Is the Franchise Agreement Negotiable?

A prospective franchisee raises a concern regarding a specific provision in the franchise agreement. Can the franchisee modify the franchise agreement base on the prospective franchisee’s concern?  e

The franchise agreement is an exhibit included in the franchise disclosure document (FDD).  The franchisor must offer prospective franchisees the franchise agreement as it appears in the FDD.  The franchisor may not offer franchise agreements different than it appears in the FDD.  However, a prospective franchisee requests a change to the franchise agreement, the franchisor may agree to the requested change. This is referred to as franchise agreement negotiated changes.

The prospective franchisee is a great candidate.  The prospective franchisee would be a great franchisee. Can the franchise agreement be modified to entice the prospective franchisee? 

There are several best practices to follow:

  • Always
    offer the franchise agreement as it appears in the Franchise Disclosure Document
    (FDD).
  • Ask
    the prospective franchisees to put a requested change in writing (it can an
    email).
  • Any
    changes to the franchise agreement should be made in an addendum. The franchise
    agreement should not be changed. 

If the franchisor agrees to waive the initial franchise fee or
other fees charged by the Franchisor, a notation of fee non-uniformity must be
made in the FDD. 

And for franchisees sold to California residents or business
operating in California, a negotiated form must be filed. 

Source: franchise blaw

Free is Not a Violation of a Franchise Non-Compete Covenant

The enforceability of a non-competition covenant is based on state law.  Generally, and perhaps uniformly, non-competitions are disfavored under the law.  Hence they are very narrowly construed. 

Restrictive covenants on employment may not be used to bar individuals from entire fields of work simply to limit the employer’s competition.

e.g., RLM Commc’ns, Inc. v. Tuschen, 831 F.3d 190, 196–97 (4th Cir. 2016)

A case out of Maryland involving Senior Helpers provides a real-life example[i].  Franchisee signs a Senior Helpers franchise agreement barring the use of Senior Helpers confidential information and engaging in a competitive business post the termination of the franchise agreement.  Competitive business under the franchise agreement is defined as Any home health care or in-home care agency or business that offers or provides non-medical care, companionship services, personal assistant services.

 Franchisee sales its Senior Helpers
franchise to another franchisee and
starts a business offering  dementia care training and consultation to
senior care facilities and family members of individuals with dementia.

[A} a non-compete provision restricting a former employee from working directly with similar businesses was overbroad and thereby unenforceable because the restriction was not tethered to actual work the employee had performed for the employer)


Seneca One Finance, Inc. v. Bloshuk, 214 F. Supp. 3d 457, 461-62 (D. Md. 2016)

Senior Helpers sues for the breach of the non-competition.  In promoting its
services and  preparing treatment plans,
Senior Helpers includes information and education about dementia.  Hence,  dementia
care training and consultation to senior care facilities and family members of
individuals with dementia is a violation
of the non-competition.

The court rejected this deduction.  Senior Helpers franchises offer companionship services and assistance.  Senior Helpers offers dementia education free to promote its services, and  incorporated dementia education into their treatment plans without charging.  Senior Helpers does not charge for dementia education.  Senior Helpers cannot bar others from selling and competing based on a service they do not charge. 


[i] SH Franchising, LLC d/b/a, Senior Helpers v. Newlands Homecare, LLC, et at. Civil Action No. CCB-18-2104 Business Franchise Guide – Explanations, Laws, cases,
rulings, new developments ¶16,353

Source: franchise blaw

Financial Disclosures After Signing the Franchise Agreement Not a Violation

The Federal FTC Franchise Disclosure Rule prohibits franchisors from sharing, discussing, giving, or showing prospective franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD). 

What about after the franchise agreement is signed?  All rules are off.  The FTC Franchise Disclosure Rule applies to the prospective franchisees.  Once the franchisee signs the franchise agreement, the franchisee is no longer a prospect. The upshot is the FTC Franchise Disclosure Rule does not apply to the disclosing, sharing, discussing, giving, or showing franchisees financials information.  Franchisors are free to share financials information post the signing of the franchise agreement.

