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Why Your Franchisor May Not Provide the Supplier Benefits You Expect

By Published On: July 18th, 2019

Many potential franchisees become trusting of their chosen franchisor and go further to make the mistake of believing that their agreement and supply chain is, and must be, a “take-it-or-leave-it” agreement.  Significant dangers lurk throughout almost every franchise or distribution agreement drafted by franchisors and suppliers. After all, these agreements are well oiled to the interest of the franchisor and their respective suppliers. We hear the laments and moans of the many bankrupted former franchisees and dealers who thought they could themselves read and understand complicated franchise and supplier terms.

Take for example something as seemingly straightforward as delicious gelato ice cream. One might believe the supply and sale of Carmel Apple Pie scoops or Black Raspberry Vanilla Parfait in sugar cones is heavenly simple. Such attitude may have graced the thoughts of Palermo Gelato, a franchisee in Pennsylvania, when they executed an agreement with Pino Gelato in South Carolina to buy and sell Pino brand gelato. The product was supposed to be exclusively from Pino and from “unique” recipes originating and developed in Sicily, the mother country. So, Palermo executed a Store License Development and Supply Agreement that allowed Palermo to sell Pino gelatos exclusively in Allegheny and Butler Counties, PA. Palermo purchased the supplied gelato at a premium price since the gelato was a premium specialty. About three years into the Agreement, Palermo discovered its Pino gelato was not small batch crafted. It was made in bulk by G.S. Gelato and was sold wholesale on the internet. Palermo lamented fraud and moaned unjust enrichment because it was paying premium supply prices.

Little known and undetected by Palermo were two simply stated and very fashionably complicated provisions in their Agreement. Located in the “small print” was “This Agreement, together with the exhibits and schedules hereto, contains the entire understanding and agreement among the parties……and supersedes any prior understandings between or among any of them, with respect to the subject matter thereof.” These terms and terms like this need to be recognized as an integration clause. Palermo should have understood that when an agreement is integrated no representation not expressed in the agreement can be used to interpret that agreement. There is more to this—it’s complicated—but the catastrophe for Palermo is that Pino Gelato won the argument, hands down in summary fashion. So, Palermo gets to pay premium for bulk manufactured gelato.        

So, let’s arise out from the world of parfaits, scoops and sugar cones and ask what is the teaching point?  This is one example of how a franchise relationship may negatively impact a franchisee’s ability to control and manage supply matters.

The AAFD Group Purchasing Task Force will present a special breakout session on Supplier Abuses in Franchising at the AAFD’s Franchisee Leadership Summit and Annual Conference, taking place September 15 – 18th in Mesa, Arizona. The Task Force will talk about and perhaps agonize over agreement and supply provisions, their meaning and applications as a sword or shield in franchisee relations. We will present a review of certain franchise provisions that are in vogue along with some current, relevant case law. We will also take time to ponder supply issues and hopefully sketch out solutions or at least suggest avoidance tactics. The Task Force will meet the following day to address an agenda for reform

We invite you to the Summit and you will leave with more understanding and some tools with which to consider or reconsider your agreement and supply transactions. Learn more about the AAFD Franchisee Leadership Summit and Annual Conference.


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Written by : Gary Tucker