Improper Termination May Be Constructive Termination

According to a US district court judge in Budget Blinds Inc. v. LeClair, a franchisee with a franchise agreement governed by Wisconsin law may be entitled to damages from its franchisor under a claim for
“constructive termination” of its franchise agreement if the franchisor does not comply with the notice and cure requirements of the Wisconsin Fair Dealership Law (WFDL).

Budget Blinds, a Window covering business franchisor, and Josh LeClair signed a franchise agreement in 2007 that specified it was governed by the WFDL and that gave LeClair a protected territory in Madison, Wisconsin. Morris, another franchisee with an adjacent exclusive territory, and LeClair agreed to allow each other to sell into the other’s territory, and both made and reported sales in the other’s territory to Budget. In 2011, Morris complained to Budget that LeClair was making unauthorized sales into his territory. Without providing LeClair any notice or an opportunity to cure, Budget filed an arbitration demand against LeClair for breach of the franchise agreement based upon LeClair’s unauthorized sales. LeClair filed a counterclaim against Budget claiming that Budget had constructively terminated the franchise agreement in violation of the WFDL when Budget shut down LeClair’s access to Budget’s “B-Fast” record-keeping and management system, redirected his sales leads to another franchisee, refused to discuss Budget’s allegations to explore potential remedies and discriminatorily enforced the franchise agreement’s provision against selling in another franchisee’s territory against him.

The arbitrator agreed that Budget had constructively terminated the franchise agreement by failing to comply with the WFDL, which requires a franchisor to provide a franchisee with 90 days prior written notice of termination and a 60 day opportunity to cure the default. The district court upheld the arbitrator’s award citing case law that held that a franchise agreement is constructively terminated when a franchisor has effectively ended the commercially meaningful aspects of the franchise relationship or taken actions that have seriously effected the franchisee’s ability to continue operating its franchise in its current market. The court rejected Budget’s argument that constructive termination was impossible when the franchisor did not actually terminate the franchise agreement.

Franchisees who receive notices of default or termination should always verify that their notices were issued in compliance with their franchise agreements and applicable law.

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