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Before Franchising Your Business, First Consider These Factors

Chair, Franchise & Distribution Practice Group

by Barry Kurtz



Franchising is so much more than casual burger chains with drive through windows and dollar menus. It’s an industry that incorporates a wealth of blue and white collar services; distributes both high- and low-end products (consumables and non-consumables) around the globe; and provides the means for many first time entrepreneurs with the formulas to launch businesses successfully.

Professional Services Franchise

According to the International Franchise Association, franchises will generate over $700 billion in 2017.

While most people have a general sense of the structure of the franchise model, few realize the breadth of businesses that successfully employ the model, despite their interaction with these businesses on a daily basis.

Almost any successful business can be franchised, including those providing services in automotive, pet, business, personal care, real estate, and many other industries. They also include businesses selling products, whether the goods are foods, flowers, vehicles, clothing or other items.

However, franchising is not right for all businesses or business-owners. A certain mind-set is required to be a successful franchisor. Because the industry is highly regulated and laws vary state-to-state and country-to-country, starting a franchise requires the investment of a lot of heart and soul, as well as a lot of time and money.

Selling Franchises Means Starting Another Career

Keep in mind: selling franchises is a totally new and separate line of business.

For example, after selling her first franchise, the owner of a bedbug remediation service is no longer solely in the business of pest control; she is now in the business of selling franchises, too. To be successful, she will not only need to be able to sell the concept, but she will need to comply with all applicable laws and regulations relating to the sale of this type of investment, which is likely to be something that is outside of her wheelhouse. For these reasons, a business owner should evaluate whether the business would be right for franchising.

Franchising Requires Dedication

Franchising is regulated at the federal level by the Federal Trade Commission (FTC). In addition, many states have enacted franchise specific laws, and 13 states require franchisors to register before offering franchises within their states to provide additional protections to potential franchisees. These “registration states” have taken the position that franchise arrangements provide a greater potential for fraud, noting that franchise agreements are typically drafted by the franchisor’s attorneys and usually favor the franchisor.

Before offering franchises, the franchisor will have to prepare a franchise disclosure document (FDD) that complies with the FTC’s Franchise Rule.  

An FDD is an offering prospectus that provides prospective franchisees with information pertaining to 23 specific items about the franchisor and the proposed franchise. The FDD must include, among other things, background information about the franchisor and its executives, fee and cost information, samples of the contracts franchisees will sign, and information about the franchisor’s trademarks and patents.

Franchisors will generally need audited financial statements to include in its FDD. The FDD will have to comply with the laws of any of the “registration states” in which the franchisor intends to sell. The franchisor must register in those states before selling.

Formula for Franchise Success Required

Sushi Restaurant FranchiseFranchises must be attractive to prospective franchisees. A franchisor’s business model is attractive if it is based on a concept that is sustainable in the marketplace. Franchises based on fad products or services rarely survive. To be sustainable, the concept must be unique enough to withstand competition and must be one potential franchisees are willing to pay to learn.

Other factors to consider include: 

  • Laws and regulations that are applicable to the particular type of business;

  • Whether it is clear the concept will be profitable for both the franchisor and its franchisees;

  • Initial cost of creating the franchise;

  • Length of time it will take to achieve success;

  • Rate at which the franchisor can reasonably expect to expand; and

  • Franchisor’s ongoing ability to ensure its franchisees will be supplied with the inventory, supplies and equipment they require to operate. 

Franchising is a proven means for successful businesses to expand, but choosing to franchise one’s business is a decision that must be well considered.

In some cases, a business owner looking to expand may be better off selling licenses or distributorships instead of franchises if it is legally possible to do so. An experienced franchise attorney can help answer those questions.

Barry Kurtz is a California Bar Certified Specialist in Franchise & Distribution Law.

This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.


Pass the Beer: Craft Brew Distribution Law in the U.S.

CalBar Certified Franchise & Distribution Law Specialist

by Barry Kurtz



How do Americans get their stouts, ales, pilsners and porters? Beer distribution, no matter the variety, is funneled through a highly regulated three-tier system: brewers at the top, distributors take their cut in the middle, and retailers sell directly to the consumer.

