Termination and the State Relationship Statutes
A franchise agreement usually permits termination on a list of defaults, some curable and some not. In roughly a third of the states a separate statute sits on top of that clause, requiring cause the legislature recognizes and a period in which the franchisee may fix the problem.
The rule in short
Where a state franchise or dealership act applies, a franchisor may terminate only for good cause, generally defined as failure to comply with a lawful material requirement after written notice and a reasonable opportunity to cure. Notice periods run from ten days for nonpayment to ninety days for ordinary defaults, with shorter or no notice for insolvency, abandonment, conviction and health hazards. Contract terms inconsistent with the statute are void in the enacting state.
Termination clauses in franchise agreements are drafted to be efficient. They list defaults, divide them into those that may be cured and those that may not, and provide for termination on notice. In a substantial minority of states that clause is only the starting point, because a relationship statute imposes its own requirements and voids anything in the contract inconsistent with them. Whether a termination is lawful therefore depends first on where the outlet is.
What the agreement provides on its own
A typical agreement permits immediate termination, without opportunity to cure, for abandonment of the outlet, unauthorized transfer, insolvency or assignment for the benefit of creditors, conviction of an offense reflecting on the system, repeated defaults of the same kind, understatement of gross sales beyond a stated tolerance, and conduct creating an imminent danger to public health or safety. Curable defaults, chiefly nonpayment and operational noncompliance, carry short periods measured in days.
Left alone, that structure gives the franchisor almost complete control over the timing of an exit. It is also, in many jurisdictions, entirely enforceable. Most states have no franchise relationship statute at all, and in those states a franchisee's protection consists of the contract, the implied covenant, and whatever the facts of the default look like to a judge.
What good cause means where a statute applies
The statutes that do exist converge on a common formula. Good cause is defined as the failure of the franchisee to comply substantially with a lawful, material requirement of the agreement, after written notice and a reasonable opportunity to cure. Two words carry the weight. Lawful excludes requirements the statute itself forbids, so a termination for refusing to buy from a source the act prohibits the franchisor from mandating is not for good cause. Material excludes trivial breaches, and franchisors that build a case from minor operational citations often find the record thinner than the file suggested.
Some acts add a second branch, permitting termination for circumstances outside the ordinary default framework: the franchisee's loss of the right to occupy the premises, the loss of a required license, a material misrepresentation in the application, or the franchisor's withdrawal from the market. Where withdrawal is a recognized ground, it is generally conditioned on non-discriminatory application and sometimes on a repurchase obligation.
A franchisee that responds to a default notice with a plan, a request for time, or a dispute about whether the default occurred has usually not cured. Where the default is monetary, the money has to be paid within the period. Where it is operational, the condition has to be corrected and, ideally, documented. Correspondence is not a substitute, and the period does not stop while the parties negotiate unless the franchisor agrees in writing.
Notice periods and what the notice must say
Statutory notice periods are the most jurisdiction-specific element of the analysis. A common pattern requires ninety days' prior written notice with sixty days to cure for ordinary defaults, ten days for failure to pay sums due, and no notice at all where the franchisee is insolvent, has made an assignment for the benefit of creditors, or has been convicted of an offense substantially related to the business. Other acts set thirty or sixty day periods and list their own exceptions.
Content requirements are equally strict. Notice generally must state the reason for termination, the effective date, and what the franchisee must do to cure. Statutes in particular industries add further content, and an omission can invalidate the notice entirely. Because a defective notice buys the franchisee time and a fresh cure period, notice practice is where franchisors most often lose terminations they would have won on the merits.
| Ground | Advance notice typically required | Opportunity to cure | Where the dispute usually lies |
|---|---|---|---|
| Failure to pay royalties or fees | Short, often ten days | Yes, within the notice period | Whether the amount claimed was correctly calculated |
| Operational noncompliance | Longer, commonly sixty to ninety days | Yes | Whether the requirement was material and lawful |
| Repeated defaults of the same kind | Varies; sometimes none | Generally no | Whether earlier defaults were noticed and cured |
| Abandonment of the outlet | None or minimal | No | Whether closure was voluntary or forced |
| Insolvency or assignment for creditors | None | No | Enforceability against a bankruptcy estate |
| Imminent danger to health or safety | None | No | Whether the condition was genuinely imminent |
The federal statute for petroleum franchises
Motor fuel franchises are governed by a federal statute rather than by the general state acts. It sets out an exhaustive list of grounds on which a franchise may be terminated or not renewed, including failure to comply with a reasonable and materially significant provision, failure to exert good faith efforts, mutual agreement recorded in writing, and specified events such as fraud, criminal misconduct, and loss of the right to grant possession of the premises.
