expiration and executes Franchisor’s then standard form of
franchise agreement in use for new franchise owners, except that the terms of the new
agreement shall provide that Franchise Owner’s protected area as described in Paragraph
____ shall remain unchanged; Franchise Owner shall not pay an initial franchise fee; t he
term of the Agreement shall be ten years without further renewal options; the monthly
royalty and advertising fee shall remain as specified in this Agreement; and no
continuing fees in any type or amount which are not provided for in this Agreement shall
be included in the new agreement [unless such fees are imposed on at least a m ajority of
ABC Units in the System].
( ) Renewal and Renewal Fee 1. The parties acknowledge that the Initial Term is sufficient to enable Franchise Owner to
amortize its investment and that Franchisor, as of the Execution Date of this Agreem ent,
cannot predict what the market for ABC System franchises or other circumstances
affecting the Franchisor or Franchise Owner will be at the expiration of the Initial Te rm.
Therefore, Franchisor is willing to grant renewal rights only if Franchisor is still offering
ABC System franchises and if Franchise Owner meets the standards which will apply to
new franchise owners at such time and only if Franchise Owner executes a new
agreement as noted below.
2. If Franchise Owner is not in breach under this Agreement, and if Franchise Owner has the right to continue to occupy the premises, Franchise Owner may renew this Franchise
for one additional term of ten years (the “Renewal Term”). At least 30 days prior t o the
Renewal Term, Franchise Owner shall pay to Franchisor a renewal fee in an amount
equal to fifty percent (50%) of the then-current initial franchise fee charged by
Franchisor to similarly situated Franchise Owners executing new franchise agreements,
and in accordance with Franchisor’s then-current terms and conditions for granting
renewal franchises, which may include: (i) execution of a new and modified agreement
with different performance standards, advertising requirements, fee structures and/or
increased fees; (ii) execution of a general release under seal, in a form satisfac tory to
Franchisor, of any and all claims against Franchisor, its parent, subsidiaries or affilia tes
(if applicable) and their officers, directors, attorneys, shareholders and employees; and
(iii) a requirement that Franchise Owner refurbish the premises to conform to
Franchisor’s then-current standards.
3. Franchise Owner shall exercise its option to seek renewal by giving Franchisor written notice of Franchise Owner’s election to renew not less than six nor more than 12 months
prior to the expiration of the Initial Term; otherwise, such renewal right shall expire
automatically.
4. If the Franchise Owner does not qualify for renewal or does not elect to renew, then during the 180 days prior to the expiration of the Agreement, it may sell the Franchised
Business to a purchaser meeting Franchisor’s then-current requirements; or,
Form 2.01[2]
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STP FF 3/02
alternatively, may continue to operate the business under a different trade identit y at the
same location or within the same trade area.
( ) No Renewal 1. The parties acknowledge that the Initial Term is sufficient to enable the Fra nchise
Owner to amortize its investment and that the Agreement contains no post-expiration
covenants against competition. Franchise Owner further acknowledges Franchisor’s
policy of reserving complete and full discretion with respect to its options after
expiration of this Agreement. Thus, renewal is not expected unless otherwise required
by law.
2. THE PARTIES AGREE THAT THERE ARE NO RENEWAL RIGHTS UNDER THIS AGREEMENT. However, if applicable law requires that renewal be offered, Licensee
shall apply for a new franchise to continue to operate the Franchised Business, and,
subject to such applicable law, Franchise Owner must meet Franchisor’s then-current
requirements for applicants seeking a franchise, which may include execution of
Franchisor’s then-current form of franchise or other agreements, with different standards
and fee structures, a general release of Franchisor and its Affiliates, completion of
renovations of the premises to Franchisor’s current standards, and payment of an
application or renewal fee.
