The question posed by the title of this post is a loaded one, which unfortunately has no clear answer. You may be thinking by now that lawyers are great at providing fuzzy answers to seemingly simple questions (something I can hardly disagree with), but the fact of the matter is, whether a franchisor must provide notice and opportunity to cure a franchise before following through with a termination is an issue that is very context-specific.
Many of the states that regulate franchise relationships prohibit terminations unless the franchisor first provides the franchisee with notice of a breach of the franchise agreement, and some period of time to cure that breach. And as a result, many franchisors with national franchise systems (or national ambitions), incorporate notice and cure provisions into their franchise agreements, thereby extending franchisees’ rights to notice and cure into states that do not explicitly regulate franchise terminations.
But curing a breach is not always possible. For example, it is a breach of most franchise agreements (if not all) if the franchisee or one of its principals is convicted of a crime. Just as one cannot unring a bell, a franchisee cannot undo a criminal conviction. Other typical examples of incurable breaches include bankruptcy filings and intentional fraud (either in reports submitted to the franchisor, or in connection with the franchisee’s customers). A franchisee cannot “take back” an intentionally fraudulent statement of sales data submitted to the franchisor. In these instances, the best the franchisee can do is promise not to engage in future misconduct; it cannot cure its prior actions.
Nonetheless, the plain language of some state relationship statutes would appear to require notice and opportunity to cure in all franchise terminations, even those that would otherwise appear to be incurable. For example, Washington State’s Franchise Investment Protection Act prohibits franchisors from terminating a franchise without notice and opportunity to cure except in a few very narrow circumstances, such as the conviction of a crime related to the operation of the franchised business, or where there are more than three defaults under the franchise agreement in any one-year period. RCW 19.100.180(2)(j). In a notorious decision from the early 1990s, the United States District Court for the Western District of Washington held that a termination without right to cure was improper in a case where the franchisee intentionally defrauded the franchisor by misappropriating several money orders. In so holding, the court expressly rejected the franchisor’s argument that such a narrow interpretation of the statute would be preposterous, because it would allow the franchisee to “routinely and intentionally defraud his franchisor with impunity, provided that he takes care not to get caught four times in any twelve-month period.” See Malek v. The Southland Corp. Bus. Franchise Guide (CCH) ¶ 11,386 (W.D. Wash. Apr. 10, 1998); see also 1-800-Got Junk? LLC v. Superior Court, 189 Cal.App.4th 500, 116 Cal.Rptr.3d 923 (2010) (holding that a franchisee’s fraud did not allow termination without notice and an opportunity to cure unless one of the four limited exceptions set forth in Washington’s Franchise Investment Protection Act applied).
A recent decision by the Second Circuit applying New York’s Automobile Dealer statute reached a more sensible result. The New York statute requires franchisors to provide franchisees with a written notice of intent to terminate at least ninety days before the effective date of the termination. In that case, the franchisee was terminated without being afforded an opportunity to cure after the franchisor learned that the franchisee had been adjudicated in violation of several state and federal consumer protection statutes for engaging in fraudulent and deceptive conduct. The district court dismissed the dealer’s claims alleging improper termination, noting that the state statute did not abrogate the common law principal that a party may terminate a contract following a material breach that goes to the root of the parties’ agreement. The Second Circuit affirmed, noting that notice and opportunity to cure is generally not required where providing an opportunity to cure would be useless because the breach is otherwise incurable.