Because they were no longer “prospective franchisees” when Haines showed them the profit and loss statements, showing them the statements did not violate the Franchise Rule. See 16 C.F.R. §§436.1(e) and 436.5(s).


Relo Franchise Services, Inc., Plaintiff v. Connor Gilman, et al., Defendants.  Case No. 1:18-cv-578 Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,350

One caution should be rendered.  Commonly, franchisors will negotiate with existing franchisees about the purchase of new or additional franchises or opportunities.  In this case, the existing franchisee may be considered a prospective franchisee in regards to the new or additional franchise and to wit, the franchisor should not share, discuss, give, or show prospective existing franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD).

Source: franchise blaw

When does not State Registration or Exemption Expire?

State laws very as to when the franchise registration
expire.  Some states only require a one-time
filings or exemptions.  Other state franchise
registrations and exemptions must be renewed yearly. 

Annual Filing Required One Time Filing Required
   
California Connecticut
Florida Georgia
Hawaii Kentucky
Illinois Louisiana
Indiana Maine
Maryland Nebraska
Michigan *North
Carolina
*South
Carolina
Minnesota Texas
New York  
North Dakota  
Utah  
Rhode Island  
South Dakota  
Virginia  
Washington  
Wisconsin  

* South
Carolina and North Carolina allow for an exemption if franchisor has a
federally registered trademark and franchisee do not purchase products from
franchisor for re-sale. 

Federal law requires that all franchisors update their
franchise disclosure document (FDD) 120 days from the close of their fiscal
year.  For franchisors with a fiscal year
that follow a calendar year ending December 31st, the FDD must be
updated by April 30th


Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30th date. 

Not all states, if fact most states registrations and exemptions
don’t follow the Federal April 30th date. 

There are only 6 state: California, Hawaii, New York,
Minnesota, North Dakota and South Dakota follow the federal rule and expire 120
days from the close of the fiscal year (April 30th).

Expiration 120 Days from Close of Fiscal
Year (April 30th)
Calendar Expiration (365 days)
   
** California Florida

Hawaii

Indiana
Illinois Maryland
New York Michigan
Minnesota Utah
North Dakota Rhode Island
South Dakota Virginia
  Washington
  Wisconsin
   
   

*
California registration action Expires April 20th (10 days early)


Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30th date. 

 

There are 10 state that follow a calendar year expiration:  Florida, Illinois, Indiana, Maryland, Michigan,
Utah, Rhode Island, Virginia, Washington, Wisconsin.

The quandary becomes post April 30th, Federal Law
requires an update of the FDD.  However,
what if the state registration has not expired. 
The state prohibits giving prospective franchisees the updated FDD until
it has been register with the state. 
But, giving prospective franchisees last year’s FDD that is registered
with the state is violation of Federal law. 

Source: franchise blaw

What is the Cost of Use Someone’s Trademark?

If you ask Walmart what the cost of using someone else Trademark, the answer is $9.5 million.  Pursuant to the case of  Variety Stores, Inc. v. Wal-Mart Stores, Inc.[i]   Walmart was sued for the use of the Variety Store’s trademark Backyard in connection with the sale of grills and grilling supplies. 

Variety has USPTO trademark registration for Backyard in the category of the lawn and gardening supplies.  Variety has been using the trademark Background in the sale of grills and grilling supplies since 1983.

Before the Court is a case in which a larger company with deeper pockets for litigation selected a product name with the same dominant word as a smaller company by which to sell the same and similar items as that smaller company. The larger company knew of the smaller company’s use — and trademark — when it decided to use the name, but the larger company used it anyway

https://cases.justia.com/federal/appellate-courts/ca4/17-1503/17-1503-2018-04-24.pdf?ts=1524594691

Walmart knowingly violated Variety’s trademark.  The jury awarded Variety $45,536,846.71 as a royalty for Walmart’s use of the trademark Backyard.  The jury also award Variety $50,000,000 in disgorgement of profits Walmart earned in the sell of the Backyard products[i]


[i] http://business.cch.com/ipld/walmart-02132019-14-217DOC570.pdf


[i] Variety
Stores, Inc. v. Wal-Mart Stores, Inc., E.D.N.C. No. 5:14-CV-217

Source: franchise blaw

What Can be Released by a Franchise General Release of Claims?

