Goodwill Indemnity in Franchising: The European Goodwill Recoupment Doctrine as a Framework for American Franchise Relationships

Abstract

Franchise contracts are often standard form contracts drafted by the franchisor and presented on a "take it or leave it" basis. Although these typically one-sided contracts may be necessary to prevent franchisees from harming the franchisor's brand name, in practice, the franchisors' contractual power can lead to franchisor-opportunism, in particular through wrongful terminations and nonrenewal, onerous transfer restrictions, and so on. Accordingly, federal government and some state legislatures have enacted specific franchise laws in order to balance potential power imbalance and to protect franchisees from opportunism. However, these laws have been criticized for being harmful to the franchising sector as they restrict franchisors' termination power, and thus, encourage franchisee-opportunism. As current laws appear to be failing to provide a fair solution for both parties, this dissertation offers an alternative theory drawn from the European concept of goodwill recoupment. Under the proposed approach, once a franchise comes to an end, the franchisee would be entitled to a payment for its goodwill. The payment does not depend on the franchisor's wrongdoing; if and to the extent that a franchisee has positive local goodwill, the transfer of this value to the franchisor upon cessation justifies the payment. This payment would allow the franchisee to receive a fair return for its intangible investment without constraining the franchisor's monitoring power and flexibility. The proposed approach is a better-suited solution against opportunism than those currently used in the U.S. legal system. This approach would ultimately reduce both franchisee and franchisor opportunism, and incentivize investment and cooperation.