After nine people were killed and 18 injured in an altercation between rival biker gangs on May 17, 2015, at a Waco, Texas Twin Peaks restaurant, the franchisor immediately terminated the franchisee without providing an opportunity to cure any defaults. Twin Peaks released a statement stating: "We are in the people business and the safety of the employees and guests in our restaurant is priority one."
It appears the franchisor warned the franchisee about the planned meeting of the biker gangs, but the franchisee ignored any such warnings. A Bike Night was just held at this same restaurant on May 14. The police openly criticized the franchisee for its failure to cooperate with authorities.
Did franchisor have a contractual right to terminate franchisee for shootout?
It is unclear exactly what language in the Twin Peaks franchise agreement was the basis for the termination, but most franchise agreements permit a franchisor to terminate an agreement when a franchisee's operations place employees and customers' health and safety in jeopardy. Additionally, most franchisors establish operational standards, and a breach of those standards could give rise to termination. The difference between the former and the latter is that a violation of the operational standard is typically accompanied by an opportunity to cure the default during a defined period of time after notice is provided. Given the timing of the termination, Twin Peaks likely terminated the franchisee pursuant to a provision permitting immediate termination without an opportunity to cure.
These types of provisions are enforceable when clearly set forth in the franchise agreement and franchise disclosure document. A deeper issue is whether there should be specific, objective criteria for a determination that a franchisee jeopardized customer and employee safety or whether this determination should be left to the franchisor's sole discretion.
Franchise systems should review the terms of their agreements, and consider whether additional clarifications about terminations due to health and safety concerns are warranted. Such a clarification could be beneficial to both the franchisor and franchisee. For example, the franchisee could benefit from limitations being placed on the franchisor's ability to terminate and gain some clarification regarding the franchisor's ability to terminate. The franchisor, although possibly limiting its discretion to terminate, could benefit because clarifications may remove ambiguity and improve the likelihood of success should any litigation ensue from a termination given that termination would be based on an expressly delineated criteria in the contract.
Do joint employer issues come into play?
Given the franchise industry's current concerns about joint employer implications, many franchisors may be wondering where the dividing line is between exerting control over a franchisee's operations and staying out of a franchisee's operations. The joint employer issue was a subject of much debate at an International Franchise Association Legal Symposium in Chicago earlier this month. During one roundtable discussion, the consensus was that given potential system-wide brand damage, franchisors are generally willing to run the risk of being deemed a joint employer when health and safety of customers are at risk. Beyond health and safety concerns and core brand standards, many franchise systems are concerned about where the line should be drawn before they are deemed a joint employer.
Twin Peaks obviously has not been deterred by joint employer issues and has even taken steps to encourage all of its current franchisees to cancel any previously scheduled Bike Night events.
This unfortunate incident has forced franchisors to consider how they should respond under similar circumstances.
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