This system is designed to prevent pre-prohibition style marketing tactics, in which beer makers sold directly to brewer-owned taverns and other retailers, encouraging excessive consumption. The three-tier system also generates revenues for the states, facilitates state and local control over alcoholic beverages, and establishes a bit of temperance.

State statutory and regulatory schemes establishing the three-tier system vary substantially. But states generally fall into one of two categories: license states and control states.

Beer Licensing States

There are 32 license states. Under a typical licensing scheme, brewers who brew beer in another state, but who wish to sell it in the license state, must obtain a manufacture’s license, or register with a regulatory body, in advance of signing a distribution agreement with a distributor to distribute its beer.

While the licensing systems in the license states provide accountability and an additional source of revenue for those states, they are often convoluted and difficult to figure out. Determining which licenses are needed is no easy task.

Beer Control States 

There are 18 control states. These have licensing requirements too. The difference between control states and license states is that at some point in the distribution process, control states obtain a direct interest in the revenues by taking an ownership stake as distributors or retailers of the product. These states are also known to exert greater control over the conditions of sale and promotion of alcohol within their borders.

Source: Alcohol and Tobacco Tax and Trade Bureau

Beer Cyber States 

Naturally, craft breweries are eyeing the internet as an alternative channel of distribution for their products.

Only 16 states allow brewers to distribute their products directly to retailers, with some restrictions and 16 states forbid the direct shipment of beer to their residents. States that do permit the direct shipment of beer to their residents typically require the shipper to be licensed as a brewer, distributor or retailer in its state of origin – and to obtain a direct shipper permit in each state into which the brewer wishes to sell products before shipping into these states.

Further complicating matters, shipping beer through the United States Postal Service is illegal; DHL refuses to ship beer per company policy; and Federal Express and United Parcel Service will typically only ship for properly licensed shippers (those holding a valid brewer, wholesaler, retailer license etc.), on a contract basis.

In a nutshell, while the direct shipment of beer represents a potential innovation for the beer distribution industry, the three-tier system is effectively keeping the beer industry stuck in the 1990’s.

However, beer drinking consumers are beginning to push state legislatures for change, urging them to among other things, provide craft brewers the same direct shipment rights that wine producers enjoy in a majority of the states, and reminding them that restraints on competition rarely benefit consumers.

All-in-all, one can expect that states will begin to open their craft brewers’ taps for the free-flow of beer to their constituents.

Barry Kurtz is the Chair of our Franchise & Distribution Practice Group.

This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.


Temporarily Tapped Out: More Time to Consider California's Clean Water Funding Bill

Environmental Litigation AttorneyEnvironmental Litigation Defense Attorney


Stephen T. Holzer



How deep does the clean water issue go in California? Let’s first take a look at some fairly recent and comprehensive findings:

There was good news and bad news regarding the cleanliness of California’s drinking water, according to a U.S. Geological Survey (USGS) study released in 2015.

California reservoir

The research comprised part of California’s Groundwater Ambient Monitoring and Assessment Program, more commonly called GAMA. It included 10 years’ worth of test data from untreated water in 11,000 wells across the state. GAMA considered area population and development to weight findings from the well tests.

First the good news: Contamination from nitrates, solvents, pesticides, etc. occurred in high concentrations in only five percent of California’s groundwater resources. The bad news was that naturally occurring contaminants like arsenic or uranium were found in about 20 percent of the state’s groundwater resources.

So what should be done about water contaminants?

According to the USGS, local and regional agencies are responsible for cleaning up the problem of high contaminant levels, particularly in high population areas like the San Fernando and San Gabriel valleys near Los Angeles. And the State Water Resources Control Board regulates safety under several state clean water laws, including the California Safe Drinking Water Act and the Porter-Cologne Water Quality Control Act.

But for some lawmakers, that may not be enough.

Temporarily Diverted: Clean Water Tax

Senate Bill 623, introduced by Senator Bill Monning (D-San Luis Obispo, Monterey and Santa Cruz), would impose the first-ever consumer tax on drinking water. 

