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Franchise Litigation Continues to Grow in America

The franchise relationship between franchisor and franchisee is becoming fraught with problems leading to increased litigation in recent years. Two legal theories that have come to the forefront in the franchise litigation arena are joint employer and vicarious liability.

Following the global financial crisis many lawyers in multiple jurisdictions have reported seeing increased levels of litigation. In some instances this is often being instigated by franchisors to eliminate under-performing franchisees. Previously, lack of enforcement against under achievers was due to concerns about the economy, whereas now economic conditions have improved in many industries and litigation can be afforded.

Another reason given by some is that long-term relationships between the more mature franchisors and franchisees are changing or dissolving as franchisor management and franchisee generations change, resulting in litigation.

Some lawyers have noted an increase in arbitration, and, in some instances mediation, since some courts are much more in favor of alternative dispute resolution. Where possible, courts are forcing individuals to try these methods first.

In Canada there seems to be a consensus that litigation levels have increased, particularly in relation to class actions, which is a fairly new development in this jurisdiction. Although there have not been an abundant number of class actions held yet, there is definitely an increase on the horizon. As one practitioner explained, "The franchising industry certainly lends itself to class actions given that franchisees can come together with common grievances against the franchisor."

Disclosure is another issue that has resulted in increased activity in the courts, with reports of active franchisee lawyers "hunting for" potential cases. Five of Canada’s provinces have now adopted the Franchise Act, which includes rules of franchise disclosue documents, with Manitoba the most recent in October 2012. According to one franchisor lawyer, "Franchisee lawyers know they can get an easy win if there was no disclosure. If they find these cases, which they are actively seeking, the question is not if but how much they will get."

Similarly in the UK there are reports of increasing litigation brought by franchisees and, in tandem, a growing franchisee bar that exclusively represents them. This is part of a larger trend noted by lawyers in such diverse jurisdictions as California, Germany and South Africa, franchisees are becoming stronger. This seems to be a result of, first, increased awareness by franchisees that they have rights and can get legal help, and second, that there is much better representation and organization of franchisees than ever before, with the internet playing an important role.

About the author:
The Kosnar Group litigation support team has provided attorneys and their clients with franchise expert witness and litigation support services for years, with some of our professionals having over 35 years of franchise experience. Our opinions are valued by attorneys, clients, and triers of fact because we are professionals who work exclusively in the franchise industry. We communicate and present our positions in a fashion that attorneys, clients, judges, and juries can understand.

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