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Thou Shall Obey All Laws

September 01, 2003

An “obey all laws” provision is commonplace in franchise agreements. Breach of that obligation may justify termination of the franchise, so long as the violation is deemed to undermine the franchise relationship or gives rise to a good faith belief on the part of the franchisor that the franchisee is untrustworthy. What if, however, the franchisor has a basis to believe the franchisee is violating federal income tax laws (e.g., tax evasion ), even though the franchisee has not admitted to the crime or is not otherwise convicted, charged or indicted? A federal court in Florida recently held that Dunkin’ Donuts sufficiently established the violation of law, and that such violation undermined the franchised relationship, so as to justify termination. The court concluded that the “obey all laws” provision in Dunkin’ Donuts’ franchise agreement does not require an admission of guilt or a conviction to justify termination. The franchisor need only prove that the franchisee violated the law in order to enforce its contractual right to terminate. The court went one step further and found that the franchisees’ violation of the tax laws was also injurious or prejudicial to the goodwill associated with Dunkin’ Donuts’ proprietary marks and system, thus breaching another clause in the parties’ agreement

This holding is consistent with other cases that have not required an admission of guilt or conviction to terminate a franchisee, and the broad view of such clause by the courts. In fact, in another recent case, a franchisee was terminated on the basis of violating the “obey all laws” clause when he was charged with drug offenses and money laundering. The court there rejected the franchisee’s claim that the “obey all laws” clause relates only to health, safety and sanitation laws.

Given the court’s broad consideration of the “obey all laws” clauses, franchisees should not overlook that clause when terminating a franchise.

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