Franchise Termination Fees Under Minnesota Law

What Is a Franchise Termination Fee and How Is It Structured?

A termination fee is money the franchise agreement says you owe because the franchise ended early. An agreement may state it as a flat amount or as a formula, for example one tied to the royalties left in the term. Federal disclosure rules require the franchisor to list the fee and its formula in the disclosure document. Those rules have exemptions: under 16 C.F.R. § 436.8(a), “The provisions of part 436 shall not apply if the franchisor can establish any of the following,” and the list includes a franchise relationship that “is a fractional franchise” or “is a leased department.”

The Federal Trade Commission’s Franchise Rule, 16 C.F.R. § 436.5, controls where the fee appears in the disclosure document:

1. Item 6, Other Fees. The franchisor must disclose “all other fees that the franchisee must pay to the franchisor or its affiliates,” and the rule adds: “Include any formula used to compute the fees.”
2. Item 17, The Franchise Relationship. The table must summarize, among other rows, “Termination by franchisee” and “Franchisee’s obligations on termination/non-renewal.”

For a franchise subject to Minnesota registration, Minn. Stat. § 80C.06, subd. 5 requires the seller to present the offering statement and all proposed agreements “at least seven days prior to the execution by the prospective franchisee of any franchise or other agreement, or at least seven days prior to the payment of any consideration by the franchisee, whichever occurs first.” Unless an exemption applies, the federal rule, 16 C.F.R. § 436.2(a), requires the franchisor to furnish its disclosure document “at least 14 calendar-days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate.” Those documents, and Items 6 and 17 in particular, show the fee’s shape: who can end the franchise early, what triggers the charge, and how the amount is figured. The federal rule does not displace Minnesota’s limits on what the agreement may require, and my page on Minnesota franchise registration covers the state’s side of disclosure.

What Does Minnesota Law Say About Termination Fees?

Minnesota makes it an unfair practice for a franchisor to require a franchisee to consent to liquidated damages or termination penalties, and every franchise agreement outside the motor vehicle fuel class must conform. For a franchisee the anti-waiver statute protects, a contract term or choice of another state’s law that waives that protection is void.

Three provisions work together:

1. The rule. Minn. R. 2860.4400 opens: “All franchise contracts or agreements and any other device or practice of a franchisor, shall conform to the following provisions.” Item J then makes it unfair to require a franchisee “to consent to liquidated damages, termination penalties, or judgment notes,” and adds that “this part shall not bar an exclusive arbitration clause.”
2. The statute behind the rule. Minn. Stat. § 80C.14, subd. 1 provides that no person, “whether by means of a term or condition of a franchise or otherwise,” may engage in an unfair or inequitable practice in contravention of the commissioner’s rules.
3. No waiver. Minn. Stat. § 80C.21 voids “Any condition, stipulation or provision, including any choice of law provision,” that waives compliance with the act “or any rule or order thereunder.” It protects a person who was “a resident of this state” when acquiring the franchise, a partnership or corporation “organized or incorporated under the laws of this state,” and “a person acquiring any franchise to be operated in this state.”

Two limits narrow the answer. Section 80C.14, subdivision 1, lets the commissioner “specifically recognize classifications of franchises,” naming motor vehicle fuel, motor vehicle, and hardware franchises and franchises requiring “an initial, unfinanced investment in excess of $200,000.” Minn. R. 2860.5100 “specifically recognizes the classification of motor vehicle fuel franchises,” and for that class Minn. R. 2860.5400 states: “The provisions of part 2860.4400 shall not apply.” Its own list of unfair practices, items A to M, does not name liquidated damages or termination penalties. For a franchisee outside the groups § 80C.21 protects, the agreement’s choice of another state’s law may decide the fee.

What Can a Franchisor Still Collect When a Franchise Ends Early?

A franchisor can still pursue the actual damages your breach caused, which it must prove. Item J addresses what a franchisor may require you to consent to in advance. Its text does not address a claim for the loss a breach actually caused, and it does not mention fees that came due before the franchise ended.

In Lagoon Partners, LLC v. Silver Cinemas Acquisition Co., 999 N.W.2d 113 (Minn. App. 2023), a commercial lease case, the Minnesota Court of Appeals quoted an earlier Minnesota Supreme Court decision on lost profits. A party claiming them must prove them “to a reasonable probability,” and “[t]he law does not require mathematical precision in proving lost profits.” A claim for lost future royalties is a claim for profits the franchisor says it would have earned, and that standard governs lost profits.

