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Monday
Feb232015

DBO Automatic Effectiveness Date Extension; and Quasi-Franchise Business Models

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
gwintner@lewitthackman.com
swolf@lewitthackman.com

February 2015

 

Franchise Times Legal Eagles 2015

Tal Grinblat, Certified Specialist in Franchise and Distribution Law and Chair of the Franchise Law Committee of the Business Law Section of the State Bar of California, has once again been selected as one of the best attorneys in franchising by the Franchise Times. The full list of honorees will be published in the magazine's April edition.

IFA 2015

Barry Kurtz, David Gurnick and Tal Grinblat attended the International Franchise Association's annual convention, held in Las Vegas. The event provided an opportunity to participate in roundtable discussions and learn about the latest business and operational challenges franchisors and franchisees face in today's ever-evolving market.

E-Filing Gaining Momentum

As of January 1, 2015, the Department of Business Oversight (DBO) is authorized to accept multiple types of electronic filings under several laws it administers. The Commissioner may now prescribe circumstances under which the DBO accepts electronic records or electronic signatures. This progression suggests that California may be inching closer toward a universal electronic filing system.

 

FRANCHISOR 101: California Increases Time for Automatic Effectiveness from 15 to 30 Business Days


Automatic Franchise Effectiveness Date 

A new California law has given the California Department of Business Oversight, the State's regulator of franchises, more time to review franchise registration and renewal applications, with the result that franchisors, their accountants and their attorneys must work harder and faster to update their franchise disclosure documents, prepare their year-end audited financial statements and submit their applications to renew and maintain their franchise registrations.

The law amends the automatic effectiveness statutes in the Corporations Code (Sections 31116 and 31121) to increase, from 15 to 30 business days, the length of time that the Commissioner of Business Oversight has to review franchise applications and franchise renewals under the Franchise Investment Law. The revised statute provides that registration of an offer of franchises automatically becomes effective at 12 o'clock noon, California time, on the 30th business day after the filing of a complete application for registration.

A complete application is defined as one that includes the appropriate filing fee, Uniform Franchise Disclosure Document, and all additional exhibits, including audited financial statements for the franchisor's prior fiscal year, in conformity with regulations of the Commissioner.

Because most franchisors operate under a January to December fiscal year, franchisors and their accountants should keep the timing requirements of the new law in mind since they will have to file their complete applications early in March to take advantage of the automatic effectiveness statute.

 

FRANCHISEE 101: Is It a Franchise?


Accidental and Quasi-Franchises

Franchise 101 Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

For decades, non-franchise businesses have tried using a quasi-franchise business model (i.e., any business format license) to distinguish themselves from franchisors to avoid onerous franchise investment laws. A recent federal decision from California serves as an important reminder that it doesn't pay to skirt franchise registration requirements when a business arrangement meets the threshold requirements of a franchise.

In Chicago Male Medical Clinic v. Ultimate Management, Inc., a federal district court in Los Angeles ruled that a consulting agreement between a Chicago medical clinic and a management company amounted to the sale of a franchise under Illinois law.

The parties stipulated to the following facts: the clinic and the franchisor entered into a consulting agreement, giving the franchisee: 

  1. the right to use the National Male Medical Clinic trademark;

  2. a suggested marketing plan;

  3. access to the franchisor's expertise and knowledge in advertising and marketing certain medical services; and

  4. call center services.

Pursuant to the agreement, the franchisee paid an initial fee of $300,000, over $56,000 in royalties, and call center fees of over $45,000. The franchisee filed suit, alleging fraud for failure to follow disclosure requirements under the Illinois Franchise Disclosure Act ("IFDA").

Finding that the management company violated the IFDA by failing to register with the Illinois Attorney General's Office and failing to deliver a disclosure document, the court entered judgment in favor of the medical clinic, awarding the return of the initial $300,000 investment, and over $56,000 in royalties paid, plus costs and attorney fees.

Franchise laws are written in broad terms and are designed to protect franchisees. So licensors in business arrangements that fit the criteria of a franchise can wind up paying heavily on the back end if they dodge the franchise registration process.

Click: Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc. et al., DC Cal. for further information.
 
 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2015. All Rights Reserved.

Thursday
Jan222015

Accidental Franchises in Atypical Industries; FDA Labeling

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
gwintner@lewitthackman.com
swolf@lewitthackman.com

January 2015

 

Department of Business Oversight

Tal Grinblat, Chair of the Franchise Law Committee of the Business Law Section of the State Bar of California and Certified Specialist in Franchise and Distribution Law, organized and met with Department of Business Oversight (DBO) members to discuss new legislation proposed by the Committee. Tal chaired the meeting which was held in the DBO's office in San Francisco.

Southern California Super Lawyers 2015

Barry Kurtz, David Gurnick and Tal Grinblat (all are State Bar Certified Specialists in Franchise & Distribution Law) have been named Southern California Super Lawyers for 2015. The designation is determined by a 12 point peer recognition and professional achievement ratings system, and via independent research. The list is published in Los Angeles Magazine, and can be found online. Click to see our 2015 Southern California Super Lawyers.

Comparing Franchise Relationships and Beer Distribution Relationships

Barry Kurtz and Bryan H. Clements had an article published in Orange County Lawyer, regarding the similar laws governing beer distribution and franchising. Click: Comparing Franchise and Beer Distribution Relationships for more information.

