Hidden Trap in Confidentiality Provisions in Settlement Agreements Entered into by Franchisors

January 2, 2014, 2:28 PM

Franchisors entering into settlement agreements must be certain that the settlement agreements give the franchisor the right to make any disclosures required by the Franchise Disclosure Document ("FDD"), without breaching any confidentiality provisions in the settlement agreement.

In a recent case, a franchisor had entered into a settlement agreement with a franchisee, which included a confidentiality clause. The Federal Trade Commissions Franchise Rule requires franchisors to disclose all material terms of a settlement arising from litigation involving the franchise relationship if, as a result of the settlement, the franchisor is required to pay money or other consideration, reduce any indebtedness, waive any of its rights, or take any action adverse to its interests. Even though the franchisor was required to disclose the settlement in Item 3 of its FDD, the Court refused to dismiss a suit brought by the former franchisee asserting breach of the confidentiality provision of the settlement agreement.

Proper drafting of a settlement agreement with any current or former franchisee is critically important. As just one example of this general principle, franchisors must ensure the settlement agreement does not contain a confidentiality provision that would restrict the franchisors ability to make required disclosures without breaching the settlement agreement.

For further information, contact Steve Story (757-624-3257) or Nicole Harrell (757-624-3306).