Just Waiving Away: Franchisees Release Their Own Claims Against Franchisor

18 June 2020 Legal News: Distribution & Franchise Publication
Authors: Brantley Smith Nathan D. Imfeld

Introduction

Manufacturers and franchisors often think of so-called “anti-waiver” provisions in state law as being absolute and unavoidable. But this is not always the case. As a recent decision from the District of New Jersey illustrates, there are indeed limits to such provisions, and savvy parties can avail themselves of those limits to claims under state statutes.

Issue / Case Summary

In Scism v. Golden Corral,1 the plaintiffs entered into a franchise agreement to operate a Golden Corral restaurant in New Jersey. After signing the agreement, the franchisees assigned their rights under the agreement to a limited liability company of which they were members. The Assignment Agreement, to which Golden Corral consented, contained a release of “any and all claims, debts, liabilities, demands, obligations, costs, expenses, actions, and causes of action” the plaintiffs may have held against Golden Corral “arising out of or related to” the assignment or franchise agreements.

After the plaintiffs’ restaurant failed, they filed suit against Golden Corral under the New Jersey Franchise Practices Act (NJFPA), alleging that various misrepresentations and omissions by Golden Corral caused the failure. The plaintiffs argued that their suit was not barred by the release because the NJFPA’s anti-waiver clause invalidates contract provisions that purport to release such claims.

As an initial matter, the court questioned whether an assignment agreement was truly within the scope of the NJFPA at all, given that Golden Corral had merely consented to the assignment rather than requiring it. Beyond this preliminary point, however, the court held that the NJFPA protects only franchisees, and because plaintiffs had assigned “all rights under the Franchise Agreement” to their limited liability company, it was the LLC that was the franchisee. In short, by executing the assignment the plaintiffs had voluntarily given up the protection the NJFPA as individual franchisees. And since the alleged misrepresentations had been made to the plaintiffs, not to the LLC, it could not bring suit. Accordingly, the court found the release enforceable and dismissed all of plaintiffs’ claims that fell within the scope of the release.

Key Takeaways:

  • Manufacturers and franchisors can benefit indirectly from a channel partner’s assignment of rights under an agreement but should carefully map out their level involvement to preserve those benefits.

  • Never assume that any particular state law applies or does not apply. Careful analysis is always required.

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1 Scism v. Golden Corral Corp., No. CV1812879ESCLW, 2019 WL 6522738 (D.N.J. Dec. 4, 2019)

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