Steering Clear of Franchise Financial Disasters

David Gurnick was quoted by CNBC regarding the necessity of research before investing in a franchise. To read the article, click: How to Steer Clear of Franchise Financial Disasters.

FRANCHISOR 101:
Accidental Franchises in Industries Not Typically Associated With Franchising

Accidental Franchise 

Almost everyone recognizes the nation's most prominent franchises: McDonald's, Domino's, Hilton or 7-Eleven, to name a few. And business people are becoming aware that arrangements that look like franchises, but are characterized by parties as something else, may still be franchises under U.S. laws. Examples include a successful restaurant that brings in investors to own new locations, or a plumbing or lock-and-key service that lets its best employees start their own branches. These deals may be or become accidental franchises.

Franchise 101 Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

The Federal Trade Commission's definition of a franchise may be summarized as a business relationship, no matter what it is called, in which: 

  1. One party will grant another the right to operate a business or sell goods or services, identified or associated with originator's trademark;

  2. There will be significant control or assistance from the trademark owner; and

  3. The operator must pay money to the trademark owner.

It is easy to see how these elements could all be present in the relationships described above. When the elements are present, the franchisor must prepare an extensive "Franchise Disclosure Document" and allow a 14-day cooling-off period before entering into any agreement with a franchisee. The franchisor cannot unilaterally change or terminate or not renew franchise agreements. In 13 states, registration is required before an agreement may be entered into. Violations can mean civil and criminal penalties.

Considering the wide scope of the FTC or state law definitions, the elements can be found in relationships in unexpected fields. Who would think the Girl Scouts, an organization chartered by Congress, would be an illegal franchise? But a federal court ruled the elements were present between the Girl Scouts and one of its local councils, based largely on selling Girl Scout cookies and merchandise.

Commercial shopping centers often require tenants to join and pay money to a shopping center association for advertising. These associations promote members using the center's distinctive brand, organize promotional events, regulate when tenants can and cannot conduct special sales, mandate operating hours, and require tenant members to participate in gift-card and loyalty programs. Possibly, the elements of a franchise are present, meaning the shopping center landlord or its tenant association may be a franchisor.

In some industries, such as software development and pharmaceuticals, independent businesses form networks and consortiums to develop products and services. These organizations require members to make payments to fund operations and create, develop or obtain products for members to use, sell, or distribute. Often the organization adopts a distinctive name which members and re-sellers may use, or be required to use. This scenario could contain all the elements of a business franchise, requiring regulatory and other franchise law compliance.

Unexpected franchises occur in other business relationships, too. For example, a snack-foods distributor or route driver who must pay material fees to the manufacturer (e.g., to purchase a vehicle or for advertising, training, manuals or meetings), follow the manufacturer's policies and promote the brand, could be a regulated franchise. In one case, a California court found a foreign winemaker to be a franchisor because the vintner sold ancillary promotional items to its U.S. importer and assisted in customer sales calls.

Franchise laws are written in broad terms. Companies, and organizations, even nonprofits and consortiums, that develop and distribute products and services, whether through their own members or others who are recruited, should assess whether their arrangements may be franchises.

 

FRANCHISEE 101:
Complying with the FDA's New Menu Labeling Requirement

On November 25, 2014, the Food and Drug Administration (FDA) released final rules governing menu and vending machine labeling to implement some of the Affordable Care Act's nutrition labeling requirements.

The final rule for menu labeling is entitled the Nutrition Labeling of Standard Menu Items in Restaurants and Similar Retail Food Establishments Rule ("Menu Rule"). Its coverage includes restaurant franchise systems.

According to the FDA's website, the Menu Rule "applies to restaurants and similar retail food establishments if they are part of a chain of 20 or more locations, doing business under the same name, offering for sale substantially the same menu items and offering for sale restaurant-type foods." Covered establishments include sit-down restaurants, drive-thrus, take-outs, delis (including grocery store delis), places with self-serve salad/food bars, bakeries, coffee shops, movie theatres, amusement parks, ice cream stores, convenience stores serving ready-to-eat foods and drinks, and certain bars serving alcohol. The FDA claims the Menu Rule will help consumers make informed choices by providing accurate, clear and consistent nutrition information when they eat out. The FDA says that at least two-thirds of adults and one-third of children in the U.S. are overweight or obese and eat one-third of their calories away from home.

The Menu Rule requires posting calorie information for standard menu items on the menu and menu boards, including electronic and online menus, so customers can understand the posted caloric information in context of their total daily diets. The postings must state that detailed, written nutrition information is available to customers on request. A covered establishment must have a reasonable basis for its nutritional declarations, keep records relating to the nutritional data used as a basis for, and methods used to determine, the nutritional information provided to customers, and make the information available to the FDA on request.

Starting December 1, 2015, franchisees, and franchisors operating company-owned locations, need to comply with the Menu Rule. Franchisees should be proactive and communicate with their franchisors and suppliers to obtain accurate nutritional data and determine what new standards their franchisors plan to implement to maintain uniformity and enable franchisees to comply with the Menu Rule's requirements.

Restaurant franchisors are likely starting to test standard menu items and work on new menu and menu board standards to provide to franchisees. But franchisees should not wait to hear from their franchisors since franchisees will be responsible to comply with the Menu Rule in December regardless of any action taken by their franchisors.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2015. All Rights Reserved.

 

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