Franchisee as commonly asked
to sign a general release of claims when entering to a franchise agreement when
to transfer a franchise, when renewing a franchise, and when entering to a settlement
agreement.  Under a general
release of claims, franchisees give up their right to sue the franchisor. 

However, not always does the release of claims effective
operate to release or prevent claims against a franchisor.  Hence the case involving Charlie Grainger hot
dog franchises.[i]   It this case a class of franchisees and area
representative sued the franchisor making claims of  (1) rescission; (2) fraud, intentional
misrepresentation, and concealment; (3) negligent misrepresentation; (4) breach
good faith and fair dealing; (5) breach of fiduciary duty; (6) violation of
North Carolina’s Unfair and Deceptive Trade Practices Act; (7) racketeering
activity, in violation of 11 U.S.C. §1962(b); (8)  a pattern of racketeering activity, in
violation of 11 U.S.C. §1962(c); (9) conspiring to violate the RICO Act; and
(10) breach of contract.

The
franchisor sought dismissal of the claims based on release claims signed by each
of franchisees and area representatives incident to the signing of their franchise agreements.  Under the release of the claims, franchisees
and area representative waived their right to sue the franchisor.

Plaintiffs [Franchisees] argue that the General Release is void because it violates federal law. In particular, they argue that the release violates the Federal Trade Commission’s Franchise Rule, which provides in pertinent part that it is “an unfair or deceptive act or practice” to “[d]isclaim or requires a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments.” 16 C.F.R. 436.9(h).

Id.

Not so fast, the court rejected the release of claims.  In agreement with the franchisees and area representatives,
the court held that the release of claims was in violation of the federal law;
more particularly the FTC Franchise Disclosure Rule.  The FTC Franchise Disclosure Rule prohibits disclaiming
or waiver of any disclosures made in the franchise
disclosure documents. 

For other reasons the court dismissed RICO and Racketeering,
but allow claims of (2) fraud, intentional misrepresentation, and concealment;
(3) negligent misrepresentation; 5) breach of fiduciary duty; and (6) violation
of North Carolina’s Unfair and Deceptive Trade Practices Act to proceed.


[i] Trident
Atlanta, LLC, Dual Energy, LLC, Cynergetic AR, LLC, Ms. Marcie Bindes d/b/a KS
Enterprises, LLC, Mr. Dale Atkinson & Mrs. Rose Atkinson d/b/a Rosedale
Three, LLC, and Mr. Trent Moore d/b/a LindsTan, Inc., Plaintiffs v. Charlie
Graingers Franchising, LLC, Charlie Graingers Franchising, Inc., Louis Craig
North, Gregory Bruce George, and Jason Matthew Nista, Defendants. No.
7:18-CV-10-BO Business Franchise Guide – Explanations, Laws, cases, rulings,
new developments ¶16,354

Source: franchise blaw

What Do You Think About the FTC Franchise Disclosure Rule?

The Federal Trade Commission (FTC) drafter of the Franchise
Disclosure Rule, which requires the delivery
of the Franchise Disclosure Document to prospective franchisee is looking for comments.  The comment requires part of the FTC periodic
review of the cost and benefits of the regulations.  Specifically, the FTC is looking for comments on the following questions: 

1.                              Is there a continuing need for the [Franchise
Disclosure] Rule? Why or why not?

2.            What
benefits, if any, has the Rule provided to prospective franchisees, including
small businesses? What evidence supports the asserted benefits?

