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Wednesday
Oct042017

Accidental Franchise = Potential Lawsuits, Fines + Other Penalties

CalBar Certified Franchise & Distribution Law Specialist

 

by Barry Kurtz

818-907-3006

 

Business owners looking to expand may leave themselves vulnerable to several obvious losses, including those related to finance, brand identity, and customer loyalty. Resources, including exemplary human resources, are sometimes spread too thin.

But there is another risk that should be considered, one that is not quite so obvious – that of accidentally franchising the business. This pitfall could lead to potential litigation, not to mention years of scrutiny and torment by government regulating agencies.

But how does a business owner inadvertently franchise a company, without specifically setting out to do so? It helps to first understand what a franchise is, and where the business operates.

For example, under California law a business relationship is a “franchise” if: 

  1. The business will be substantially associated with the franchisor’s trademark;

  2. The franchisee will directly or indirectly pay a fee to the franchisor for the right to engage in the business and use the franchisor’s trademark; and,

  3. The franchisee will operate the business under a marketing plan or system prescribed in substantial part by the franchisor.

The Federal Trade Commission and several other states use similar characteristics to determine the difference between franchises and other business opportunities.

Then there are states that incorporate different elements in their franchise definitions. In Hawaii for example, the three elements that constitute a franchise are trademark license, required fee, and “community of interest”, or the mutual interest of the franchise company and the purchasing business to market goods and services.

Franchise Trademarks

If a business uses another company’s trademark to identify itself, or uses it in its advertising, the business may likely be found to be “substantially associated” with the enterprise company’s, or franchisor’s, trademark.

Licensing agreements may be a bit challenging when trying to avoid becoming a franchise, as they usually grant rights to the purchaser to use intellectual property, and payments or royalties are definitely made in return. Pay particular attention to state and federal regulations to walk the line between franchising and licensing.

Franchise Fees

Just about any payment can be interpreted as satisfying the “fee” element, regardless of whether the parties call it something else. And fees are generally involved no matter which path to expansion a business owner chooses, because the goal of growth is profit.

Franchise Controls & Marketing

The third element, sometimes referred to as the “control” element, requires the franchisee to operate the business under a specific method or system – it’s the “recipe for success” so to speak

  • A franchisor will typically provide its franchisees with an operations manual containing a system of operations and closely monitor its franchisees for compliance to protect the integrity of its system.

  • Franchisors usually mandate the use of specific suppliers, and in some cases, act as the exclusive supplier of certain products or services sold by their franchisees.

  • Franchisees rely on their franchisors for advice, training, advertising, increased purchasing power and marketing assistance.

Differences Between Franchise, License and Distribution Agreements

Under a typical licensing arrangement, one company permits another to sell its products or services in exchange for a percentage of the proceeds without any other involvement on the part of the licensor.

In dealership and distributorship arrangements, independent businesses operate under their own trade names. The dealers or distributors usually buy products or services from the other party at wholesale prices and then resell them to the public. Neither party is substantially involved in the business affairs of the other. 

Franchises have many advantages for both franchisors and franchisees. Creating a franchise system allows franchisors to expand already successful business concepts, achieve greater brand recognition and diversify risk through the investments of its franchisees. Franchisees generally enjoy access to a proven business system and a wider customer base, greater brand name recognition, a stronger market presence, group purchasing discounts, professional marketing, research and development benefits, and continuing education and training. However, business owners and their advisors must be able to spot the telltale signs of a franchise to avoid unwittingly becoming or contracting with accidental franchisors.

Keeping with the California example, true licensing, distributorship and dealership arrangements lack at least one of the three elements of a franchise defined under state law.

But they also lack the level of scrutiny and regulation of a franchise. Business owners should decide if they’re ready for that level of commitment. The rewards are great, but franchising requires a certain “upping of the game”, if you will.

Business owners who suspect they may have inadvertently sold franchises when they really wanted to just expand operations, should seek legal counsel immediately.

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

Disclaimer:
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.

Thursday
Sep282017

Executives Behaving Badly: Can CEO be Fired for Kathy Griffin Hate Speech?

Wrongful Termination Defense

by Amy I. Huberman

818-907-3014

 

Neighbors don’t always get along – not even affluent neighbors living in exclusive gated communities in Bel-Air.

