Franchise Law Dissecting and Applying

Franchise Law

Dissecting and Applying Franchise Law and Contractual Responsibilities: The Quick Lube Case

Opening a franchise can be an excellent business opportunity for many entrepreneurs, providing an established brand, knowledge base, and system of support while also allowing for independent ownership. Offering franchise opportunities can also lead to great business success for the franchisor, providing royalty income often with a minimum of capital outlay and service responsibilities. When things go well -- i.e. remain profitable -- for both the franchisee and the franchisor, this system is second to none in terms of the efficiency and pace of growth that it allows and the ease of branding and building a business. Things do not always go this well, however, in fact several very large vulnerabilities and potential problems exist for franchising operations, depending on certain other factors.

Just as franchises provide many benefits to small-scale owners and entrepreneurs that are just starting out, operators with many franchise stores and larger operations can experience many of the specifics of a franchise agreement and its operational constraints as inefficient and unprofitable. It is also possible for franchisors with large and extended networks of franchisees to experience a lack of control and a degradation of service capabilities for these franchisees, placing further strains upon the franchisor/franchisee relationship. Problems in both areas appear to have arisen in the Quick Lube case, though there are also other complicating factors that have an enormous impact on the legal implications of the case.

Quick Lube Franchise Corporation was founded as a large franchise operator for Super Lube, the original creator of a lube job/oil change station business model. As Super Lube's franchise network grew, however, it began to stumble in its contractual agreements for certain service provisions to its franchisees, including Quick Lube Franchise Corporation, which was itself quite a large company at this time. At the same time, Quick Lube secured a substantial amount of debt from Huston Oil to facilitate its growth; part of the repayment agreement included contractual obligations to purchase Huston Oil products. Then, Huston Oil bought out Super Lube to save it from collapse, suddenly making the holder of much of Quick Lube's debt and its contractual supplier also its franchise operator, as well as the entity now responsible for the failures to provide the contracted franchisor services.

Grounds for Suit

There are several reasons that the Board of the Quick Lube Franchise Corporation might feel justified in filing a suit against Huston. One of the most basic suits here, and one that it appears Quick Lube would have a good chance of winning, is a suit for damages incurred as a result of the breach of contract performed by Super Lube, now owned by Huston Oil, which is a common type of suit in franchise cases (FSS 2011). Despite the fact that Quick Lube (presumably) remained current in its obligations to Super Lube, the company failed to provide the level of service and support that was being paid for, and Huston Oil would have incurred this breach when they acquired the company and made no effort to implement noticeable change (FL 2011).

There are several other less straightforward but still compelling reasons that a suit might be seen as warranted by Quick Lube. An anti-trust suit is a definite possibility, as Huston has made it clear that a use of Huston Oil products will become a new part of the franchising operation at all Super Lube franchise locations, and moving into a position as the sole provider of products and service models for the Super Lube franchises limits the ability for these franchises to operate as independent businesses, and instead effectively makes them subsidiaries of Huston Oil due to a lack of competition (Grimes 2010). Such suits are also not unheard of in franchise cases, and are complicated in this case due to the fact that Huston Oil also holds a great deal of Quick Lube's debt, putting them in a position of even greater power and control over Quick Lube's costs and profitability potentials.

The Meeting

There are a number of reasons that Huston might have called a meeting, all dependent on its board's interpretation of past events and predictions for the future of the lawsuit and the business as a whole. It is quite possible that Huston foresees a Quick Lube victory in the suit, but even this would not necessarily give clear insight as to what will be discussed in the meeting. It is possible that Huston will attempt to expand its acquisition, purchasing Quick Lube (and in effect rejoining the companies) and thus becoming a major operator as well as franchisor. It is also possible that Huston simply wants to avoid what it sees as a losing suit and is going to attempt to address any grievances brought up by Hegert and Quick Lube.

Of course, Huston could also predict a win for itself in the suit, and though this might not be as expected Hegert should be prepared to enter a meeting where this attitude is taken. The most useful tool Hegert has at his disposal is information, and it doesn't hurt that this information shows Quick Lube to be a very profitable and actually a highly solvent company, which has very real and very large implications on the potentials for the company with or without the lawsuit. Quick Lube could sell of certain assets in order to discharge its debt to Huston quicker and ultimately sever ties with the company, and if the Quick Lube prevails in a contractual or an anti-trust lawsuit, it could also potentially become a fully independent company operating not as a franchise, but as a wholly owned chain (Grimes 2010). If Hegert is prepared with this information and the data that supports it, he will make a strong showing in the meeting with Huston's board regardless of what their position is.

Valuation

Much of the strength in Hegert's position is derived from the fact that Quick Lube is a valuable company in its own right and as a revenue generator for Super Lube and thus now Huston Oil. Quick Lube makes approximately two million dollars a month in gross sales, seven percent of which -- one-hundred and forty thousand dollars -- goes to the franchisor, now effectively Huston Oil. Any substantial dent in these figures or the threat of the loss of this revenue to Huston Oil would likely be reacted to strongly, and it also provides a compelling incentive for Quick Lube to move towards independence if it does not receive substantial services from the franchisor.