When the Going Gets Tough, the Tough Get Expert Witnesses

By Chuck Modell

Franchise disputes between franchisors and franchisees can sometimes get ugly.  The stakes can be high, especially when multiple franchisees are involved, or the issue goes to the heart of the franchise system.  In those situations, the use of an expert witness can swing the pendulum in favor of one side or the other.  I speak from experience because I have been called as an expert in several cases, including three times in 2020.

Types of Experts in Franchise Cases

There are several types of experts that can be used in franchise cases.  Accountants and actuaries have been called for years to calculate damages.  However, franchise consultants and franchise attorneys well versed in franchising can help sway the case in your favor on the question of liability.  Technically, courts and arbitrators should not be hearing testimony on the law from franchise attorneys, but there are ways to get that testimony on the record, and when you do, it can assist the judge or arbitrator in understanding an area of law that many judges and arbitrators know little about.

When a consultant or franchise lawyer is called to testify, they are not called to explain the law, but rather to address “common practices” in franchising.  For example, I was once called by a sandwich shop franchisor to testify as to how national advertising funds are typically used in a federal court lawsuit challenging the control and use of their fund.  To qualify me as an expert, the attorney representing the franchisor had to go through my background in franchising and address my knowledge of franchise law and franchise practices.  Once he did that, it was clear to the judge that I had a better understanding of the franchise law than anyone in the room, and he was interested in having me address issues beyond how franchisors commonly use advertising funds.

Use of Experts in Arbitration

The use of experienced franchise consultants and attorneys can be especially helpful in an arbitration, where the rules of evidence are relaxed, and the arbitrator will allow more testimony to be presented than would a judge.  In an arbitration in which I testified last year, I was called as an expert in an arbitration case in which I was called as an expert on financial performance representations, and specifically, the practices of franchisors in making financial performance representations, in order to defend against a franchisee’s claim that the disclosures on past performance in Item 19 of the franchise disclosure document were inadequate.  In order to provide context for my opinions, my direct testimony went well beyond “common practice,” and to the requirements of the FTC Franchise Rule and more specifically, the NASAA Commentary on financial performance representations.  After my testimony concluded, the arbitrator began asking me questions on common franchise contract provisions and the enforceability of those provisions, a subject that went to the heart of the franchisor’s counterclaim, a subject on which I had not even been called to testify.

Scope of Expert Testimonies

Franchise consultants are often called as experts to address issues such as the scope of training programs and other services provided by franchisors, the strength of supply programs, and even the general competency of a franchisor.  In the case of attorneys, they are more often called to address the scope of disclosures made to franchisees.  Personally, I have been involved, among others, in cases addressing a franchisor’s compliance with the obligation to disclose all fees in Item 6 of its Franchise Disclosure Document, the scope of supplier disclosures in Item 8, the overall purpose of disclosure (including what it is and is not intended to do) and, as indicated above, the scope and adequacy of financial performance representations.

The use of a franchise expert can add significant costs to an adversarial proceeding, and therefore is not appropriate in all cases.  However, when the stakes are high, or when the issues in dispute can result in a significant adverse precedent or adverse consequences to the franchisor, having an expert at the table, who is not there to represent you but who obviously agrees with your position (or would not have been retained), can be highly beneficial and can be the difference between winning a case and suffering a significant loss.