If you signed personal guarantees for the franchise company, I suggest reading what each guarantee covers before you decide how to exit, because a guarantee can make you personally answerable for the company’s obligations.

How Do Minnesota Courts Decide Whether a Fee Is a Penalty?

Where the franchise rule does not reach a clause, Minnesota contract law decides whether a fixed exit charge is enforceable liquidated damages or an unenforceable penalty. The charge must be a reasonable forecast of harm that is hard to estimate, and the party relying on the clause must prove it.

The test comes from Gorco Construction Co. v. Stein, 99 N.W.2d 69 (Minn. 1959). There, the Minnesota Supreme Court held that a 15% cancellation charge in a garage construction contract was a penalty and unenforceable. The court stated that “The controlling factor, rather than intent,” is “whether the amount agreed upon is reasonable or unreasonable in the light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances.” The court also stated that Minnesota’s rule accords with the Restatement of Contracts, under which an agreed amount is unenforceable unless “the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach.” The Restatement adds a second condition: “the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.”

Lagoon applied that test to a commercial lease clause whose amount was “the sum of past-due rent and the present value of future rent.” The court held the clause “unenforceable because actual damages caused by the tenant’s breach are capable of accurate estimation and because the amount of liquidated damages, which does not account for the landlord’s duty to mitigate damages, is not a reasonable forecast of actual damages.” The court also read Gorco to show that “the proponent of a liquidated-damages clause bears the burden of introducing evidence to justify the liquidated-damages clause.”

These cases govern, for example, a deal that is not a “franchise” under Minn. Stat. § 80C.01, subd. 4. One of that subdivision’s alternative definitions, in paragraph (a), clause (1), requires, among other elements, “a community of interest in the marketing of goods or services” and a franchise fee paid “directly or indirectly.” My page on whether a licensing deal is really a franchise covers that definition.

How Does the Way a Franchise Ends Change What You Owe?

Who ends the franchise, and why, changes the analysis. Outside motor fuel franchises, a franchisor ending the franchise needs good cause. It must also give written notice and a chance to correct, unless the alleged grounds are among three that make the notice effective immediately on receipt. Your voluntary abandonment of the franchise relationship is one of those three grounds.

For franchises other than motor fuel franchises, Minn. Stat. § 80C.14, subd. 3 sets three rules that bear on the money:

1. Notice and a chance to cure. No person may terminate a franchise unless it has given “written notice setting forth all the reasons for the termination or cancellation at least 90 days in advance of termination or cancellation,” and the franchisee “fails to correct the reasons stated for termination or cancellation in the notice within 60 days of receipt of the notice.” The notice is instead “effective immediately upon receipt” where the alleged ground is “voluntary abandonment of the franchise relationship by the franchisee,” “the conviction of the franchisee of an offense directly related to the business conducted pursuant to the franchise,” or a “failure to cure a default under the franchise agreement which materially impairs the good will associated with the franchisor’s trade name, trademark, service mark, logotype or other commercial symbol after the franchisee has received written notice to cure of at least 24 hours in advance thereof.”
2. Good cause. A franchisor may not terminate “except for good cause,” which means “failure by the franchisee to substantially comply with the material and reasonable franchise requirements imposed by the franchisor.”
3. Abandonment. The good-cause list in paragraph (b) includes “voluntary abandonment of the franchise business.”

A franchisor that terminates without good cause or the required notice faces a claim of its own. My pages on Minnesota franchise termination and on notice and cure periods cover those steps in more detail.

Motor fuel franchises have their own termination rules. Minn. Stat. § 80C.14, subd. 2 requires franchise agreements “other than those classifications of franchises specifically recognized by the commissioner under subdivision 1” to conform to subdivisions 3 and 4, and for motor vehicle fuel franchises Minn. R. 2860.5500 provides: “Any provisions regarding cancellation of the franchise agreement shall be governed by items A to C.” The federal Petroleum Marketing Practices Act, in 15 U.S.C. § 2801(1)(A), defines a “franchise” as a contract under which a refiner or distributor “authorizes or permits a retailer or distributor to use, in connection with the sale, consignment, or distribution of motor fuel, a trademark.” For such a franchise, 15 U.S.C. § 2806(a)(1) provides that “no State or any political subdivision thereof may adopt, enforce, or continue in effect any provision of any law or regulation” on termination “unless such provision of such law or regulation is the same as the applicable provision of this subchapter.”

