By Michael Joblove, Venable LLP, Norman Leon, DLA Piper LLP, and Robert Zarco, Zarco Einhorn Salkowski, P.A.

At one end of the tightrope, franchisors need to protect brand quality and system standards to remain competitive; at the other, franchisees need their investment to be predictable and to remain viable.

For decades, the legal framework surrounding the franchise relationship — disclosure requirements, good faith obligations, relationship statutes, and reasonableness standards — has served as the guardrails attempting to keep that balance intact. But in a world where consumer preferences shift by the quarter, technology that was cutting-edge 24 months ago is already obsolete, and AI is rewriting the competitive landscape in real time, the pressure on those guardrails has never been greater.

The imperative for franchise brands to modernize and remain relevant is real and relentless. A national brand that stands still while its competitors evolve is not protecting its franchisees — it is slowly suffocating them. But that urgency, legitimate as it is, does not make its costs of implementation any less real for the franchisee writing the check. And when those costs compound across capital improvement mandates, system standard overhauls, and an ever-expanding stack of fees, the cumulative burden can fundamentally alter the economics of an investment that was made on very different assumptions.

As professor Gillian Hadfield identified over 30 years ago, franchise agreements are, by design, “incomplete contracts” — deliberately silent on future specifics because neither party can anticipate the full arc of a multi-decade relationship. A franchisee who signed a deal in 2010 did so in a world without mobile ordering, without AI-driven inventory management, and without the consumer expectation of seamless digital loyalty integration. From the franchisor’s perspective, this reality requires the franchise agreement to provide it the broad flexible authority to compel the change that the future demands. From the franchisees’ point of view, often times the same structural incompleteness that franchisors invoke to justify system changes is also the mechanism by which the deal a franchisee thought they were buying is quietly replaced with a different one.

Everyone agrees that progress is necessary. The friction lies in what it looks like, how fast it must happen, and who is bearing the costs compared to who reaping the benefits. These tensions surface most acutely in three recurring areas: capital improvement mandates, technology adoption and the source of fees that fund it, and system standard changes. Each raises distinct challenges for both sides — and each illustrates why accurate pre-sale disclosure, responsible implementation, and genuine collaboration between the franchisor and franchisee matter more now than ever.

The Dynamics Surrounding the Need for Capital Improvements

Capital improvement mandates are among the most contentious pressure points in mature franchise systems. In mature systems, this tension may arise as franchisors undertake efforts to give the brand a fresh and competitive look, or to implement changes relating to digital technology. It is, of course, franchisees who generally must pay for the upgrades.

The core conflict is that a system-wide image refresh can be strategically important for the brand, but the cost lands unevenly on individual operators especially those who may face thin margins, rising labor costs, and inflationary pressure.

Franchisors generally believe that modernizing stores is necessary to protect long-term brand equity, and that the investment is a value to both franchisors and franchisees. Typically, franchisors build a business case, with projected ROI, respecting the investments that have already been made. Older units can weaken the brand’s ability to compete with newer concepts that have more appealing designs, better technology, and more efficient layouts. From the franchisor’s perspective, delaying remodels risks a decline in sales, lower system relevance, and greater difficulty attracting customers and future franchisees.

Franchisees, however, often see these capital demands differently. A mandated remodel can feel like an imposed expense that may not generate enough return on investment at the unit level. If sales lift is uncertain, owners may view the franchisor as shifting brand-maintenance costs downward while preserving corporate benefits such as royalties, expansion opportunities, and a more marketable brand image. That mismatch can be especially sharp in mature systems where many locations are older, the original investment has already been amortized, and operators may be reluctant to reinvest heavily in assets they believe should already be profitable.

The dispute is usually less about whether updates matter and more about who should pay, when the updates should happen, and how much proof should be required that the spend will pay off. Franchisees want clearer evidence, phased requirements, and flexibility for weaker stores; franchisors want uniformity, speed, and stronger brand control.

To help alleviate the burden, often franchisors offer financial inducements to franchisees in return for the capital spend. These can include royalty reduction for a limited time, early renewals of franchise agreements or direct capital contributions by the franchisor. In practice, successful systems tend to manage the inherent tension through collaborative planning, realistic remodel standards, and a shared understanding that capital spending must support both brand competitiveness and unit-level economics.

Technology Fees: Innovation at What Price?

Similar tensions often arise when franchise systems attempt to adopt new and improved technologies. Just as they need to modernize their stores, franchise systems also need to modernize the technologies that are used in those stores and made available to consumers. Consumers expect to have mobile ordering options, they expect to have easy, contactless payment methods, and they expect digital loyalty programs (among many other technologies). Businesses that fail to adapt to these expectations risk decreased sales, consumer dissatisfaction, and brand damage.

