Nearly 200 franchisees have left or are set to exit the Line-X franchise system after the franchisor added what operators described as “onerous” new terms to the franchise agreement. The main point of contention? A switch to a royalty-based system from one based on product commissions.
“I understand that franchise agreements and systems change, but Line-X is trying to impose a completely new business model, where it charges royalties in a system that for more than 20 years was advertised as a non-royalty franchise, which will destroy the value of these businesses,” said attorney Michael Einbinder, who represents the Independent Association of Line-X Franchises. “And it has issued an ultimatum to franchisees that if they don’t fall in line, it will seek to enforce a non-compete provision in the existing agreements and put the franchisees out of business.”
An automotive aftermarket franchise, Line-X locations provide spray-on bedliners for trucks, boats, trailers, motorcycles and other applications, and also sell truck accessories. Many franchisees have run their stores for decades, said longtime owner Josh Berg, and their relationship with Line-X was essentially one of product distribution, with the franchisor generating revenue from its sale of chemicals and coatings to franchisees.
“We’ve got guys that are body shops. We’ve got guys that are car dealerships. We’ve got guys that sell farm and ranch equipment, lawn mowers, tractors. We’ve got all these different businesses that incorporate with spraying Line-X … and for them to come after a percentage royalty on things that they had no ambitions of is just insane,” said Berg, who owns three stores in San Antonio and is on the franchisee association’s board.
Attorney Michael Einbinder of Einbinder & Dunn represents the Independent Association of Line-X Franchises.
“We’ve built a pretty successful business, and it really hasn’t been to Line-X’s credit.”
In a letter sent February 16 to Dennis Leone, an attorney at Shankman Leone representing Line-X, Einbinder provided notice that 190 franchisees representing 217 stores—some whose franchise agreements already expired and others still under contract—will de-identify their locations and no longer operate as Line-X. That represents an estimated 75 percent of Line-X’s revenue, according to the franchisee association. Post-contract franchisees will de-identify their stores within 60 days of the letter’s date; franchisees still under contract will operate until their agreements expire and then de-identify within 60 days.
“The conversion of the Line-X system to a royalty-based arrangement is diametrically contrary to the deal that my clients made and have lived under for 10 to 20 plus years,” Einbinder wrote in the letter. “Perhaps more important, this change will be financially devastating to franchisees and serve only to enrich your client and likely get it ready for sale to a larger private equity firm.”
Einbinder said he has yet to receive a formal response from Leone or Line-X.
Line-X President Blair Boggs disagreed with the characterization that the shift to a royalty system would harm franchisees. “What I do know to be financially devastating is to not evolve with the market,” he said.
“We’re evolving the franchise and are committed to the franchisees who want to pull forward together,” he continued. “We genuinely regret that some of our franchisees don’t want to come forward. They’re entitled to make that decision and we respect that.”
The company on March 8 sent emails to affected franchisees with the title “RE: Confirming your election not to renew your Franchise & Notice of Termination,” according to franchisee Edward Hess, who owns Auto Dogz/Line-X of South Jersey and shared the email with Franchise Times.
Blair Boggs joined Line-X as president in 2021.
“This letter confirms that your Franchise agreement will terminate 30 days from the date you receive this letter. After that date, your store will no longer be a LINE-X Franchise location and all you need to do from here is to settle up your LINE-X accounts and meet your post-termination obligations as spelled out in your Franchise Agreement,” read the email, which was signed by Boggs
Franchisees push back on system change
For the group of Line-X franchisees, the problems started after Clearlake Capital Group acquired parent company Innovative XCessories & Services from Olympus Partners in March 2020 for a reported sale price of nearly $1 billion. IXS, based in Windsor, Ontario, has two divisions: Ground Effects, a provider of vehicle upfit services, and IXS Coatings, which includes Line-X and its roughly 500 branded service locations.
Santa Monica, California-based Clearlake Capital has more than $75 billion in assets under management, according to its website. Its other active investments range from digital marketing company Constant Contact and media group Learfield to pet food company Wellness Pet. A spokesperson for Clearlake said the company won’t comment on the situation at Line-X.
Line-X announced in August 2021 its hiring of Boggs, who came from Driven Brands, where he was chief revenue officer for the parent company of automotive franchises including Meineke, Carstar and Maaco. Prior to that he spent 16 years at Valvoline.
It was through a series of meetings between Boggs and Line-X’s franchise advisory council in late 2021 and early 2022 that Berg, who was on the council at the time, said operators began to recognize major changes to the system were underway. There were discussions of raising a national ad fund, the need for new software and a single point-of-sale system, and standardized core services.
“He was dropping these breadcrumbs as we were sitting there, and all of us could see where this was leading. We’re like, OK, this is all going to come with a cost. Where’s the catch?” said Berg. “And here it was: ‘We’re going to switch you guys from a product distribution to a royalty-based system.’”
“We brought up the fact that our contract literally says, we don’t charge royalty, unlike most franchise systems,” he continued. “We said, ‘Well, if it says we don’t charge royalty, you’re going to have to get us to sign new contracts.’ And that’s kind of where this fight came from.”