4. OPERATING ASSISTANCE A. Sample clauses regarding various elements of potential operating assistance provided by
Franchisor in connection with a product franchise are set forth below:( ) The opportunity to participate, on the same basis as other similarly situated fra nchise owners,
in group purchasing programs for products, supplies, insurance and equipment which
Franchisor may, from time to time, use, develop, sponsor or provide and upon such terms and
conditions as may be determined solely by Franchisor. Franchisor agrees to sell the ABC
Product Line to Franchise Owner at the prevailing gross price or prices then charged by
Franchisor to other franchise owners, making allowances for varying volume discounts and
costs of shipping and delivery. Franchisor will use reasonable efforts to ship ABC products to
meet Franchise Owner’s requested delivery dates; provided, however, that Franchisor may, in
its sole discretion, allocate distribution in the event that Franchisor is subject to production or
shipping delays for any component parts of the ABC Product Line. All risks of loss or
damage to the products shall cease upon delivery to the carrier selected by Franchi sor or
designated by franchise owner in its order. Franchisor may, in its sole discretion, limit
availability of any component of the ABC Product Line to certain geographic areas or se t
minimum purchase levels for certain components of the ABC Product Line.
( ) Franchise Owner’s orders for all ABC products shall be submitted by formal purchase order in form and substance acceptable to Franchisor. Franchisor may, in its sole discretion, ac cept
telephone orders. A purchase order shall not be deemed binding on Franchisor unless and
until Franchisor accepts the same by sending written confirmation thereof to Franchise Owne r,
or in lieu of such confirmation, by shipping any products covered by the order. Franchisor
may direct Franchise Owner to purchase various components of the ABC Product Line from
third-party sources which may set terms of sale according to their own standards, or such
third-party sources may refuse or terminate business with Franchise Owner according to their
own terms.
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FF 3/02
STP 2012-15
( ) Franchise Owner shall be required to pay for products in accordance with the applicable te rms
of any invoice thereof, without any setoff or counterclaim, except for the amount of any
written credit memorandum which has been issued by Franchisor to Franchise Owner prior to
the due date of the outstanding invoice. Franchisor reserves the right to change such terms a t
any time. Without limiting any other rights Franchisor may have hereunder, if Franchise
Owner’s account is not current, or if, in Franchisor’s sole discretion, Franchise Owner’s credit
standing deteriorates after the Effective Date, Franchisor may discontinue shipments or
require advance payments on all shipments. Payment for all ABC products is due in
accordance with the terms of sale set forth by Franchisor and in no event shall notify
Franchisor in writing within ten days of such delivery and Franchisor shall use its best effort s
to rectify such problem or credit Franchise Owners account for any such damaged
components. Franchisor assumes no liability for goods damaged in transit. Franchise Owner
or a representative must be available to accept goods at their final destinat ion, to thoroughly
inspect goods for damage and/or completeness and to file any freight claims necessary.
Franchise Owner waives any and all claims against Franchisor for actual, incidental and
consequential damages arising from delays in the shipment or delivery of any products,
incomplete deliveries, missing parts or other claims arising from Franchisor’s defective
delivery of products ordered by Franchise Owner.
5. FEES A. Consider whether a minimum fee would be appropriate, as referenced by the brackets in
Paragraph 5(b)(i). If not, the following option may be used:(i) A continuing fee equal to __________ percent of the Gross Volume of Business (as hereinafter defined); and
B. The following provision could be used if the percentage fee will vary based on different levels of
sales:
(i) A continuing fee equal to: a. __________ percent of the annual Gross Volume of Business (as hereinafter defined), from $0 to $__________: plus
b. __________ percent of the annual Gross Volume of Business for the next $__________; plus
c. _________ percent of the annual Gross Volume of Business in excess of $__________.
C. Consider whether the bracketed language in Paragraph 5(b)(ii) is appropriate. Also, it is
contemplated that no one should get a “free ride” and all units in the System should contribute to
advertising. Paragraph 5(b)(ii) attempts to assure the Franchise Owner that advertising funds will not
be used for normal operating expenses of the Franchisor. Paragraph 9 of the form agreement
elaborates on this issue.
