Dispute resolution

Common disputes

What issues are typically the subject of disputes between franchisors and franchisees in your state?

Disputes between franchisors and franchisees in Texas typically involve breach of contract and quasi-contract/tort claims (e.g., common law fraud and fraud in the inducement). Claims alleged by franchisors typically involve the parties’ post-termination obligations, including violation of the franchisor’s intellectual property and violation of non-compete covenants. Claims alleged by franchisees may include a franchisor’s violation of the Texas Deceptive Trade Practices—Consumer Protection Act (DTPA), as well as a franchisor’s failure to comply with the Texas Business Opportunity Act.

Venue and governing law

What legal and practical considerations should be borne in mind when choosing a litigation venue and governing law for franchising disputes arising in your state?

The Texas Supreme Court has adopted the same principles and criteria to consider forum selection clauses as the United States Supreme Court. In general, a Texas court will accept a voluntary forum selection clause unless the clause was due to fraud or overreaching, or unless the clause is unreasonable and unjust. A party alleging that a voluntary forum selection clause is contrary to public policy before a Texas court bears a heavy burden to prove so. A Texas court must enforce the parties’ forum selection clause regardless of the legal theory of liability. With respect to selection of governing law, Texas courts will not enforce a governing law provision if the result would be contrary to public policy. The jurisdiction whose law will apply must bear a reasonable relation to the agreement.

Other legal and practical considerations to keep in mind when choosing a litigation venue and governing law for franchising disputes arising in Texas are subject matter jurisdiction, the legal environment of the selected forum, the desire to litigate in the party’s home state, and where the parties are qualified to do business.

Document retention

What document retention considerations and policies are pertinent for parties to franchise-related litigation in your state?

There are no Texas-specific considerations or policies regarding how long parties must retain documents for franchise-related litigation. Given the range of statutes of limitation for various common law claims under Texas law (typically from one to four years), it is advisable to retain documents pertaining to franchise-related matters for at least four years.

Remedies

What remedies are available and commonly awarded in franchise-related litigation?

Franchisors often sue for injunctive relief and/or monetary damages when faced with a current or former franchisee’s breach of the franchise agreement (including violations of non-compete covenants) or misuse of the franchisor’s intellectual property. If successful on a trademark infringement claim, a franchisor can obtain injunctive relief, including an order that the infringing conduct be stopped. In addition, courts may award the franchisor its actual damages, treble damages in cases of intentional infringement, and costs and attorneys’ fees. Further, courts may enjoin ongoing violations of a franchise agreement’s post-term covenant not to compete. In appropriate cases, a franchisor may recover monetary damages for unpaid amounts owed under the franchise agreement or for its reasonably certain lost profits.

With respect to a franchisee’s misappropriation of a franchisor’s trade secrets, remedies under the Texas Uniform Trade Secrets Act may include injunctive relief, actual damages caused by the misappropriation, exemplary damages for willful and malicious misappropriation (capped at twice the amount of actual damages), and an award of attorneys’ fees.

From a franchisee’s perspective, the Texas Deceptive Trade Practices—Consumer Protection Act (DTPA) creates a private right of action for consumers—and franchisees generally qualify as consumers under the DTPA—to sue for actual economic damages, damages for mental anguish or up to treble economic damages for conduct committed knowingly, up to treble damages for mental anguish and economic damages for conduct committed intentionally, injunctive relief, restitution or rescission, and court costs and reasonable attorneys’ fees, for a defendant’s false, misleading, or deceptive act or practices, or for the defendant’s unconscionable action or course of action. A franchisor’s violation of the Texas Business Opportunity Act constitutes a false, misleading, or deceptive act or practice under the DTPA. Further, pre-sale misrepresentations or omissions may constitute a deceptive trade practice under the DTPA. In addition, a franchisor’s bad faith, predatory, or other unconscionable or unfair conduct during the franchise relationship may support a claim under the DTPA. Remedies for claims of common law fraud or misrepresentation potentially include monetary damages or rescission of the agreement.

Remedies for breach of contract, including a franchise agreement, may include monetary damages, recovery of attorneys’ fees if authorized by the contract, and/or equitable relief, such as an injunction, specific performance, or rescission of the contract.

Alternative dispute resolution

Is alternative dispute resolution (ADR) commonly used for franchising disputes in your state? What considerations should be borne in mind when opting for ADR?

ADR is commonly used to resolve franchise disputes in Texas. The Texas legislature enacted the Texas Alternative Dispute Resolution Procedures Act in 1987 (ADR Act) in part to encourage early resolution of pending litigation through voluntary settlement procedures and to outline the basic framework for these procedures. The ADR Act outlines five ADR procedures that are non-binding: mediation, mini-trial, moderated settlement conference, nonbinding arbitration, and summary jury trial and provides that other types of nonbinding ADR procedures may be established by agreement of the parties. The Texas Arbitration Act (TAA) and the Federal Arbitration Act (FAA) are the two common statutory sources of governing law for agreements to binding arbitration in Texas. The TAA provides various procedural and substantive rules governing the arbitration unless otherwise agreed to by the parties. The FAA pre-empts the TAA and is applied broadly to interstate commerce transaction. The outcome of arbitrations under the TAA and FAA are binding on the parties and limited appeals to the courts are available.