What Are the Ways Out of a Franchise Before the Term Ends?

You can negotiate an exit with the franchisor, sell the franchise to a qualified buyer, operate to the end of the term, or close and defend any damages claim. Each path carries a different cost, and a conversation with the franchisor’s leadership can be the least costly first step.

1. Talk with the franchisor first. A direct conversation, owner to franchisor executive, can produce a mutual termination on terms both sides accept. Minn. R. 2860.4400 item D bars requiring a release of liability under the franchise act but provides “that this part shall not bar the voluntary settlement of disputes.” Section 80C.21 has no settlement exception in its text, so I suggest reading any release in the exit agreement closely, because it decides which claims you give up.
2. Sell to a buyer. Under Minn. Stat. § 80C.14, subd. 5, it is unfair “to unreasonably withhold consent to an assignment, transfer, or sale of the franchise whenever the franchisee to be substituted meets the present qualifications and standards required of the franchisees of the particular franchisor.” My page on selling your franchise covers that process.
3. Finish the term. Operating to the end avoids an early-exit dispute. Hiring a manager, or any schedule change your agreement allows, may make the remaining term easier to carry.
4. Close and defend. Closing invites a claim for actual damages, which the franchisor must prove. Outside motor fuel franchises, if the franchisor alleges voluntary abandonment of the franchise relationship as its ground, its termination notice takes effect immediately on receipt. The rule separately makes it unfair to “enforce any unreasonable covenant not to compete after the franchise relationship ceases to exist,” which matters if you plan to stay in the same line of business.

Your agreement’s transfer and termination sections, and the Item 17 table, show which steps the franchisor has committed to.

What Happens If a Franchisor Enforces a Prohibited Fee?

A franchisee can sue a franchisor that violates the franchise act or its rules for damages, rescission, or other relief. The suit may also recover reasonable attorney’s fees with actual damages, and a court may grant a temporary injunction without a bond. Under Minn. Stat. § 80C.17, subd. 5, “No action may be commenced pursuant to this section more than three years after the cause of action accrues.” A motor fuel franchisee’s federal suit under the Petroleum Marketing Practices Act, 15 U.S.C. § 2805(a), has its own limit. It cannot be maintained “unless commenced within 1 year after the later of” the date of termination or nonrenewal or “the date the franchisor fails to comply with the requirements of section 2802, 2803, or 2807 of this title.” Check the current text of the statute before relying on these periods.

The remedies come from three provisions:

1. Damages and other relief. Under Minn. Stat. § 80C.17, subd. 1, a person who violates “any provision of this chapter or any rule or order thereunder shall be liable to the franchisee or subfranchisor who may sue for damages caused thereby, for rescission, or other relief as the court may deem appropriate.”
2. Fees and costs. Subdivision 3 allows recovery of “the actual damages sustained by the plaintiff together with costs and disbursements plus reasonable attorney’s fees.”
3. An injunction. Under § 80C.14, subd. 1, “A temporary injunction may be granted under this section without requiring the posting of any bond or security. A bond or security is required if a temporary restraining order is granted.”

My page on remedies under the Minnesota Franchise Act covers each remedy in more depth.

Termination Fees and Your Minnesota Franchise

If your deal is a “franchise” under the act and not a motor vehicle fuel franchise, Minn. R. 2860.4400 bars the franchisor from requiring you to agree to a termination penalty or liquidated damages. Minn. Stat. § 80C.21 voids a waiver of that rule, including a choice of another state’s law, for three groups. They are a person acquiring a franchise to be operated in Minnesota, a person who was a Minnesota resident when acquiring the franchise, and a partnership or corporation organized or incorporated under Minnesota law. The franchisor may still claim the actual damages an early exit causes and must prove them, so a negotiated exit or a sale can be the less costly path. More on Minnesota franchise relationships is on my franchise practice page.

If you are facing a termination fee and want to know whether it is enforceable against you, email [email protected] with a brief description of the situation. I can then start an intake and conflict check before you send any confidential documents.