The notice provisions are exacting. Termination generally requires written notice delivered personally or by certified mail not less than ninety days before the effective date, stating the intention to terminate, the reasons, and the effective date, and enclosing a summary statement prepared by the federal energy department. Shorter notice is permitted where ninety days would be unreasonable, in which case notice must be given as soon as practicable. The statute also preempts state law governing the termination or nonrenewal of a petroleum franchise, which is why a service station operator's rights differ from those of a restaurant franchisee in the same state.
Enforcement is likewise distinctive. A franchisee may sue in federal district court, the franchisee carries the burden of showing termination or nonrenewal and the franchisor then carries the burden on the ground relied on, and preliminary injunctive relief is available on a standard more favorable than the ordinary one. Parallel protections exist for other regulated distribution sectors, including the vehicle and equipment dealer acts and the boards that hear their disputes.
What follows a lawful termination
Termination ends the license, and the post-termination obligations then take over. The franchisee must stop using the marks, remove signage and trade dress, return manuals and confidential material, transfer telephone numbers and web addresses, and in many systems offer the franchisor an option to purchase the assets or assume the lease. Whether the franchisee may continue in a similar business at the same site is governed by the post-term covenant and whether it is enforceable in that state, a question with markedly different answers by jurisdiction.
Franchisees facing a notice should treat three items as immediate. Establish whether a relationship statute applies where the outlet sits, since that determines the timetable. Confirm the accounting behind any monetary default, because disputed charges are common and paying under protest preserves the argument while defeating the termination. And read the guaranty, since personal liability continues after the franchise ends and the damages claim that follows a termination is usually pursued against individuals as well as the entity.
Points to carry away
- Good cause is a statutory standard and is not satisfied merely because the agreement lists a default.
- Notice must ordinarily state the reason and the date on which termination takes effect.
- Cure periods run from the notice, and a franchisee that cures within the period defeats the termination.
- Abandonment, insolvency, criminal conviction and health hazards commonly permit termination without cure.
- The federal petroleum statute supplies its own grounds and notice rules and displaces inconsistent state law.
- A clause waiving the state act is void in the enacting state even if the contract chooses another law.
Questions readers ask
Does a choice of law clause defeat a state relationship statute?
Usually not where the outlet is in the enacting state. The acts typically contain anti-waiver provisions declaring void any condition, stipulation or provision purporting to waive compliance, and courts have applied those provisions to choice of law clauses selecting the franchisor's home state. The result is that a franchisee operating in a protective state generally keeps the protection regardless of the contract. Where the franchisee operates elsewhere and only the franchisor is connected to the protective state, the analysis is far less predictable.
Can a franchisee that cures still be terminated for the same conduct later?
A single cured default does not support termination, but a pattern can. Many statutes and most agreements permit termination where a franchisee has repeatedly failed to comply with the same requirement, even if each individual failure was cured. Franchisors build that record deliberately, issuing notice for each occurrence so that the file supports a later termination on repeated default. A franchisee that cures without addressing the underlying cause is often building the franchisor's case rather than defeating it.
What is the effect of an improper termination notice?
Where the statute requires particular content, an incomplete notice is generally ineffective, and the termination it purports to effect does not occur. Courts have treated omissions of the reason, of the effective date, or of a required statutory summary as fatal rather than technical. The practical consequence is that the franchisor must start again with a compliant notice and a fresh cure period, which can be significant where the franchisee uses the interval to correct the default or to sell the outlet.
Sources
- Wisconsin Statutes Chapter 135, Fair Dealership LawGood cause, ninety-day notice, sixty-day cure, and the exceptions that shorten or remove them.
- California Business and Professions Code, Franchise Relations ActDefines good cause and lists the failures that permit termination without an opportunity to cure.
- Cornell Legal Information Institute — 15 U.S.C. 2802, Termination and Nonrenewal of Franchise RelationshipsThe grounds on which a petroleum franchise may be terminated or not renewed.
- Cornell Legal Information Institute — 15 U.S.C. 2804, Notification of Termination or NonrenewalThe form, content and timing of notice required before a petroleum franchise ends.
- Cornell Legal Information Institute — 15 U.S.C. 2805, Enforcement ProvisionsThe franchisee's action, the burden allocation and the preliminary injunction standard.
- Minnesota Administrative Rules Chapter 2860, Franchise RulesState rules requiring good cause and written notice before termination or nonrenewal.
- Washington Revised Code Chapter 19.100, Franchise Investment Protection ActUnfair practice provisions governing termination and the remedies available to a franchisee.
Justice Partners Journal is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