Disciplining Executive EmployeesThis was proven most recently, when the Huffington Post released security camera audio of Jeffrey Mezger yelling profanities at his neighbor Kathy Griffin and her partner Randy Bick. Warning: the audio is definitely NSFW – keep the speakers on low so as not to offend colleagues.

Mezger is the Chief Executive Officer of KB Home which is one of the largest home builders in the nation, and a publicly traded company.

Griffin, of course, is a well-known and somewhat controversial comedienne. In July she shaved her head to show support for her sister who was dying of cancer. In August she was fired by CNN for posting a photo in which she held a mask of President Donald Trump covered in fake blood. In mid-September, Griffin’s sister passed away, and more recently, she was the target of Mezger’s rant.

Mezger called Griffin, among other things, a “bald f-ing dyke” – not just obscene, but truly insensitive to Griffin’s recent loss.

The reason for Mezger’s rant?  He was upset that Griffin and Bick called the police with a noise complaint between 8 and 9 p.m. on a Saturday night. The alleged noisemakers were Mezger’s young grandchildren who were playing in the pool – supervised by the children’s mother and grandmother.

Mezger’s anger may or may not be justified, but how he expressed his anger was not. His employer acted quickly to minimize damage.

An Employer’s Right to Terminate

Some may believe what an employee does outside of the workplace is strictly the employee’s business. That’s mostly true, but only to a certain extent. And what about free speech rights?

These concerns were addressed recently, just after the Charlottesville “Alt-Right” march last August. 

Photos from Charlottesville featured individuals who were later identified by the public in social media, and tagged by Twitter user @YesYoureRacist. There was a very public call to action via social media for employers to fire the Alt-Right participants, particularly those brandishing swastikas.

Here are some legal clarifications:

First, the Bill of Rights protects citizens from our government’s attempts to quash speech – the Bill doesn’t protect employee speech from employers. There are other laws for that, as seen below.

Second, most California employees are “at will”, and can be terminated for any reason or no reason at all, provided the decision is not based on race, age, religion, gender, gender identification, marital status, or other protected categories defined by state and federal laws.

California’s Labor Code section 1101-1106  prohibits employers from discriminating against employees for expressing political views. Discriminatory or adverse acts could include firing, or refusing to consider the employee for promotions, bonuses, professional training, or other opportunities. However, there are exceptions. 

For instance, if an employee’s political activity creates a conflict of interest, or if the activities interfere with work duties.  In Mezger’s case, there is some evidence KB Home’s stock prices dropped about three percent following release of the meltdown audio. As CEO, Mezger has a fiduciary duty to protect the company.

How Can Employers Reduce Risk of Wrongful Termination Claims?

Separation Agreement to Reduce Claims Risk

Mezger’s expletive-ridden rant created a public perception problem for KB Home. But the employer in this case reacted quickly and we think, effectively.  

Here’s what employers in this position should consider: 

  1. The home builder chose to slash Mezger’s year-end bonus by 25 percent. There is some question as to whether or not the CEO will even earn a bonus this year, but Mezger is on notice that his behavior affects his income.

  2. KB Home created a written record expressing that the CEO’s “personal dealings with a neighbor is unacceptable….” The record is a public filing with the securities exchange, but most other employers can just send a troublesome employee an email or memo. Either way, the employee should be informed in writing, and a copy added to the personnel file.

  3. The employer protected its interests. Though KB Home states it has full confidence in Mezger’s abilities (this may cause a problem if Mezger ever files a wrongful termination suit against KB Home in the future), the builder also states outright that Mezger will be terminated should similar incidents occur later. 

The lessons for employers?

First and foremost, make expectations clear. If those expectations are not met, consider a separation agreement as a means to offer the employee a bit of transition assistance in return for a waiver of future claims.

Amy I. Huberman is an Employment Defense Attorney.

Disclaimer:
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.

Friday
Sep222017

Lighting Up Legislation: Regulating Recreational Marijuana in California

Environmental Litigation AttorneyEnvironmental Litigation Defense Attorney

Stephen T. Holzer

818.907.3299

 

California voters legalizing the use of recreational marijuana under Proposition 64, also known as The Adult Use of Marijuana Act (AUMA) last November is just the beginning. Deciding how cannabis will be grown, sold and consumed involves a lot of deep thinking by state and local legislators.