The Independent Association of Line-X Franchises formed in early 2022 as a chapter of the American Association of Franchisees and Dealers. Dialogue continued with the franchisor, and franchisees wanted to negotiate a resolution, said Einbinder, but Line-X took a hardline position that included planned enforcement of its non-compete clause that in turn hardened the stance of franchisees.
On November 3, 2023, Line-X and Boggs sent to legacy franchisees what the company called its “path forward,” outlining the move to a royalty-based system with a 6 percent royalty fee and the shift to a national marketing fund contribution of 2.5 percent. Franchisees were previously required to spend 5 percent of gross revenues on local marketing; the new franchise agreement would put half of that into the Line-X System Advertising Fund.
Other changes include a requirement to offer 21 “core services” and the addition of a monthly $600 POS fee. The company said it would reduce the price it charges franchisees for chemicals once they begin paying royalties.
“These changes are an important prerequisite to become a true retail franchise. Moving to a royalty-based relationship creates a vital connection between Franchisee and Franchisor, one that ensures the Franchisor’s success can only come with the success of the Franchisees,” wrote Boggs in the “path forward” letter. “It connects all of LINE-X—it has us all pulling together—in pursuit of our vision: to be the Undisputed Leader in Vehicle Upfit Services.”
In an interview, Boggs expanded on that point and said Line-X is moving more into the vehicle upfit space where franchisees “can make a lot of money.”
“We’re changing with the times and flowing to where there are some incredible opportunities,” he said, as the category of upfit services—the addition of accessories for performance and comfort or customization for commercial service vehicles—is growing quickly “and lacks an undisputed leader.”
“There’s incredible power in us moving together to take that leadership position.”
Legacy franchisees were offered a five-year transition agreement with a two-year royalty deferment program, after which they could sign a new 10-year agreement or exit the system via a forbearance program. Post-contract legacy franchisees in good standing could also choose the forbearance program.
The forbearance option, said Einbinder, includes unfair and unreasonable demands in exchange for Line-X not enforcing its non-compete obligation. In order to continue operating their business independent of Line-X, exiting franchisees would have to turn over their customer records and agree to buy chemicals exclusively from Line-X at a 20 percent price premium for two years.
Scott Keck, a franchisee in Tulsa, Oklahoma, and co-founder of the franchisee association, said most owners would lose more than half of their current net revenue if they signed the new franchise agreement. “I don’t know of any situation that a franchisor is trying to implement a change in the system that will literally, as far as good faith and fair dealing, will literally take your income in half and reward them with what was your income for literally doing nothing,” he said.
Hess, the franchisee in New Jersey, agreed that the Line-X model is not viable with imposition of a royalty. His net income was $120,000 last year, an amount he said would drop to $56,000 if he agreed to the new terms.
“It seems that it’s all fallen on deaf ears of a private equity-owned franchise or wanting to play by the typical franchisor playbook that they’re going to squeeze their franchisee for every dollar they can get,” Keck added.
Dispute extends to non-competes
Keck, who’s been in the Line-X system since 1997, said historically, the company didn’t enforce its non-compete provision when franchisees left the system. That changed under the new management, which “didn’t sit well with me,” he said, and was another catalyst for the formation of the franchisee association.
Einbinder said he’s so far filed 10 separate arbitration claims for two groups of franchisees asking for declaratory judgment and injunctions against Line-X to prevent enforcement of the non-compete provision, which requires operators to stop spraying bedliners and, in some cases, providing upfit services for two years.
He is also defending several former franchisees who’ve been hit with arbitration claims by Line-X as it pursues enforcement of the non-compete obligation.
The company’s franchise disclosure document lists four franchisor-initiated arbitrations filed between October 4, 2022 and August 23, 2023, for, among other allegations, “violation of the non-compete, and breaches of the Franchise Agreement for violation of the post-termination obligations.”
Because the franchisor was based in Huntsville, Alabama, until its move in 2022 to Charlotte, North Carolina, Einbinder said the applicable law in the arbitrations he involved with is Alabama’s, which is favorable to franchisees. In 2016, he explained, Alabama changed its restrictive covenant law in a way that is protective of franchisees and states restrictive covenants are not enforceable in any agreement unless they meet one of six specific exceptions.
“We’re pretty clear” the exceptions “are not applicable to our situation,” he said.
Boggs said the notion that Line-X hadn’t previously enforced its non-compete obligation is “not an accurate reflection of history.”
“We are obligated to protect the system and protect who is staying,” he said.
The U.S. Federal Trade Commission, meanwhile, continues to examine the use of non-compete provisions in franchise agreements as part of its broader inquiry into fairness within the franchisor-franchisee relationship.
The Independent Association of Line-X Franchises conducted its own campaign to inform the FTC of issues faced in the system, and three of its board members—Berg, Keck and Jim Hutchek—met with FTC staff in Washington, D.C., March 6 to further explain the situation and the effects of non-compete clauses on their businesses.
“We were picked because of our unique situation and how our non-compete is attempting to be enforced. The focus on non-competes in franchising has been overlooked for too long and they requested our testimony to further understand these complex issues, especially in regards to how private equity is affecting franchising,” wrote Hess in an email after the meeting. “Hopefully our testimony will help to create more favorable rules for future franchise relations.”