Franchise Releases and Settlements Require Attention

August 28, 2017Articles The Legal Intelligencer

Settlements are the results of ­dispute resolutions that we make for ­ourselves. To avoid the uncertainties of having third parties resolve our disputes, we rewrite our own relationships. In ­franchise relationships, which can be complicated and have long-term commitments, releases have special uses so that the parties can put issues behind them. This article focuses on certain issues recurrent in franchise arrangements that continue to require additional attention.

Generally, a release is treated as a ­contract subject to the rules of contract construction; the effect of the release is determined by the ordinary meaning of its language. It is the court's task to interpret a contract and its effect, the primary inquiry being the intent of the parties at the time the release was executed. The effect of a release is to be determined by the ordinary meaning of its language, however, ­improvident the release may subsequently prove to be. For these reasons, after the parties have laid down their arms, the focus should be on crafting the enforceable release. Where a written agreement purports to encompass the parties' entire agreement, parol evidence to vary, modify or supersede the written contract is ­inadmissible absent a finding of fraud, accident or mistake.

• Making sure the right parties are bound by the release and settlement agreement.

Comprehensive settlements require binding all parties which were or could have been affected by the release. This may be beyond the actual parties to the ­franchise agreements, such as the investors, the ­officers, directors, board of managers, ­personal guarantors, limited partners and their agents. This is particularly true in cases where state franchise anti-fraud ­statutes impose personal liability of officers, directors and managing members.

With respect to settlement of noncompetition agreements, care must be taken to settle the case and bind the agents of the ­violator. This may require binding the family members of the violators so that the activity restrictions are not ­circumvented. All key parties should be signatories to the settlement agreements to ensure enforceability.

Care must be taken that the actual ­signers have the authority to bind the parties. Any issues regarding the capacity to bind the parties or corporate authority should be documented by warranties, representations and corporate resolutions.

• Settlements resolved by business purchases must have proper conveyancing terms.

When the settlement agreements and releases are outlined and prepared by the litigators, make sure the transactional lawyers are involved in the process. Detailing the assets purchases, liabilities handled, representations and warranties are best handled by those who involve themselves in such work day to day. Also, deals which are premised on ­contingent sales to third parties or disposal of assets contain inherent risks that the parties may not be able to control; accordingly, the contingency plans for alternatives should be articulated in any settlement and release.

• Statutory limitations on settlements and releases.

California law ­provides that a release shall not release unknown claims unless a statutory ­acknowledgment that future and unknown claims are released. Similarly, state franchise statutes may have explicit language barring release or limitations on the statutory protections, and these limitations would, if interpreted literally, would prevent settlement of statutory violations.

These statutes are generally not ­interpreted to prohibit final resolution of statutory violations, but rather, simply ­prevent past or concurrent waiver of the protections of the statutory protections. Review case law interpreting the statute to ensure that the release and settlement will be enforceable.

Additionally, the statutes may create a good faith standard which could impact the operation of the terms of the settlement or work out arrangement. Best practices suggest alignment of any state statutory levels of protection with the requirements under the settlement agreement.

• Need for independent review by counsel.

No statute requires that parties engage independent counsel to review the releases and settlement agreement, however, the settlement agreements should always list the independent counsel of the signatory counsel, or state that the opportunity to obtain independent counsel to review the transaction has been granted.

• Confidentiality and nondisparagement provisions.

The FTC Act provides for disclosure of many disputes in offering documents to prospective franchisees. When ­requesting confidentiality in dispute resolution, ­remember to carve out exceptions for regulatory disclosures. Disclosure compelled by third party subpoena production should allow for contest by the counterparty to have the settlement remain confidential, with sufficient time for the counterparty to object to the production.

For nondisparagement agreements, the difficulty occurs defining what may not published and the remedy. The remedy may be to have counter-advertising, publicity or education now, or the right to have remedial advertising in the future at the cost of the breaching party. The remedies should ­preserve equitable relief, but also liquidated damages for compensation and not for ­corrective advertising.

• Dispute resolution.

The settlements may be more complicated than the underlying disputes. Dispute resolution should be addressed in anything other than the most simple settlement ­arrangements, including fee shifting for the prevailing party. Do not assume that you can go back to federal court to enforce the settlement six months later. The ­jurisdiction was exhausted once, and may not be available unless jurisdiction is retained to enforce the settlement by the federal court.

• Scope of the settlement and release.

The entire controversy should be resolved by the settlement and release. Complete ­resolution should address discontinuing pending or inchoate disputes in other cases or jurisdictions. Veteran commercial litigator Ken Dubrow suggested two cases addressing the scope and finality of settlements and releases decided recently, Erie Insurance Exchange v. K. Hovnanian Companies, Philadelphia Court of Common Pleas, No. 2016-C-1311, and Keely v. First National Bank of Pennsylvania,Philadelphia Court of Common Pleas, Oct. Term, 2016, No. 01914.

In franchising, releases and settlement agreements are used extensively to resolve growing pains as the franchise system and brand confront growing pains and the inevitable disputes. Proper use of settlement agreements and releases in this context can set the stage for unimpeded growth, change and evolution of the franchise brand.

Reprinted with permission from the August 28 issue of The Legal Intelligencer. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.