These innovations entail a host of legal risks, particularly as they relate to the use and collection of personal data. But they also create a host of practical problems. From the franchisor’s perspective, it wants to be sure that it stays on top of technological advances, that its disclosure document properly discloses the franchisees’ obligations as it concern technology innovation, funding and implementation, that its franchise agreement and manual give it the ability to modify and upgrade technologies as new ones become available, and that it has enough resources to properly research, develop and implement these new technologies as they come along. Failing to do so could be viewed by some as a breach of the implied covenant of good faith, and doing so carelessly or without conducting the proper diligence could be grounds for a negligence claim.

From the franchisee’s perspective, they want to be involved in the development and testing of new ideas and to have a say in how their technology fees are being spent. Regular and transparent communications within the system and the use of franchisee advisory councils and franchisee associations are effective ways of addressing these concerns. But franchisees also want to know that the new technology has been tested before its rolled-out, and how responsibility will be allocated if the new technology does not work or, even worse, creates potential significant liability to third parties. While a well-drafted franchise agreement and a robust disclosure document are a big part of this process, franchise systems that do not collaborate on the responsible development, roll-out and use of new technologies risk not only system disruption and litigation, but brand damaging publicity and potentially system-threatening exposure to third-party claims.

System Standard Changes: A Moving Goalpost — by Design

System standards are the specifications, guidelines, and operating procedures set by a franchisor to ensure quality, brand consistency and reputation. Changes to those standards can touch nearly every aspect of a franchisee’s operation: equipment, procedures, pricing programs, marketing initiatives, vendor relationships, and the products and services offered to consumers. And unlike capital improvements, which are less frequent and more likely to be discussed, timed, and negotiated, system standard changes often arrive continuously, through unilateral updates to the operations manual, without negotiation or even advance warning.

The franchisor’s case for broad system standard authority is grounded in the logic of the franchise model itself. A franchise system is not a collection of independent operators who happen to share a logo. It is a coordinated network in which the whole is worth substantially more than the sum of its parts — and that premium depends on consistency. When one unit operates with outdated equipment, a tired store design, or inferior technology, it does not just hurt that franchisee — it dilutes the brand that every other franchisee paid to be part of. Uniformity is the franchise model’s core value proposition. Strong system standards are the principal method by which that value is delivered and protected.

The franchisee’s resistance to system standard changes is not, at its core, a resistance to evolution. Instead, usually it is resistance to absorbing costs without context, complying with changes that they consider arbitrary, or adapting to mandates that may be perceived as designed to serve the franchisor’s interests at the expense of the individual unit. While each mandate may (or may not) seem reasonable in isolation, franchisees generally experience their impacts cumulatively. Each change may bring operational disruption, increased expenses, and workflow rebuilding. Sometimes the next mandate comes before the long-term benefits of the last change have been realized.

Ultimately, both parties share the same interests, improving performance, increasing earnings, a healthy franchise system and remaining competitive. Franchisors’ royalty streams depend on strong franchisee revenues, which means they are financially incentivized to ensure that system changes actually improve performance. But royalties are tied to aggregate system-wide revenue, while franchisee viability depends on unit-level profitability — and that divergence can produce genuine conflicts.

The tension around system wide standard changes is real, but it is not irreconcilable. Franchisors can avoid unnecessary conflict by testing across diverse market types rather than just average ones, acknowledging the cumulative weight of changing compliance standards on individual operators, providing empirical evidence supporting the benefits of mandatory changes, and offering meaningful incentives to alleviate the burden on the outliers. Franchisees can likewise avoid conflict by recognizing the important need to modernize the system and keep it competitive.

Guardrails Are the Baseline, Not the Foundation

The legal guardrails — disclosure requirements, good faith obligations, relationship statutes, common law, and reasonableness standards — exist to protect both sides from the extremes of these tensions. But thriving franchise systems are not built on guardrails alone. The most successful franchise systems are not the ones with the most carefully drafted agreements. They are the ones that treat disclosure as a foundation for trust rather than a compliance checkbox, that design system changes with genuine attention to unit-level impacts, and that build meaningful franchisee participation into the innovation process rather than presenting it as a fait accompli.

Franchisors who meaningfully and timely communicate the business rationale for change, phase implementation thoughtfully, provide robust support, and consider cost-sharing arrangements face far less resistance — and far less litigation. Franchisees who engage constructively, participate in advisory processes, and hold their franchisors accountable through established channels rather than reflexive dispute alternatives find better outcomes on the other side of change. The goal, after all, is the same on both sides of the podium: a system worth being part of, for everyone in it.

Michael Joblove is partner at Venable LLP, Norman Leon is partner at DLA Piper LLP and Robert Zarco is partner at Zarco Einhorn Salkowski, P.A.