Battle Over the Franchisor Business Judgment Rule and a Path to Peace

A key component of any franchise agreement is the role it plays in enabling the franchisor to grow, evolve and protect the franchise system. In a healthy franchise system, the franchisor properly balances its own interests with the interests of the franchisees and the system as a whole in order to make necessary decisions, like system change, that allow a franchise system to be sustainable in the hearts and minds of consumers.

When courts are required to evaluate a franchisor’s decisions, especially when the dispute involves a discretionary decision, the question becomes by what standard should those decisions be judged. In an article he co-authored for the American Bar Association's Franchise Law Journal, Faegre Baker Daniels partner Brian Schnell noted a recent shift in how franchise agreements address this central issue, with many franchisors using a business judgment rule as a standard for resolving whether a franchisor has exercised its discretion reasonably and in good faith.

In the article, Schnell and co-author Ron Gardner, managing partner at Dady & Gardner, P.A., look at the use of the business judgment rule from the franchisor and franchisee perspective and, not surprisingly, reach much different conclusions. Through their shared belief in the power of franchising, especially when a franchisor and its franchisees collaborate on shared opportunities and challenges to the system, they  propose a new standard for franchise systems to consider—a “modified business judgment rule based on broad, rational discretion plus collaboration”—that would facilitate “more sustainable franchisor-franchisee relationships.”