The bill would levy a 95 cent per month tax on water meters “up to one inch or customers without water meters” (see Article 5 of SB 623).  The tax would increase, depending on the size of the water meter at issue, to as much as $10 per month for customers with water meters greater than four inches.

There would be exemptions from the tax for low-income customers, e.g. if the customer’s household income equals or is less than 200 percent of the federal poverty level, or if the water meter exclusively measures flow of non-potable/recycled water.

The taxes, estimated at $110 - 140M per year, will be diverted to a Safe and Affordable Drinking Water Fund to clean up our drinking water sources.

But there are an interesting mix of groups and individuals both for and against the bill. As a result of the controversy, SB 623 is now on a two year track and won’t be decided until 2018, which gives us all time to contemplate.

Strange Water Bed Fellows

Farm Crop SprayerAccording to the Visalia Times-Delta, more than one million California residents live in communities with unsafe drinking water because of 300 state water systems that don’t meet federal criteria.

Many of the communities with bad water are in the middle of the state – the breadbasket of California, where agriculture is the main industry. Perhaps that’s why the farming industry is teaming up with environmentalists to support this clean water bill.

A spokesperson for the Western Growers’ Association released this statement regarding the clean water fund:

The use of organic and commercial fertilizers are necessary to replenish soil nutrients to allow for crop production. We believe it is in the best interests of the people of the state of California to have a safe and secure food supply grown in California for the benefit of people everywhere. . . SB 623 strikes the needed balance between providing the necessary resources for addressing critical drinking water needs, while protecting agriculture from certain nitrate related enforcement actions in the short-term. 

The Association of California Water Agencies, however, opposes SB 623 because the bill turns hundreds of water agencies into tax collectors, opens the door to more taxes on water in the future, and thus hinders the affordability of water, which is fundamental to life.

The Association thinks California’s General Fund and the income from the Safe Drinking Water State Revolving Fund should pay for cleaning up drinking water.

And not all environmental groups are on board with SB 623, as some contend the bill gives the agricultural industry a “pay to pollute” pass, as the bill would allow farmers to enroll in a waiver program by paying an applicable fee, potentially protecting them from environmental enforcement actions.

So one question that must be answered between now and a legislative vote in 2018: How best can we protect both our food and our drinking water suppliers? Will SB 623 take care of one challenge without sacrificing the other? 

Stephen T. Holzer is a Business Litigation Attorney and the Chair of our Environmental Practice Group.


This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.


Franchise Litigation Rising Over Dietary Considerations

Chair, Franchise & Distribution Practice Group

by Barry Kurtz



Rising concerns over food sourcing and preparation is leading to more and more litigation for restaurants and franchises.

Most of the lawsuits claim discrimination, which makes sense as many dietary strictures are rooted in religious tradition. Other restaurant lawsuits are based on disability discrimination, as some plaintiffs suffer physical hardships when their dietary needs are not met, or are blatantly ignored.

Then there are franchisor-franchisee lawsuits, generally over how restaurants are allowed or not allowed to market, and regarding suppliers of specialty foods.

Here’s a closer look at the litigation menu:

First Course, Gluten Free

Gluten-free Diner DiscriminationRecently, a living-history museum in Virginia forced a fifth grade student on a school field trip to eat his home-prepared gluten-free (GF) meal outside in the rain – the museum’s restaurant had a strict “no outside food” policy. The boy’s father tried to talk to the restaurant employee who was enforcing the rule and then to the manager, who steadfastly refused to make an exception.

The family’s GF discrimination lawsuit cites violations of Section 504 of the Rehabilitation Act of 1973, Title III of the Americans with Disabilities Act (ADA), and the Virginia Rights of Persons with Disabilities Act.

Here in California, a gluten-free class action lawsuit was recently dropped by the lead plaintiff. In this case, Anna Marie Phillips was contesting P.F. Chang’s $1 surcharge for GF menu items, pointing out that customers who asked for vegan substitutions, or peanut and peanut oil-free dishes, were not similarly charged. Phillips dropped her suit because of complaints from a group who advocates for celiac disease victims.

But even though the suit was dropped, a legal question looms: Is Celiac Disease considered a disability under the federal ADA or various state laws?

