November 30, 2016

U.S. Insight: Using Customer Feedback to Evaluate Franchisees

Consumer reviews are integral to an individual’s decision to purchase a product or service. By extension, reviews are intertwined with a business’s success.  In the world of franchising, customer feedback serves a dual purpose – not only does it drive business (or detract from it), but it also operates as an effective tool for franchisors to measure franchisee performance against system standards. Surveying recent happenings in the United States in areas where Canadian courts have not yet ventured is often an insightful endeavor; this blog post considers U.S. case law on customer satisfaction reviews in the franchising context and contemplates how Canadian law might approach similar issues to those already addressed by U.S. courts.


Customer surveys serve as a method of assessing a franchisee’s compliance with system standards.  However, the question arises as to what extent customer feedback may be relied on for the purpose of discipline, including terminating a franchisee. In some U.S. cases, the courts have determined that relying on customer survey scores is permissible grounds for termination.  In a 2015 decision involving the Hilton Inn chain, an appellate court affirmed the trial court’s decision regarding a hotel franchisor’s termination of a franchisee on the basis of customer reviews.


In the case, Hilton terminated the franchisee “as a result of its failure to comply with required…brand and product quality standards.”  Hilton had an evaluation system in place for its franchisees. An aspect of the evaluation process involved customer surveys, which were administered to guests after their stay at the hotel.  The franchisee received unacceptable overall customer scores even after notices were sent to it by the franchisor. The franchisee challenged Hilton’s decision to terminate, arguing bad faith and the existence of a flawed evaluation process.


The trial court struggled with the complexity of Hilton’s evaluation system, which it described as baroque. The court was not clear as to what areas under measurement constituted brand standards, commercial facilities or guest rooms or if what was purported to be measured was cleanliness, conditions, or standards.


The appellate court determined that it was unnecessary to consider whether aspects of the evaluations were arbitrary or irrational; determination of this issue was rendered irrelevant because Hilton possessed an independent basis for terminating the franchise agreement – the guest surveys. The appellate court affirmed that the franchisor acted properly in terminating the franchising agreement, stating:


“Because [Hilton] terminated the franchising agreement based on a contractually permitted, rational, and non-arbitrary factor—the poor guest survey scores—it did not breach the implied covenant of good faith and fair dealing or act arbitrarily or irrationally.”


The franchisee’s termination was due to failing scores on guest surveys and not because of failing scores on the on-site inspections.  Because the basis for the termination was the customer survey scores, the decision of the trial court was upheld.


The case suggests that customer surveys may be utilized as a basis for termination, so long as this is contractually permitted.  However, when customer surveys are utilized as a measure of adherence to system standards, they must be conducted consistently across the system – if a franchisor imposes higher tests on a particular franchisee, this would be suggestive of bad faith.


Discussion of customer input warrants a few remarks on online reviews.  Increasingly, consumers are making decisions on the basis of online reviews. Sites such as TripAdvisor, Yelp and Google reviews, are open forums for both disgruntled and pleasantly surprised customers to post reviews about their experiences with a service or product.  But what about if a franchisee business has accumulated a mound of negative reviews on the web? Is a franchisor entitled to rely on negative online reviews in order to terminate?


While online reviews may be helpful for prospective customers in making decisions, they are less useful to franchisors in evaluating franchisees. Not only are online reviews often anonymous, thus lessening their credibility, they also tend to present polarizing views – the extremely negative and the fantastically positive. In some cases, these reviews may be the result of efforts by a competitor to discredit a business or an attempt by an owner to draw in more customers by posting a phony review. Customers with average experiences are less likely to post an online review.  In addition, online customer reviews often only represent a subset of the population – young, tech-savvy twenty-somethings have greater online presence and are more likely to write an online review than their eighty-year old grandparents.


Therefore, online customer reviews rest on shaky ground and franchisors would be wise to avoid making material decisions solely on the basis of them.  That being said, online customer reviews can serve as a tool that alerts franchisors to potential issues within a franchisee business, enabling the franchisor to work with a franchisee to address deficiencies and achieve better results.


For franchisees, it is important to take customer surveys seriously and view them as an opportunity to make improvements.  Franchisors should also look at customer surveys as an opening to work with franchisees in order to improve the overall franchise brand and ensure system standards are being implemented consistently across the board. Undeniably, customer surveys are an effective tool for measuring franchisee success and assessing quality control.  Such assessments are vital to improving a franchise system’s brand and reputation.  In order to ensure their maximum effectiveness, franchisors should ensure that customer surveys are implemented in accordance with clear, consistent, and fair standards.  In the event of any uncertainty as to whether a customer satisfaction program is being implemented in accordance with the duty of good faith, franchisors should seek legal guidance to guard against a future legal challenge.