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Tuesday
Dec292015

10 Ways to Reduce Vicarious Liability Risks; and Paying Attention to Contractual Statutes of Limitation

Franchise 101 News

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

Franchise Lawyers

December 2015

 

National Award: Best Law Firms 2016 (Franchise Law)

We were named one of U.S. News & World Report's 2016 Best Law Firms for franchise law. According to the publication, the selection is based on rigorous scrutiny of client and lawyer evaluations -- at least one attorney from the firm must be eligible for Best Lawyer ranking in a particular practice area within a specific region. David Gurnick has been selected to the Best Lawyers in franchise list for the past four, consecutive years: Franchise Law National Ranking

 

Barry Kurtz in Los Angeles Business Journal

"First time restaurant licensors sometimes struggle to help partner companies get off the ground. At the same time, they sometimes realize too late that their partners lack skills to run the business." For more information regarding Los Angeles's popular gourmet marketplace and cafe, Joan's on Third, read: Eateries Fed Up

 

Tal Grinblat, David Gurnick and Nicholas Kanter in Valley Lawyer

"Individuals and businesses are becoming increasingly vulnerable to electronically posted falsehoods, invasions of privacy, revenge and other negative content... There are several strategies and legal tools for victims and lawyers to fight back." Read Online Negativity: How to Fight Back, for details.

 

FRANCHISOR 101:
10 Ways Franchisors Can Reduce Vicarious Liability Risks

 

Franchise Vicarious Liability 

The U.S. Department of Labor says McDonald's is liable for actions of franchisees. In the last three months a California federal court said McDonald's could be liable for a franchisee's alleged failure to pay overtime and provide meal and rest breaks.

But another California federal court dismissed similar claims against the franchisor of ARBY's. In 2014 the California Supreme Court said Domino's Pizza was not liable for misconduct by a franchisee's manager. The decision was close, decided by a 4-3 vote. All of these cases concern franchisor liability for acts and omissions of franchisees.

There are several theories on which a franchisor may be liable for acts of omissions of a franchisee.

One is the claim that the franchisor has so much control over the franchisee as to be, in effect, a principal or employer, with the franchisee being an agent. Another is the claim that the franchisor let the franchisee appear to the public or to employees to be an agent or branch of the franchisor. A third theory, developed in recent years, is that the franchisor exercises control over the franchisee's employees, and is therefore their joint employer along with the franchisee they work for.

Here are ten steps franchisors can take to reduce the risk of being liable for actions of their franchisees:

1. Choose or change the franchise company's name to something different from the name of the franchise. If the franchise brand is "Apex Advisors" or "Bubble Balloon Parties" the franchisor could be AA Franchising, LLC or BBP, Inc., or another formulation. Many lawsuits simply use the name of the franchise as the Defendant. By using a different name, a franchisor will reduce the risk of being inadvertently named as a defendant.

2. Require each franchisee to use and inform others of its/their/his/her true name. Franchisee business cards, stationery, checks, signage, advertising, menus, service lists, memos, and other materials should state the true name of the person or company that operates the franchise. Require each franchisee to display a plaque, for example: "This Apex Advisors Franchise is independently owned and operated by Sarah and Johan Jones." Other ways are to present certificates of training, longevity (years of ownership) and awards that state the independent owner's name.

3. Require the franchisee to display a sign in the employee area, possibly on the doorway to the work and customer area, reminding employees who owns the franchise. For example: "This franchise is independently owned by Sarah and Johan Jones. We appreciate your service and want to remind you that you are employed by us, not Bubbles Balloons." The franchisee should state a similar message on communications to service providers, inventory suppliers, utilities, chambers of commerce and other trade associations.

4. Review the franchise agreement, operating manual and operating policies to remove controls or requirements that are not essential to goodwill of the brand. For example, restricting the activities of franchisees' employees when they are not at work; specifying the color scheme of the employees-only area, or designating suppliers for a franchisee's holiday party are matters that do not protect the brand, and should be removed from the operating manual.