Restauranteurs wanting to avoid ADA suits may be best advised to accommodate GF diners whenever they can – without surcharges, unless the extra costs apply to all special requests. (We can hear the revamped Burger King commercial now: “Hold the pickles, hold the lettuce, special orders don’t upset us…if we can charge you just a dollar more…”)

On the other side of the healthy food coin, a customer in Massachusetts brought a class action lawsuit against 20 Dunkin’ Donuts stores last year. His complaint?  He asked for real butter on his bagel but was served a butter substitute instead. The point in this case, according to the plaintiff’s attorney, is the need for truthful representations.

Point taken. At the point of a butter knife.

Second Course: Religious Concerns

Food and Cultural ConcertsAlso of note recently are the lawsuits initiated by those concerned with kashrut (kosher) or halal diets. Though pork is forbidden in both of these, the lists of allowed and forbidden foods diversify a bit for Jews and Muslims.

A Muslim customer in Michigan sued Little Caesars for $100 million last May, alleging he accidentally ate pepperoni, which is strictly prohibited by Islamic law because it is composed of pork. The plaintiff specifically ordered halal pizzas, and though the boxes were labeled halal, they were topped with regular, non-halal pepperoni.

On the other hand, many Hindus believe in non-violence, including non-violence toward animals. Thus, many practitioners are vegetarian, or lacto-vegetarian, if not fully vegan. Some Hindus will eat meat, but draw the line at beef.

Remember the lawsuit over french fries? McDonald’s labeled their fries vegetarian, but litigation ensued when customers realized the fries and hash browns were cooked in a vegetable oil containing “the essence of beef” to enhance flavor. The franchisor paid over $10 million to settle the complaints.

It’s important for franchisors, franchisees, distributors or suppliers, and employees to know the differences between halal, kosher, Hindu, vegetarian and vegan diets. Wait staff, food expediters and kitchen staff should be especially aware of legal consequences when making a simple mistake, like putting meat-filled samosas in a vegetarian-labeled container.

Even if such mistakes don’t lead to lawsuits, they definitely lead to customer mistrust and injured reputations for the restaurant.

Third Course: Franchise Agreements and Policies That Just Won’t Fly

Unauthorized products, particularly in the food industry, can cause system-wide problems. One of the primary purposes of franchisors approving suppliers is so that the corporate office can trace problems in food quality or sanitation. Outbreaks of food poisoning, a discovery that a unit’s fries are cooked in oils containing animal byproducts, or that a hot dog isn’t really kosher all lead to an injured reputation for the unit as well as the franchise system.

Further, consistently ignoring the franchisors requirements regarding ingredient sourcing can lead to an agreement termination, and possibly, litigation.

But here’s another twist on the food supply problem:

KFC Franchisee Halal Chicken

The KFC Corporation (franchisor of Kentucky Fried Chicken restaurants, or “KFC”) was recently accused of enforcing an allegedly unknown policy that prohibits religious claims regarding KFC products.

The plaintiff, a multi-unit franchisee owner, alleges he has sold halal chicken for 14 years with KFC’s help; the religious claims prohibition is not part of the franchise agreement or disclosure statement; and at no time since opening his first restaurant did the franchisor ever mention the prohibition. The franchisee claims he was first made aware of the provision in December 2016, and that KFC’s policy violates the Illinois Halal Food Act. He expects to lose $1 million in revenue annually.

Boxing It All Up

It’s easy to sum up the lessons – be respectful, be aware, and be proactive.

To avoid potential litigation, restaurant operators should ensure all employees handling food are well trained. It may be difficult to instill knowledge about every ingredient in every menu item, but at least train workers to ask management or kitchen staff when they don’t know the answers to customer food questions. Front of the house staff should never tell the customer what s/he thinks the customer wants to hear, or provide the easy answer when busy.

Also, be very wary of triggering discrimination complaints like the ones mentioned in the gluten-free lawsuits cited earlier. There shouldn’t be one set of rules for GF requests, another for people with allergy concerns, and others for halal or kosher diets. If imposing surcharges for one type of food modification, impose the same surcharges for all. (Though it’s probably best not to initiate extra charges at all.)

