Is There Ever A Fiduciary Relationship Between Franchisor and Franchisee?

September 01, 2003

In franchise litigation, it is not uncommon for franchisees to argue that a fiduciary relationship exists between them and their franchisors. This argument is most often made by a franchisee in an effort to impose duties on the franchisor that do not appear in the franchise agreement, such as the requirement for the franchisor to advise the franchisee of a sale. A fiduciary duty, generally speaking, does not result from an arms-length business relationship. Applying that principle, the vast majority of state and federal courts — in New York and elsewhere — have generally held that the franchise relationship is not fiduciary in nature. Like any general rule, however, there are exceptions to the rule, and some courts have found that a fiduciary relationship does exist between a franchisor and franchisee.

Although New York courts have been more willing to permit claims of fiduciary duty in cases involving manufacturer-distributor relationships, in the franchise realm, a fiduciary relationship was found to exist in only one reported lower court decision in New York. In that case, the franchisees were a family of Taiwanese immigrants with no business background, who alleged that the franchisor discouraged them from seeking independent legal advice in connection with their purchase of the franchise. Notably, that case has been limited to its facts by every New York court that has analyzed it.

What should you do to avoid a dispute over this issue? A provision expressly disclaiming the existence of a fiduciary relationship can be written into the franchise agreement. Those provisions — in conjunction with provisions in which the franchisee disclaims reliance on unwritten representations made by the franchisor — should be helpful in defeating claims for breach of fiduciary duty, as well as claims relating to alleged misrepresentations of failures to disclose in connection with the sale of the franchise. Fundamentally, however, when deciding this issue, the courts look to the level of domination and control over the franchise.

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