5. Remind franchisees in writing of all operational aspects of the business in which they are the decision-maker. Examples include site selection (franchisor does not select site but only consents to site selected by franchisee), lease negotiation, where and how to advertise, recruiting personnel, deciding who to hire, setting compensation, conducting reviews and giving raises, setting and scheduling hours, choosing which publications to advertise in, choosing which charities to support, setting prices, managing inventory, whether to extend credit; how much credit to extend; and declining to do business with some customers.

Store and location decor is an area where franchisors may consider allowing franchisees more flexibility. A McDonald's or other franchise can still be recognizable as part of the chain, even if the franchisee has wider discretion to customize or individualize many aspects of layout and decor.

6. State in the franchise agreement that the franchisee is responsible for safety of customers, workers and vendors who are at the premises and require the franchisee to be attentive to these matters.

7. Make sure the franchise agreement has indemnity language requiring the franchisee to indemnify the franchisor for any claims arising from the franchised business including employment claims by the franchisee's employees against the franchisor.

8. The franchisee should be required to purchase liability insurance and name the franchisor and franchisor's management and personnel as additional insureds under the franchisee's insurance.

The franchisor should require the franchisee to annually provide a copy of the full policy, so in the event of a claim the franchisor can tender it directly to the insurer. In addition, the franchisee should be required to purchase employment practices liability insurance with a co-defendant endorsement in favor of the franchisor.

9. In the franchise agreement require the franchisee to cooperate in the defense of any vicarious liability claim.

10. Franchisor personnel should not give directions or instructions to employees of the franchisee. For example, in an inspection visit of a franchisee's location, franchisor personnel should call the franchisee's attention to any deficiencies, but should not presume to instruct an employee of the franchisee to make any changes. The employees work for the franchisee, not for the franchisor. Employees should not come to view the franchisor as their supervisor.

In the Arby's and McDonald's cases mentioned above, Arby's was found not liable because Arby's did not make decisions about hours, breaks, or hiring and firing of the franchisee's employees. In the McDonald's case, the court found McDonald's might be liable, because the franchisees' employees said they believed McDonald's was their employer, partly because they wore McDonald's uniforms, served McDonald's food in McDonald's packaging, received paystubs and orientation materials marked with McDonald's name and logo, and applied for their jobs through McDonald's website.

The above are some steps a franchisor can take to reduce the risk of being sued and of being liable for acts and omissions of a franchisee. This article does not list every possible step that can be taken, but provides a good place to start.

 

FRANCHISEE 101:
Pay Attention to Contractual Statutes of Limitation

Many franchise agreements include a contractual limitation period or time limit when parties can bring a claim for relief. Though the franchise agreement is often written by and for the franchisor, these limitations can help or hurt either party.

Recently a court in Ohio ruled that a contractual time limit for claims, barred an action by the franchisor. The franchisor, Buffalo Wings and Rings, sent a notice to its franchisee in early 2011 describing claims. More than one year later, the franchisor filed a lawsuit.

At the franchisee's request the court dismissed the action, ruling that the franchisor's claim was barred by the one year limitation period stated in the franchise agreement. The Buffalo Wings and Rings case is a reminder to franchisors and franchisees, to be thoughtful of both statutory and contractual time limits for bringing claims, and is a reminder that a statutory or contractual time limit may be a successful defense to a claim by the other side. 

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.

 

Tuesday
Oct272015

Catch-all Disclaimers No Substitute for Untrained Salespeople; and "Two Wrongs Don't Make a Right"

Franchise 101 News

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

October 2015

 

38th Annual Forum on Franchising

Barry Kurtz, David Gurnick, Tal Grinblat, Gabe Wintner and Sam Wolf all attended the American Bar Association's 38th Annual Forum on Franchising in New Orleans. The three day event provides an opportunity for attorneys from around the world to discuss industry-wide legal concerns. David Gurnick spoke on the potential legal risks and opportunities of using intellectual property created by others.

