It is not uncommon for disputes to arise between a franchisor and a franchisee. If a franchisor and franchisee are unable to resolve their issues and disputes, a franchisor may wish to terminate the franchise agreement of the franchisee. Prior to deciding whether or not to declare a default and terminate a franchise, the franchisor should carefully review the specific terms and provisions of the franchise agreement related to events of default and termination. The franchisor needs to know whether or not the franchise agreement:
- Mandates advance notice to the franchisee prior to termination
- Requires an opportunity for the franchisee to cure the default, and, if so, the length of the applicable cure period
- Requires the franchisor to perform during any applicable cure period
In addition to the specific provisions of the franchise agreement, the franchisor must also be aware of applicable state laws that set forth specific requirements for the termination of a franchise. In 19 states, Puerto Rico and the Virgin Islands there are specific laws that govern the termination of a franchise relationship by the franchisor.1 Most franchise termination laws require the franchisor to have “good cause” to terminate the franchisee. What constitutes good cause varies from state to state. Accordingly, the franchisor needs to determine which state laws apply and what each law requires.
Ohio does not have a statute of general applicability to the termination of a franchise agreement by a franchisor. Ohio does, however, have certain specific statutes governing termination of wine and beer distributorships and new motor vehicle dealerships.
The Ohio Alcoholic Beverages Act The Ohio Alcoholic Beverages Act, Ohio Revised Code §§ 1333.82 through 1333.87, regulates the franchise relationship between Ohio distributors for the re-sale of “alcoholic beverages” and Ohio retailers. Pursuant to Ohio Revised Code § 1333.84(A), no manufacturer or distributor engaged in the sale and distribution of alcoholic beverages shall fail to act in good faith or without just cause under the terms of a franchise or in cancelling or failing to renew a franchise. "Good faith" is defined in Ohio Revised Code § 1333.82(E) to mean the duty of all officers, employees, or agents of any party to any franchise, to act in a fair and equitable manner toward each other so as to guarantee each party freedom from coercion or intimidation. Subject to certain limitations, no manufacturer or distributor shall cancel or fail to renew a franchise or substantially change a sales area without the prior consent of the other party for other than just cause without first providing at least 60 days written notice setting forth the reasons and justifications for such cancellation, failure to renew, or substantial change.2 The statute further provides that a manufacturer’s sale, assignment, or other transfer of the manufacturer’s product or brand to another manufacturer over which it exercises control does not constitute just cause to terminate a distributor, but that just cause is not required for termination that occurs within 90 days of a successor manufacturer’s acquisition of all or substantially all of the stock or assets of another manufacturer through merger, acquisition or assignment. 3
The Ohio Motor Vehicle Franchise Act The Ohio Motor Vehicle Franchise Act, governed by Chapter 4517 of the Ohio Revised Code, was amended in 2010.4 Ohio Revised Code § 4517.54(A) states in part: “Notwithstanding the terms provisions, or conditions of an existing franchise, no franchisor shall terminate, cancel or fail to continue or renew a franchise except for good cause.” The burden is on the franchisor to establish good cause.5 Ohio Revised Code § 4517.55(A) sets forth nine circumstances constituting “good cause” to terminate, cancel, or not renew a franchise. The Ohio Motor Vehicle Board, which hears evidence concerning a franchisee’s protest of the termination of its franchise, must take the following into consideration:
- The amount of retail sales transacted by the franchisee during a five-year period immediately preceding the notice as compared to the business available to the franchisee
- The investment necessarily made and obligations incurred by the franchisee to perform its part of the franchise
- The permanency of the franchise investment
- Whether it is injurious or beneficial to the public interest for the franchise to be modified or replaced, or the business of the franchisee disrupted
- Whether the franchisee has adequate motor vehicle sales and service facilities, equipment, vehicle parts, and qualified service personnel to reasonably provide for the needs of the consumers for the motor vehicles handled by the franchisee, and is rendering adequate service to the public
- Whether the franchisee fails to fulfill the warranty obligations of the franchisor required to be performed by the franchisee
