The Unappreciated Franchise Lawyer

, New York Law Journal

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Rupert Barkoff
Rupert Barkoff

What I am writing about in this column is applicable not only to franchise lawyers but to lawyers in general. The topic came to mind recently when an Australian franchisor's CEO asked me: "When you 'bring in the lawyer,' does it mean it is too late to repair whatever damage exists in a franchise relationship?"

I generally hate lawyer jokes (except when they are told by a lawyer), but before I answer the question above, let me tell two. The first is, "Why do 95 percent of the lawyers have to ruin it for the rest of us?"

In the second joke, three professionals—a doctor, an engineer and a lawyer—are arguing over which of their professions is the oldest. The doctor claims that medicine is the oldest, because God was practicing medicine when he removed a rib from Adam. The engineer then tries to trump the doctor by noting that before the Garden of Eden was even created, in only one week God created the heavens and the earth from chaos. The lawyer wryly smiles at the two of them and replies, "But who do you think created the chaos?"

Now, back to my client's question, which raises two points. The first is the impression that most lawyers are incompetent, dishonest, or, in general, unprofessional. This impression is particularly disturbing for franchise lawyers, first because the franchise bar is a small close-knit group, and my experience with the franchise bar is that this is simply not true and hurts the reputations of the rest of us. Any lawyer, after a long career, could develop a list of lawyers whose performance was not sterling, and, in some cases, even unethical. And, indeed, I would be a fool to contend that all 2,000 members of the American Bar Association's Forum on Franchising are all great lawyers or, for that matter, even competent.

But what is competency? Lawyering is not like baking a cake or fixing a carburetor. Like many other social sciences, the amount of actual science in this subject field is often limited. Statutes do not always cover certain problems or may be ambiguous, often requiring interpolation, extrapolation, or both. This is true in most areas of the law, and certainly true with respect to the complex franchise regulatory scheme, with its federal regulation, and state franchise and business laws, not to mention special industry legislation. It is a complicated area to practice in.

Skill is not only measured by how well an attorney can read the written word, but how well he or she can do so when required to look for answers beyond the sheet of paper where the written word appears. Knowledge of legislative history, legal precedents, assessment of risk, and that old friend experience, all go into determining who among us will be the good lawyers and who will be the ones who ruin it for the rest of us.

Outsiders to franchise law don't realize that there is a "folklore" in our field, and those who do not know about it are the ones more likely to find themselves getting into trouble.1 For example, in the area of disclosure, there is the sometimes called "one-free bite rule." That is, it is not considered bad practice for a franchisor, on a one-time basis, to negotiate the terms of a franchise with a prospective franchisee and not disclose the results of those negotiations in the franchisor's disclosure document. On the other hand, when a particular point becomes one that the franchisor agrees to more routinely agree to accept in these negotiations, the general thought (the so-called folklore) is that it then becomes a point that needs to be disclosed in the franchise disclosure document. Nowhere in the franchise regulations or statutes is the one free bite rule clearly spelled out.

Now my second point: There is a public misconception that lawyers are predominantly deal breakers, and it is here where I take great offense at the chaos joke mentioned above. The question my Australian friend asked me presumes that once the lawyer enters the scene, the opportunity to smoke the peace pipe has vanished. I have found this belief present much more often in franchise situations than in other business transactions and in non-franchise litigation matters.

Letting Go of 'Zero Sum'

There are lawyers—many lawyers—who think of life as a collection of zero sum games. That is, for their clients to win, the other side must lose. But if one reads Roger Fisher's "Getting to Yes," a classic for those interested in negotiations, Fisher persuasively argues that, in many instances, disputes or challenges will end with settlements where the participants achieve a result that is, overall, considerably better than an alternative situation where the winner takes all. In franchising, the lawyer who can save a relationship through finding a creative solution to a problem is a jewel in the crown, for franchising is a continuing relationship, and its value lies in the synergy created by the franchisor and franchisee.

What often goes overlooked by clients and their lawyers—especially lawyers who represent primarily franchisees—is that the cost of terminating and replacing a franchisee is very large. The legal cost of terminating a franchisee in an adversary proceeding, the loss of royalties, and the cost of finding a replacement franchisee, far outweigh in most circumstances the benefits a franchisor might receive from termination. Thus, the lawyer who can come up with a creative solution is a very valuable commodity, and can be a very valuable factor in saving a relationship, not a cause in destroying it. For example, in a territorial dispute, a franchisor might claim that the franchisee has no rights to Territory A, a proposition that the franchisee vigorously disagrees with, even though the language of the franchise agreement is quite clear. If going to court turns out to be the direction the train is heading, the result will almost certainly be disastrous for one side. However, what other alternatives are there?

To a zero-sum lawyer not familiar with franchising, the answer may be "none." However, the skilled, experienced, and creative franchise lawyer might suggest that the franchisor agree to add to the existing territory, but that the franchisee must pay something for the increase. Or, in exchange for the additional territory, the lawyer may suggest that the franchisee might agree to build a new store. Or perhaps the territory doesn't change in the resolution of the dispute, but the franchisor pitches in certain dollars to be used for marketing, or agrees to finance the franchisee with respect to a worn-out store, attempting in each case to make the unit more attractive to the public and economically viable. In other words, the highly competent franchise lawyer does not try to set up roadblocks, but tries to turn a negative into a positive. The focus should be on saving the relationship, and the lawyer's presence should not lead to the conclusion that a prophet of doom has appeared.

What I frequently see, however, is that, when the lawyer is brought on the scene in resolution of a franchise dispute, walls rise, communications are cut off, and reasonable attitudes are thrown to the wayside. Stated differently, a situation that may have ultimately ended up with a peaceful and quick settlement, had a franchise lawyer participated in the dispute, the dispute ends up in chaos, and, indeed, it is often the lawyer who creates that chaos.

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