 

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

FRANCHISOR 101:
Catch-all Disclaimers No Substitute for Untrained Salespeople

 

 

How strong are "non-reliance disclaimers" or "integration" or "merger" provisions in franchise agreements at protecting a franchisor when it really matters? Only so much, a New York court recently decided.

For protection, franchisors often include "non-reliance disclaimers" in franchise agreements. By signing, the franchisee states they did not rely on any promise or representation which, though not in the printed Franchise Disclosure Document (FDD), was communicated in some way by the franchisor's staff. "Rather," the franchisee says, "I understand that only what is actually printed in the FDD is true."

To cover the other side of the issue and try to prevent any possibility of being bound by such promises, franchisors include an "integration" or "merger" clause in the franchise agreement. By signing, the franchisee agrees that only the terms printed in the agreement and its attachments - and nothing communicated outside of those documents - will actually bind the parties.

Two franchisees claimed they were induced to join the Engel & Voelkers real estate brokerage franchise by fraudulent statements made orally by E & V's representatives. E & V tried to have the claims dismissed based on non-reliance, integration and merger clauses in the franchise agreements. But the court refused to dismiss the claims and held that the anti-fraud provision in the New York Franchise Sales Act (NYFSA) prevented dismissal of claims just because such clauses were in the agreements.

The franchisees also claimed damage by not receiving FDDs before their first meetings with E & V's representatives. E & V moved to dismiss these claims as well, arguing that the franchisees could not suffer damage from failure to receive the disclosure at that early point because, ultimately, they received FDDs and were fully informed before they signed franchise agreements. Again the court disagreed, reasoning that the very existence of the NYFSA requirement implies that some harm could come to a franchisee just by beginning to speak with company representatives before having an FDD in hand.

Franchisors cannot depend fully on non-reliance provisions, merger clauses, or a "better late than never" approach to disclosure. A preferable approach is to have salespeople and company representatives trained in the rules and apply disciplined sales procedures.

To read the full opinion, click: EV Scarsdale Corp. v. Engel & Voelkers North East LLC, N.Y. Sup. Ct., para. 15,561

 

FRANCHISEE 101:
"Two Wrongs Don't Make a Right"

At one time or another, many people have occasion to be renters who feel mistreated by a landlord. This may be due to delays in repairs, responses, or just turning on the heat. A typical reaction is the temptation to retaliate by withholding rent. However, someone who watches court TV (or knows someone who does) knows that no matter how much one is in the right, failing to send the rent check is a wrong approach and often makes things worse.

In Dunkin' Donuts Franchising LLC v. Claudia III, LLC, a Pennsylvania court proved this when owners of a Dunkin' Donuts franchise did not complete a required renovation of their franchise location, and then stopped paying fees altogether. Due to their defaults, the franchisor terminated the franchise. But the owners continued operating as a Dunkin' Donuts store, claiming the original default - failure to complete renovation on time - was at least partly the franchisor's fault, because the franchisee owners had submitted a remodel plan that Dunkin' Donuts took an unusually long time to approve.

Nevertheless, the court found for the franchisor, issuing an injunction against the franchisee, prohibiting the owners from ever operating a store that used or infringed upon Dunkin's trademarks. The court noted that even if the franchisee could win its claim that the franchisor was at fault, that would not prevent the franchisor from terminating the franchise. The court held that a franchisee's remedy for wrongful termination is a claim for money damages, not continued unauthorized use of the franchisor's trademarks. The court noted that the franchisee never disputed its default nor questioned Dunkin's ownership of the trademarks, and therefore decided there was no choice but to rule against the franchisee.

Franchisees may have valid claims against their franchisor. But, to continue operating the franchise, a franchisee must stay in compliance with the franchise agreement - even if the franchisor does not. Failure to maintain this contractual moral high ground will give a franchisor the right to terminate.