- The extent and materiality of the franchisee’s failure to comply with the terms of the franchise and the reasonableness and fairness of the franchise terms
- Whether the owners of the new motor vehicle dealer had actual knowledge of the facts and circumstances upon which termination, cancellation, discontinuance, or nonrenewal is based
- Whether the proposed termination, cancellation, discontinuance, or nonrenewal constitutes discriminatory enforcement of the franchise agreement
The foregoing list is not exhaustive and Ohio Revised Code § 4517.55 does not require consideration of each of the enumerated circumstances. Any one factor is sufficient to support a good cause determination.6 In addition to demonstrating good cause, the franchisor must also send written notice of the termination, cancellation, discontinuance, or nonrenewal, by certified mail, to the franchisee, and the notice must include the specific grounds for such termination, cancellation, discontinuance, or nonrenewal. The franchisee must receive the notice no later than the 90th day before the effective date of the termination, cancellation, discontinuance, or nonrenewal, or the 15th day before the effective date if the termination, cancellation, discontinuance, or nonrenewal is based upon:
- The bankruptcy, insolvency, or receivership of the franchisee;
- Any unlawful business practice of the franchisee, after receipt of a warning from the franchisor; or
- Cessation of business operations by the franchisee.7
A franchisee may request a hearing by the Ohio Motor Vehicle Board to determine whether or not the franchisor has good cause to terminate, cancel, discontinue, or not renew the franchise. If the Ohio Motor Vehicle Board determines that good cause does not exist, the franchisor may be liable to the franchisee for the franchisee’s reasonable attorneys’ fees, costs and expenses.8
Because Ohio does not have a statute of general applicability to the termination of a franchise agreement by a franchisor, Ohio courts have been left to interpret what constitutes good cause on a case by case basis. In addition to the uncertainty of what constitutes good cause, franchisees are likely to raise various defenses and counterclaims in litigation, including, without limitation, that:
- The franchisor acted in bad faith;
- The franchisor breached the implied covenant of good faith and fair dealing;
- The franchisor unfairly discriminated against the franchisee by treating similarly situated franchisees in an inconsistent manner;
- The franchisor waived its right to enforce a particular provision of the franchise agreement; and
- The franchisor tortiously interfered with the franchisee’s business relationships.
Based on the foregoing, a franchisor must proceed with caution when contemplating the termination of a franchise. In certain circumstances, a franchisor may determine that the benefits of avoiding termination (continued payment of royalties and advertising fees, protecting the goodwill of the brand, and maintaining franchisee and employee moral) outweigh its desire to terminate a franchisee.
These are just some of the issues that should be addressed when a franchisor is considering whether or not to terminate a franchise in the State of Ohio. McDonald Hopkins' team of franchise, commercial litigation, business restructuring, intellectual property, and real estate attorneys are prepared to provide counsel to both franchisors and franchisees.
1 The 19 states are Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Virginia, Washington and Wisconsin.
2 See Ohio Revised Code § 1333.85.
3 See Ohio Revised Code § 1333.85 (B)(4) and (D) Beverage Distributors, Inc. v. Miller Brewing Company, 2011 U.S. Dist. LEXIS 30583 (S.D. Ohio Mar. 22, 2011); The Bellas Company v. Pabst Brewing Co., 2011 U.S. Dist. LEXIS 24781 (S.D. Ohio Mar. 11, 2011), (analysis of a successor manufacturer’s obligations and right to terminate a franchise under The Ohio Alcoholic Beverages Act).
4 On June 10, 2010, Governor Strickland signed Ohio Senate Bill 204, which received unanimous approval from both the Ohio Senate and Ohio House of Representatives. The amendments became effective on September 10, 2010.
5 See General Motors Corp. v. Monte Zinn Chevrolet Co., (2000), 136 Ohio App.3d 157, 164; and Brown Motor Sales Co. v. Hyundai Motor America, 2011 WL 4541304 (10th District Court of Appeals, Sept. 30, 2011).
6 See General Motors Corp. v. Monte Zinn Chevrolet Co., (2000), 136 Ohio App.3d 157, 165.
7 See Ohio Revised Code § 4517.54(B).
8 See Ohio Revised Code § 4517.65(C).
For more information, please contact:
Scott N. Opincar 216.348.5753
We represent manufacturers, distributors, dealers, franchisors, franchisees, licensors, licensees, sales representatives, franchisor and franchisee investors, and franchisee associations in all aspects of franchising. We also assist franchise suppliers, such as banks, insurers, brokers and consultants. When appropriate, we work in close contact with a client’s business lawyer as special counsel.