D. Include other applicable fees (e.g., a reservation system fee in a lodging franchise, a frequent
guest program fee, fees for customer survey programs, etc.).
E. Franchisors are increasingly utilizing electronic funds transfer to effectuate imme diate payment
of franchise fees. The following provisions may be included in the franchise agreement if the
Franchisor chooses to utilize electronic funds transfer:
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STP FF 3/02
( ) Method of Payment and Collection. All fees and expenses due to the Franchisor, after
payment of the Initial Franchise Fee, shall be collected and paid by electronic funds transfer
initiated by or at the direction of the Franchisor from the accounts of the Franchise Owne r
maintained in accord with Paragraph (_) hereof, or at the Franchisor’s election by any other
means, with such frequency as the Franchisor shall elect. The electronic funds transfer and
debit entries to Franchise Owner’s bank account shall be made pursuant to authorization
agreements for pre-authorized payments which Franchise Owner agrees to execute and deliver
to Franchisor in the form attached hereto as Exhibit _ or such other forms as Franchisor shal l
specify from time to time.
( ) Accounts. Franchise Owner shall maintain all bank accounts relating to the Franchise d
Business as specified by Franchisor and shall confirm Franchisor’s right to draft monies from
such accounts, electronically or otherwise, from time to time, in payment of fees and expenses
set forth herein.
To utilize this structure for electronic funds transfer, it is necessary for Franchise Owner to
execute a Current Bank Authorization Form similar to that set forth below:
EXHIBIT __
Current Bank Authorization Form
I hereby authorize [Franchisor’s name] (Federal I.D. #_________) to initiate debit entries to
my ___ Checking ___ Savings account indicated below at the depository named below,
hereinafter called DEPOSITORY, and authorize DEPOSITORY to debit the same to such
account:
DEPOSITORY (BANK) NAME:_______________________
BRANCH:_________________
ADDRESS:__________________________________________________________________
CITY:________________________ STATE:_______________________
ZIP:____________
Bank/ABA # _________________________ ACCOUNT #: __________________________
This is to remain in full force and effect for the entire term of the Franchise Agree ment,
including renewals, unless upon ten (10) days written notice this authorization is subsequently
replaced by maker.
NAME: ___________________________ FEDERAL IDENTIFICATION #: ____________
SIGNED: _______________________________ DATE: ___________________
6. LICENSED MARKS A. The following option might be appropriate in a conversion of an existing business into the
Franchisor’s System or in a case where the name of a business must (or should) be used (e.g., Smith
Properties/ABC Realty):
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STP 2012-17
( ) Franchisor may permit Franchise Owner to continue utilizing a pre-existing trade name or
corporate name, provided that any such supplementary name is utilized and displayed in
accordance with standards and specifications published, from time to time, by Franchisor in
the Confidential Operating Manual or otherwise in writing. If Franchise Owner is permitted
by Franchisor to utilize a pre-existing trade name or corporate name, such supplementary
name shall not exceed percent of the height of the words “ABC.”
B. Paragraph 6(e) may require some negotiation, especially if the Franchise Owner has not ha d time
to amortize his investment in such Marks. The Franchisor may wish to consider paying for al l or part
of the costs of such new Marks. See possible optional paragraph below:
(e) Franchisor reserves the right to designate one or more new or modified Licensed Marks for use by franchise owners and to require the use by Franchise Owner of any such new or
modified Licensed Marks in addition to or in lieu of any previously designated Licensed
Marks. Exterior signage, if permitted or required, shall be modified within thirty days of the
date on which Franchisor designates any such new or modified Licensed Marks; all other
goods, materials or supplies bearing the Licensed Marks shall be replaced or modified wit hin
six months of such date. [Only those expenses or costs associated with the replacement or
modification of exterior signage which is necessitated by the adoption by Franchisor of any
other new, modified or replacement Licensed Mark required by a final decision of the Unite d
States Patent and Trademark Office or an unappealed decision of a United States Di strict
Court shall be the responsibility of Franchisor.]