To read the full opinion, click here: Dunkin' Donuts Franchising LLC v. Claudia III, LLC, DC Pa., para. 15,584

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
Jun252015

Disclosure Violations and Running the Risks of Rescission; & Pay Now or Pay Later: Liquidated Damages

Franchise 101 News

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

June 2015

 

Bryan H. Clements Named Rising Star

Congratulations to Bryan H. Clements, named one of Southern California's Rising Stars for 2015 by Super Lawyers Magazine. To be recognized, Bryan underwent Super Lawyers' rigorous selection process quantified by peer evaluations and professional achievements. Less than 2.5 percent of nominated attorneys are finally selected to the Rising Stars list. 

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

Tal Grinblat & Franchise Law Committee

The California Bar's Franchise Law Committee chaired by Tal Grinblat recently submitted proposed legislative changes to state law. One would make it easier for franchisors to negotiate terms of the franchise agreement with prospective franchisees. Another would permit franchisors to present at trade shows without formal registration, to gauge interest in a franchise concept before investing resources in developing a franchise program. If the Business Law Section's Executive Committee approves, the proposals will be submitted to the Bar for introduction in California's legislature.

David Gurnick Presents to ABA

David Gurnick, Certified Specialist in Franchise and Distribution Law, business litigation attorney and author, was invited by the American Bar Association to co-present a seminar for members attending the 38th Annual Forum on Franchising in New Orleans. The seminar topic, entitled Finders Keepers Losers Weepers: Opportunities, Risks and Considerations in Using Intellectual Property Created by Others, takes place in October.

FRANCHISOR 101:
Disclosure Violations & Running the Risks of Rescission

 

Despite a district court's recent decision in Braatz, LLC v. Red Mango FC, LLC, franchisors are well advised to comply with applicable disclosure requirements to a "T" to ensure new franchisees will not have an ongoing right to rescind their franchise agreements.

Braatz was disclosed with Red Mango's franchise disclosure document (FDD) on November 4, 2011. On December 28, 2011, Braatz received an execution version of the franchise agreement and a franchise compliance questionnaire from Red Mango. On January 5, 2012, Braatz paid Red Mango an initial franchise fee and entered into a franchise agreement with Red Mango for a Red Mango yogurt store.

After cashing Braatz's check for the initial fee and countersigning the franchise agreement, Red Mango re-sent a blank closing questionnaire to Braatz asking Braatz to change two answers it had previously provided and resubmit the questionnaire. Braatz completed and signed the replacement questionnaire and returned it to Red Mango before January 16, 2012. Braatz closed the store on March 2, 2014, filed for bankruptcy soon thereafter, and filed a claim against Red Mango for violation of the Wisconsin Fair Dealership Law (WFDL) on December 23, 2014. Braatz sought to rescind the franchise agreement since Red Mango had not provided Braatz 14 days to review the replacement questionnaire before accepting Braatz's initial franchisee fee payment.

The WFDL provides "No franchise [...] may be sold in [Wisconsin] unless a copy of an offering circular is provided to the prospective franchisee at least 14 days prior to [its] execution of any binding franchise agreement or other agreement with the franchisor or at least 14 days prior to the payment of any consideration...." If the franchisor materially violates this provision, the franchisor shall be liable to the franchisee and the franchisee may bring an action for rescission.

The court ruled that even if Red Mango was required to provide Braatz an additional 14 days to review, complete and resubmit the questionnaire, the alleged violation was not material. Since Braatz promptly completed and resubmitted the questionnaire, the court opined, the violation did not affect Braatz's decision to enter the franchise. Also, the representations Red Mango had asked Braatz to change in the questionnaire conflicted with representations Braatz had made in the franchise agreement. In the court's opinion, asking Braatz to align its representations did not present any new requirements for franchise ownership, and thus, was not enough to amount to a material violation of the WFDL's disclosure requirements. Accordingly, the court granted Red Mango's motion to dismiss Braatz's claim.

