Franchise Recontracting and Hold up

With 76 stores and 1600 employees over four states, Paradigm Investment Group is a large franchisee of Hardee's restaurants. It is currently suing Hardee's to block them from terminating franchise agreements due to Paradigm's failure to comply with new contract terms. At issue are a nonpayment of monthly technology fee, limited hours of operation, non-use of third-party delivery services, but primarily Paradigm's non-participation in an in-app loyalty program.

The market conditions when the terms of a franchises contract are agreed upon will almost certainly change over time so that it will be efficient to alter the terms. When Paradigm first became a franchisee 25 year ago, smartphone apps to order food and Door Dash did not exist. An efficient contract would now address these new aspects of an evolving market. However, over the decades, Paradigm has made large investments in the Hardee's brand and business practices. Hardee's could seek to impose conditions on the implementation of these practices that are disadvantageous to the franchisee. If Paradigm does not agree, it could have to abandon these investments. That is, the franchisor can use these relationship-specific sunk costs to holdup the franchisee.