For one thing, AUMA has been replaced by the Medicinal and Adult-Use Cannabis Regulation and Safety Act, or MAUCRSA. The new law created one system of laws to regulate both medicinal and adult recreational use.

As we near the end of September, we realize two things: 

  1. Retailers are already stocking shelves with decorations for December holidays – it’s called “Christmas Creep” – a phenomenon that seems to arrive earlier and earlier each year.

  2. This year, “Cannabis Creep” is encroaching on the state too, as growers, distributors, potential retailers and consumers all keep their eyes peeled for the latest local and state laws regarding the purchase and sale of marijuana and marijuana-related products. Just think of the state government stocking up the legal shelves with bills and licensing requirements. 

Here’s a look at what’s happening currently in Los Angeles and state laws.

Regulating Marijuana Business Interests

State licenses for marijuana businesses are required, while many cities in California will also require approvals if not their own licensing. Los Angeles for example, requires city approval.

Los Angeles’s Proposition D, approved in 2013, will go up in smoke in January. The old ordinance prohibited sales of pot within the City unless the business dealt in medical marijuana and met certain other guidelines, like registration with the City Clerk. Proposition D will be repealed by Proposition M as of January 1, 2018.

Proposition M gives the L.A. City Council authority to enact and revise regulations regarding medical and recreational marijuana; enforce laws or collect fines; and tax sales.

Los Angeles Zoning: The City Planning Commission passed a Los Angeles ordinance to establish zoning regulations affecting pot growers, distributors and sellers. The primary rule under this ordinance to remember is the 800 ft. rule – no selling within 800 feet of schools, drug or alcohol treatment and rehabilitation centers, public libraries, public parks, or other cannabis retailers and microbusinesses that sell marijuana on site.

There are other zoning rules for Los Angeles: generally speaking, licensed sellers are allowed to sell in retail zones, and licensed cannabis product manufacturers are permitted to make products in manufacturing zones.

Cultivators though, have much more stringent rules pertaining to outdoor growth vs. greenhouse or nursery growth. See the info starting on page 9 of the L.A. ordinance link above for more information.

The California government developed a website to keep everyone straight at the state level: California Cannabis Portal (CCP).

As of now there are three branches of marijuana government: the Bureau of Medical Cannabis Regulation (BMCR, the main regulatory office), CalCannabis Cultivation Licensing (branch of the state’s Department of Food and Agriculture, also referred to as just CalCannabis), and Office of Manufactured Cannabis Safety Branch (MCSB is part of the state’s Department of Public Health), all post updates here.

State Licensing: According to CCP, applications for licensing are coming soon.

Under Senate Bill 94 which was chaptered in June, there will be two types of cannabis sales licenses in the state of California. Retailers selling recreational marijuana to adults should apply for A-licenses. Businesses selling medical marijuana should apply for M-licenses.

As noted, none of the state agencies are issuing licenses yet. The BMCR is the branch responsible for retail, distributor, lab testing and microbusiness licensing; and recommends business owners pursue approvals and licenses from city and county governments while they finalize the state process.

CalCannabis estimates the first cultivation licenses will be issued in January 2018. CalCannabis is working on a track-and-trace system to record supply chain movements.

The MCSB will offer several cannabis licenses, including Type 6 (non-volatile solvent and/or mechanical extractions) and Type 7 (volatile solvent extractions) licenses – neither of which will be available for a while, as the branch expects to be able to receive applications for licenses in January.

Pipe Dreams for Consumers?

Legalizing marijuana whether for medicinal or recreational use is a weighty endeavor – one that should be taken with great deliberation for the protection of all.

But given the fact that none of the state agencies are ready to issue licenses, and realistically, don’t seem to be able to do so until well after the start of the new year, the only lighting up consumers can look forward to in the near future is that of the Christmas and Hanukah lights in December.

At least those retailers are ready to roll.

 

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

Disclaimer:
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.

Wednesday
Sep202017

Before Franchising Your Business, First Consider These Factors

Chair, Franchise & Distribution Practice Group

by Barry Kurtz

818-907-3006

 

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.

Disclaimer:
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.

Friday
Sep152017

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

CalBar Certified Franchise & Distribution Law Specialist

by Barry Kurtz

818-907-3006

 

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.

Disclaimer:
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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