Franchises suing each other is unsurprising given the competitive nature of the U.S. franchising market. While a lawsuit is completely possible, there are several layers to it, which may create some complications.
This article will offer insights about how and why franchises can sue themselves for unfair practices. “Failure of a franchise to abide by territorial restrictions may amount to unfair practices and be a valid ground for a legal dispute,” says franchise attorney Jason W. Power of Franchise.Law.
Understanding the Nature of Franchise Relationships
A franchise is a contractual relationship between a franchisor, the owner of the brand, trademarks, and business model, and an independent franchisee who operates under that brand.
Each franchisee typically signs an agreement granting the right to use the franchisor’s intellectual property in accordance with the franchisor’s rules and regulations. Generally, franchise agreements include protections that limit activities to specific territories to avoid direct competition.
What Are Potential Legal Grounds for Lawsuits Between Franchises?
A franchise can initiate legal action against another franchise under several breaches recognized in U.S. law. Unfair competition, trademark infringement, tortious interference, and deceptive trade practices are the most common legal grounds.
If both franchises operate under the same brand, the matter often centers on territorial infringement or encroachment. For example, if a franchisee opens or operates beyond its permitted area, thereby siphoning customers from another franchisee’s territory, the aggrieved party may claim that the encroaching franchise’s actions violate the franchise agreement or constitute unfair competition. In these cases, the franchisor faces implications as well, since it typically controls territorial assignments.
If the two franchises belong to competing brands, a claim may arise under federal or state unfair competition laws. The Lanham Act, which governs trademark and trade dress protection in the United States, provides remedies when one business misrepresents its goods or services in a way that confuses consumers or damages another brand’s reputation. Similarly, state statutes such as Unfair and Deceptive Trade Practices Acts (UDTPA) prohibit conduct that misleads the public or disrupts fair market competition.
A franchise may also pursue a claim for tortious interference with contractual relations if another franchise intentionally disrupts its contractual rights, business relationships, or customer base. For example, if a rival franchise knowingly engages in false advertising or deliberately undercuts prices to drive a competitor out of the market, the courts may find such behavior actionable.
The Place of Federal and State Oversight
The Federal Trade Commission (FTC) enforces regulations designed to ensure transparency and fairness in franchising, particularly through the Franchise Rule. The FTC doesn’t directly settle disputes between franchises, but it does set the rules for disclosure and fair competition.
Additionally, most states impose specific franchise relationship laws and business opportunity statutes. In states like California, New York, and Illinois, these laws provide an additional layer of protection against deceptive or unethical conduct between competing franchisees. Depending on the jurisdiction, they have the option to file a claim for unfair trade practices in either federal or state court.
Why Is Legal Counsel Essential When Dealing with Unfair Practices Among Franchises?
A key reason legal counsel is essential when handling franchise disputes is the varying nature of competition laws across the United States. A franchise attorney can offer immense assistance in identifying contractual breaches or territorial violations within the identified laws. They can also help the franchise identify the most suitable way to address the issue, apart from filing a lawsuit.
Conclusion
Any franchise affected by the unfair practices of another franchise in the United States can initiate a lawsuit. To do this, they must refer directly to the contractual obligations that define the franchise’s operations. A detailed understanding of competition laws and other relevant legal provisions is also essential.
To avoid making the wrong move when bringing a claim against another franchise, contact a qualified franchise attorney today!
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