C. Sample clause regarding Franchisor’s ability to change or modify Licensed Marks: ( ) Franchisor shall have the right at any time and from time to time upon notice to Franchise
Owner to make additions to, deletions from, and changes in any of Franchisor’s names or
marks, or all of them, all of which additions, deletions and changes shall be made i n [good
faith, on a reasonable basis and with a view toward the overall best interests of the ABC
System] [accordance with Franchisor’s exercise of its Reasonable Business Judgement].
Franchisor will use its best efforts to protect and preserve the integrity and validit y of
Franchisor’s names and marks, including the taking of actions deemed by Franchisor to be
appropriate in the event of any apparent infringement of any of Franchisor’s names or marks.
D. Sample indemnity clauses: ( ) Franchisor shall hold Franchise Owner harmless from any liability or expense (but excluding consequential damages) resulting from infringement of a third party’s service mark, trade
name or trademark by Franchise Owner’s use of Franchisor’s service mark ABC or by any
service mark, trademark or trade name of Franchisor which Franchisor shall designate as part
of the ABC System. This hold harmless indemnity shall not apply to any unauthorized use by
Franchise Owner of any such service mark, trade name or trademark.
( ) Franchise Owner agrees to notify Franchisor promptly in writing of any suit or claim for infringement which is within the scope of the hold harmless indemnity set forth in thi s
subsection. Subject to the terms and conditions of this subsection, Franchisor shall have the
sole right to defend or settle any such suit or claim of infringement at Franchisor’s expense .
Franchise Owner, at Franchise Owner’s expense, shall have the right to be represented by
counsel. Franchisor shall, however, retain control of any negotiations with respect to such
claim or of any litigation involving such suit. Franchise Owner agrees to cooperate with
Franchisor and to assist Franchisor whenever reasonably requested by Franchisor, at
Franchisor’s expense, in the defense of any such infringement suit or claim. Franchise Owner
shall not enter into any settlement of any such claim or suit or conduct any sett lement
negotiations relative thereto without the prior approval of Franchisor in writing and, if
Form 2.01[2]
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STP FF 3/02
Franchise Owner does so, the hold harmless indemnity set forth in this subsection ____ shall
be deemed to have been waived and released in all respects.
Form 2.01[2]
FF 3/02
STP 2012-19
7. STANDARDS OF OPERATION
A. Consider including the following language at the end of the respective paragraphs:(b) . . . In the event Franchise Owner desires to obtain a 90-day extension of the time se t forth in
this Paragraph 7(b), Franchise Owner must make such a request, in writing, to Franchisor—
not later than 30 days prior to such time or times therein provided—setting forth the reason for
such request and the status of the construction of the ABC Restaurant and such other
information as Franchisor shall require to consider Franchise Owner’s request. It is
understood and agreed that Franchisor shall be free to grant or deny any such requests for
extension in its sole discretion. If any such extension of time is granted, Franchise Owner
shall pay to Franchisor a fee of __________ Dollars ($__________) for the first 90-day
extension. If Franchise Owner requests and is granted any subsequent 90-day extensions, the
fee payable to Franchisor shall be __________ Dollars ($__________) for each subsequent
extension.
(c) . . ., which authorization must be requested by Franchise Owner, in writing, at least 15 days in
advance of the date on which Franchise Owner desires to open the Unit for business.
B. In the case of an Area Development program, the site selection process may be le ss structured, so
long as the site is in the Protected Area at a location approved by the Franchisor. In m ost cases, the
more detailed site selection process will be appropriate. In the case of a conversi on of an existing unit
previously operated outside of the System, additional or modified language may be necessary t o
reflect accurately the manner in which a conversion takes place. See optional language below:
(a) Franchise Owner shall submit to Franchisor a proposed site for operation
