THE CASE OF
THE BLOCKHEADS
In
1999, 16 of Block's largest franchisees sued the franchisor for
hindering their business by, among other things, selling tax preparation
software directly to the public. Block countersued, and then notified
the plaintiff franchisees that their franchise agreements would
be terminated at the end of their 5 year term. At this point the
parties also got litigious about whether Block could legally terminate
the franchise agreements.
Block
franchise agreements typically have a 5 year term. Here, the interpretation
of the termination provisions were in dispute. Block argued the
literal terms of the written contract, which required both parties'
consent to renew. The franchisees offered a mixed bag rationale:
first, they seem to have argued that the historical course of dealing
in the franchise industry changed the literal terms of the contract.
They pointed out that the historical industry standard is to allow
franchise agreements to automatically renew with no action by either
party. In other words, the agreement was renewed by the absence
of action by either party. These are called "evergreen"
arrangements.
But
the court case was anything but green for the franchisees. The trial
court ruled for Block and now the franchisees are wondering where
that leaves them. The case is on appeal, and many different groups
have so there's more to come.
Nevertheless,
this case provides several good lessons that apply to every written
contract. First, make sure you know what the contract provides as
it is written. This will allow you to, second, see your weaknesses,
so that you don't cut off your nose to spite your face. The franchisees
put themselves at risk by suing the franchisor in the first place.
Maybe they felt like they had no choice but to sue over the publicly
sold software, but they seemed to have been quite surprised that
Block terminated their agreements. Third, if you see the writing
on the wall that an impasse is coming, take steps to reduce the
losses that will be suffered. Fourth and finally, never assume that
just because that's the way it's always been, that's the way it'll
always be. The Trial Lawyers Association of America, among others,
will see to that.