Had this case been heard by a different court, or had the court been asked to apply the franchise disclosure laws of a different state, the result could have been different. So, keeping in mind that an ounce of prevention is worth a pound of cure, franchisors are best advised to provide franchisees no less than 14 full days to review all documents before accepting any signed documents or monies for a new franchise.

See: Braatz, LLC v. Red Mango FC, LLC.

 

FRANCHISEE 101:
Pay Now or Pay Later – Liquidated Damages & Future Royalties

 

Super 8 Worldwide, Inc. v. Anu, Inc. serves as a reminder to franchisees that, in general, courts will hold franchisees and their guarantors liable to their franchisors for losses suffered when franchisees abandon their franchises before their franchise agreements have expired.

Super 8 sued its former franchisee and the franchisee's guarantors for breach of contract alleging the franchisee unilaterally terminated the franchise when it stopped operating the facility without Super 8's prior consent. Applying New Jersey law, the court granted Super 8's motion for summary judgement against the franchisee's guarantors and awarded Super 8 liquidated damages, lost royalties and attorney's fees (the court had earlier granted Super 8's Motion for Default Judgment against the franchisee and awarded Super 8 $317,591.65 in liquidated damages and recurring fees).

The result in this case would likely have been the same had it been tried in California. California generally follows the rule that a non-breaching franchisor "... is entitled to recover damages, including lost future profits, which are proximately caused by the franchisee's specific breach." Postal Instant Press, Inc. v. Sealy, 43 Cal.App.4th 1704. Therefore, if a California franchisee's actions, such as abandonment of the franchise, are the cause of the franchisor's failure to realize future profits, the franchisor may recover its lost profits from the franchisee. Interestingly, though, a district court interpreting California law in Radisson Hotels Intern., v. Majestic Towers, Inc. went a step further. It ruled, based on a specific provision in the franchise agreement, that Radisson's franchisee was liable to Radisson for lost future profits, even though Radisson had terminated the franchisee for its failure to pay past due royalties.

Most states, though, including Washington and New York, follow the general rule that "a [franchisor] is entitled to recover lost profits [future royalties] if the [franchisor] demonstrates that (1) the [franchisee's] breach caused [the franchisor's loss of future royalties]; (2) the loss may be proved with reasonable certainty; and (3) the particular [lost future royalties] were within the contemplation of the parties to the contact at the time it was made." ATC Healthcare Services, Inc. v Personnel Solutions, Inc., 2006 WL 3758618; see also Ashland Mgt, Inc. v. Janien, 82 N.Y.2d 395 (1993); and see Tiegs v. Watts 135 Wash.2d 1. Following this rule, a franchisor would not be able to collect lost future royalties if it terminates its franchisee for failing to pay past due royalties, but could for acts by the franchisee, such as abandonment, which proximately cause the franchisor's damages.

Many franchise agreements provide a provision calculating the damages the franchisor will be entitled to receive if the franchisee abandons or otherwise terminates the franchise before its expiration date (i.e. 2 years' royalties based on the past 12 months). As the Super 8 case demonstrates, these provisions are typically enforceable, even against the franchisee's guarantors

Click: Super 8 Worldwide, Inc. v. Anu, Inc.

 

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
May282015

Freshii Not Joint Employer; 7-Eleven to Disclose Metadata

Franchise 101 News

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

May 2015

 

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

David Gurnick Presents to ABA

David Gurnick, Certified Specialist in Franchise and Distribution Law, business litigation attorney and author, was invited by the American Bar Association to co-present a seminar for members attending the 38th Annual Forum on Franchising in New Orleans. The seminar topic is entitled Finders Keepers Losers Weepers: Opportunities, Risks and Considerations in Using Intellectual Property Created by Others. The event takes place in October.

Tal Grinblat published in Business Law News Annual Review

Tal Grinblat co-authored an article highlighting recent case law regarding franchising and legislation passed affecting both franchisors and franchisees in California. The article appeared in the State Bar of California's Business Law News, which publishes an update every spring. Click: Selected Developments in Franchise Law to read the article.

