Recent Franchisee Wins: Accountability Challenges and Positive Steps Forward

By Lucila Garcia and Keith Miller

In recent franchise news, two significant announcements have shed light on positive developments for franchisees. One franchisee achieved a landmark arbitration victory against Choice Hotels, while the state of Indiana took decisive action against the franchisor of I Heart Mac & Cheese. These cases highlight not only the victories for franchisees but also underscore the need for greater accountability within the franchise community.

Choice Hotels Arbitration Ruling: In a noteworthy arbitration ruling, a franchisee successfully secured a legal victory against Choice Hotels. The franchisee was awarded $19,398 in damages along with $780,000 in legal fees for a total of $779,398. This ruling resonates with many franchisees due to its potential implications for their own battles. View Arbitration PDF

The ruling primarily addressed two critical issues faced by franchisees:

• Vendor Negotiations: The arbitration revealed that Choice Hotels had promised to negotiate with vendors for the benefit of franchisees. However, the arbitrator found that not only did the franchisor fail to pursue better deals for franchisees, but it also negotiated agreements that favored the franchisor, disadvantaging the franchisees by increasing the franchisees costs.
• Franchisee-Funded Advertising Programs: The arbitrator’s findings highlighted the mismanagement of franchisee-funded advertising programs. The franchisor had diverted these marketing funds towards incentivizing new franchise properties, rather than utilizing the funds for promoting the businesses of the contributing franchisees.

This arbitration outcome underscores the uneven playing field when franchisees attempt to hold franchisors accountable. The mandatory arbitration clauses and class action limitations present substantial challenges for franchisees seeking justice, because as can be seen from the Choice arbitration individual franchisees cannot justify or afford to pursue an individual claim at a cost of hundreds of thousands of dollars. Even though the awarded damages might seem modest (around $20,000), when multiplied across 6,000 outlets, the potential collective damages could amount to $120 million. However, individual franchisees face daunting risks, including covering their legal bills and potential liability for the franchisor’s legal expenses if the case is lost.

Indiana’s Action Against I Heart Mac & Cheese Franchisor: The State of Indiana’s action against the franchisor of I Heart Mac & Cheese represents a significant step towards accountability. The state discovered that the franchisor had withheld crucial disclosure information, including not providing accurate histories for key personnel and omitting legal actions involving of the CEO This resulted in the franchisor’s registration being revoked for selling franchises within Indiana. Read Cease and Desist Letter

• This action received widespread support, including a joint statement from the International Franchise Association and the Coalition of Franchisee Association. The hope is that other regulatory bodies, both at the state and federal levels, will follow Indiana’s lead. The aim is not only to halt further franchise sales by non-compliant franchisors but also to hold them responsible for any damages resulting from false disclosure.

Recent developments in the franchise industry paint a mixed picture of both victories and challenges for franchisees. While the arbitration win against Choice Hotels celebrates a franchisee’s successful pursuit of justice, it also highlights the arduous and costly journey that franchisees must undertake to hold franchisors accountable. Additionally, Indiana’s action against the I Heart Mac & Cheese franchisor serves as a beacon of hope for increased transparency and accountability within the franchising ecosystem, demonstrating the essential need for a better balance of power between franchisors and franchisees. The need for an emphasis on fair practices, proper disclosure, and stronger franchisee protections is essential for fostering a thriving and equitable franchise landscape, where both franchisor and franchisee can benefit.