The Case of the Errant Spouse

As a franchisor, do you have the right to terminate a franchise agreement if one of your franchisees gets into trouble with the law?

It seems a settled question that you do; after all, the typical franchise agreement and many state laws give the franchisor the right to end the relationship if the franchisee “is convicted of a felony or any other criminal misconduct which is relevant to the operation of the franchise”.

But a recent Florida court case suggests that franchisors might do well to revise their agreements to specify that, where there are two or more co-franchisees involved, errant conduct on the part of one can cause the others to lose out, too.

A Florida woman had called the matter into question on grounds that it was her husband, not the woman herself, whose arrest and conviction on child pornography charges had led the franchisor in the case to terminate a franchise agreement signed by both spouses.

The woman argued the franchisor had been well within its rights to terminate the husband as a franchisee but not her. She herself had engaged in no misconduct, her suit argued, so the franchisor’s termination of the franchise agreement constituted a breach of contract and unjust enrichment.

No deal, the trial court ruled. Florida law holds partners in any business arrangement jointly and severally liable for the obligations of the partnership, and the couple’s franchise agreement set out no exceptions to that rule. The franchise agreement thus bound both spouses, the court ruled, and the franchisor had done nothing wrong in terminating it.

To be sure, the Florida ruling comes down squarely on the side of franchisors. But franchise laws differ from state to state, and in a litigious age, the case does not free franchisors elsewhere from the threat of similar litigation from the determined spouse or partner of an errant franchisee.

A risk foreseen, however, is a risk provided for – in this case with contract language making it clear that as a franchisor, you retain the right to terminate a franchise agreement if any co-franchisee runs afoul of the law in such manner as to bring your operations into disrepute.