Are You Ready?

Upcoming state and federal laws go into effect soon. Click the links for more information:

 

FRANCHISOR 101: Freshii Not Joint Employer 


Joint Employer Liability

The National Labor Relations Board ("NLRB") recently published a memo finding that Canadian fast-casual restaurant franchisor Freshii is not a joint employer of its franchisee's employees. The ruling concerns unfair labor claims made by an employee against a Chicago franchisee.

The ruling is important in light of another initiative at the NLRB, claiming McDonald's Corporation is a joint employer of franchisees' employees at many McDonald's locations.

In the Freshii case, a franchise owner fired employees who tried to organize a union. A regional NLRB branch requested advice from NLRB's general counsel whether to treat the franchisor as a joint employer, rendering the franchisor potentially responsible with the franchisee if the firings were found unlawful.

Under Freshii's franchise agreement, system standards do not include personnel policies or procedures. Even if Freshii shared policies with franchisees, each franchisee decided if it wished to use the policies in its own restaurant. The franchisees were solely responsible for setting wages, raises and benefits for employees. Freshii provided its franchisees with a sample employee handbook, but did not require the franchisees to use it. Potential candidates could apply for jobs with franchisees through the franchisor's website, but Freshii did not screen resumes or do anything more than forward them to its franchisees. Franchisees made their own hiring decisions. Freshii only passively monitored sales and costs, and the franchisor and any software it provided were not involved in scheduling workers.

In a key finding, NLRB's General Counsel noted Freshii stayed silent after the franchisee sought advice on how to resolve the union issue. After the union started to organize at the franchisee's restaurant, the franchise owner informed Freshii's development agent, but neither the franchisor nor the development agent advised the franchisee on how to respond.

Under the NLRB's current standard, joint employer status over franchisees' employees may exist if a franchisor "meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction." Freshii was found not to have a meaningful impact over the franchisee's hiring, compensation, scheduling, discipline, or ongoing supervision.

A broader standard proposed in several cases against McDonald's indicates the NLRB may look at "totality of the circumstances," including how the separate entities structure their commercial relationship, to decide if a franchisor influences working conditions of a franchisee's employees to the extent that collective bargaining cannot occur without the franchisor's involvement.

This so-called "industrial realities" test does not distinguish between direct, indirect, or potential control over franchisees' working conditions. Its broader scope would make more companies joint employers. In the Freshii case, the NLRB Memo said that even under the broader standard, there was no "joint employer: "Freshii does not directly or indirectly control or otherwise restrict the employees' core terms and conditions of employment." Therefore "meaningful collective bargaining could occur in Freshii's absence."

The NLRB's Freshii memo is good news for franchisors and provides guidance on steps franchisors can take to reduce the risk of being deemed a "joint employer" whether for matters concerning labor practices, or other vicarious liability matters.

To read the entire NLRB memo, click: Advice Memorandum re Nutritionality, Inc. d/b/a Freshii.

 

FRANCHISEE 101: 7-Eleven Ordered to Disclose Metadata

 

Litigation and Metadata

A federal court has ordered 7-Eleven to disclose its metadata in three franchisees' claims that they were targeted for termination for financial, political and racially discriminatory reasons. Metadata is deep down "data about data" in computer files. It is created when documents are created, collected and processed to be produced in discovery.

The franchisees sought metadata of documents 7-Eleven filed in litigation, including dates of creation, authors, custodians, dates of each modification, author of each modification, and data showing who documents were electronically sent to. The Court found the franchisees showed that many paper documents exchanged in discovery were missing source, date, and other key background. The Court rejected 7-Eleven's claim of hardship or undue expense to produce the metadata.

Read the Opinion and Order: Younes v. 7-Eleven, Inc. (D.N.J. 2015) 2015 WL 1268313.

 

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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