Franchisors, ensure franchisees are using approved suppliers only. If making policy changes about food supply or anything else, first consider whether or not those changes are going to cause economic hardships for the franchisees, and whether or not the changes are contractually enforceable.

Franchisees, don’t go off menu with ingredients. The suppliers pre-approved by the franchisor are generally well-vetted. Their ingredients may cost a little more, but you can probably assume the higher costs are due to better quality, legitimate certifications, and the like.

Barry Kurtz is a California Bar Certified Specialist in Franchise & Distribution Law.

This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.


Gas Station Dealers: A Review of the Petroleum Marketing Practices Act

Franchise Litigation Attorney David GurnickCertified Franchise & Distribution Law Specialist

by David Gurnick


So far in 2017 no federal or state court in California issued a published decision under the Petroleum Marketing Practices Act (“PMPA”) – despite the fact gasoline demand and consumption continue to rise. The reason for fewer cases may be the ongoing decline in number of gas stations and dealers. For dealers who operate as franchisees, it is useful to be aware of the PMPA.

The PMPA was passed nearly 40 years ago, in 1978. Congress sought to protect gas station franchisees from being unfairly terminated or not renewed by their oil company franchisors.

Its basic rule is that a franchisor cannot terminate a dealer or refuse to renew a dealer’s franchise at the end of the term. The law then states exceptions. For a franchisor to lawfully terminate or not renew a franchisee, it must fit the circumstances into one of the law’s exceptions.

A franchisor may terminate or not renew a franchisee dealer in the following circumstances: 

  • If the franchise dealer does not perform the franchise agreement, or try in good faith to carry out its terms. 

  • If the franchisor withdraws from the market area where the dealer is located. 

  • The franchisee fails to pay the franchisor on time. 

  • The franchisee fails to operate for 7 days. 

  • The franchisee commits fraud, criminal conduct or files for bankruptcy. 

  • The franchisee becomes severely disabled, physical or mental. 

  • The franchisor loses its lease for the location. 

Nonrenewal by the franchisor is allowed if: 

  • The franchisee did not operate in a clean, safe and healthful manner. 

  • The franchisee did not correct problems identified in customer complaints. 

  • The parties cannot agree on renewal terms. 

  • The franchisor decides to convert the location to a different use or to sell or replace the location. 

  • The franchisor decides the location is not economical. 

The above circumstances for termination or nonrenewal are summaries. The actual statutory grounds include additional restrictions and conditions on the franchisor.

For example, some of the grounds apply only if the franchisor’s decision was made close in time to when the situation occurred. Franchisor decisions must be made in good faith. In some cases, the franchisor is required to offer to sell the premises to the franchisee.

A franchisor seeking to terminate or not renew a dealer must provide written notice under the rules of PMPA.

For example, if the franchisor’s action is due to breach or misconduct by the franchisee, the franchisee must be allowed an opportunity to correct the breach. A franchisor must provide notice at least 90 days before the termination or nonrenewal date. The notice must meet requirements as to form. It must state the date of termination or nonrenewal and provide a summary statement specified by the PMPA.

For a dealer whose rights are being violated, the PMPA allows an action in federal court. The PMPA provides a relaxed standard for the court to grant an injunction against wrongful termination or nonrenewal. The PMPA directs the court to grant a preliminary injunction if the franchisee shows: the franchise is being terminated or not renewed; there are serious questions to be litigated; and the hardship to the franchisor from an injunction is less than the hardship to the franchisee if no injunction is granted.

A dealer who wins PMPA litigation can recover damages, punitive damages, expert fees and attorney fees. In one case, $2.5 million of damages was awarded against a franchisor (Sun Oil) that stopped selling product to its dealer on credit and told the dealer to stop using its trademark.  

A jury agreed that the franchisor had not followed the PMPA’s requirement to give an advance notice of termination. A franchisee whose claim is frivolous could be ordered to pay the franchisor’s attorney and expert fees.

David Gurnick is a business litigation attorney and a Certified Specialist in Franchise & Distribution Law.


This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

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