3.            What
modifications, if any, should be made to the Rule to increase its benefits to
prospective franchisees, including small businesses?

a.            What
evidence supports the proposed modifications?

b.            How would
these modifications affect the costs the Rule imposes on franchisors and
franchise sellers, including small businesses?

c.             How
would these modifications affect the benefits to prospective franchisees?

4.            What
impact has the Rule had on the flow of truthful information and on the flow of
deceptive information to prospective franchisees?

5.            What
significant costs, if any, has the Rule imposed on prospective franchisees,
including small businesses? What evidence supports the asserted costs?

6.            What
modifications, if any, should be made to the Rule to reduce any costs on
prospective franchisees, including small businesses?

a.            What
evidence supports the proposed modifications?

b.            How would
these modifications affect the benefits provided by the Rule?

7.            What
benefits, if any, has the Rule provided to franchisors and franchise sellers,
including small businesses? What evidence supports the asserted benefits?

8.            What
modifications, if any, should be made to the Rule to increase its benefits to
franchisors and franchise sellers, including small businesses?

a.            What
evidence supports the proposed modifications?

b.            How would
these modifications affect the costs the Rule imposes on franchisors and
franchise sellers?

c.             How
would these modifications affect the benefits to prospective franchisees?

9.            What
significant costs, if any, including costs of compliance, has the Rule imposed
on franchisors and franchise sellers, including small businesses? What evidence
supports the asserted costs?

10.          What
modifications, if any, should be made to the Rule to reduce the costs imposed
on franchisors and franchise sellers, including small businesses?

a.            What
evidence supports the proposed modifications?

b.            How would
these modifications affect the costs the Rule imposes on franchisors and
franchise sellers?

c.             How
would these modifications affect the benefits to prospective franchisees?

11.          What
evidence is available concerning the degree of industry compliance with the
Rule?

12.          What
modifications, if any, should be made to the Rule to account for changes in
relevant technology or economic conditions? What evidence supports the proposed
modifications?

13.          Provide
comment on any overlap or conflict with other federal, state, or local laws, or
regulations.

a.            What
evidence supports any asserted conflicts?

b.            With
reference to asserted conflicts, should the Rule be modified? If so, why or why
not?

The questions posed by the FTC provide a chance for introspective of the Franchise Disclosure Rule and perhaps more particularly the Franchise Disclosure Document.  I would gander to say the Franchise Disclosure Rule and Franchise Disclosure Document (FDD) will not be abandon or eliminated by the FTC.  And, if the FTC did abandon the Rule, many states have enacted like statutes and regulations that mirror or greater than the federal FTC Franchise Disclosure Rule, and therefore, such abandonment will cause minor alteration the regulatory nature of franchising. 

Source: franchise blaw

How Much Can Franchisees Be Charged?

It shall be an unfair or deceptive act or practice or an unfair method of competition and therefore unlawful and a violation of this chapter for any person to sell, rent, or offer to sell to a franchisee any product or service for more than a fair and reasonable price.  


RCW 19.100.180(2)(d)

One long hot button issue in franchising is charges, profits,
and rebates that franchisors receive from
franchisee purchases.  In addition to being
the brand owner, franchisors may also be the supplier of goods or services to
franchisees.  Franchisors have the right to be paid for service and value tendered.  But on the flip side, exorbitant charges can
render the franchisee unprofitable and uncompetitive in the market place. 

Within ever contract, including franchise agreements and
supplier agreements, there is implied a duty
of good faith and fair dealing.   This can translate into to not charging unreasonable
fees.  The obligation of good faith and
fair dealing is not written in the agreement, but rather is an implied obligation
in every agreement.  It is assumed. 

Washington state’s franchise law has codified into law the
obligation of good faith and fair dealing. 
In pertinent part, the codification
is quoted above.  The Washington law says
it is  “unfair or deceptive act or practice or an unfair method of competition……to
sell, rent, or offer to sell to a franchisee
any product or service for more than a fair and reasonable price.

A test of what is a fair
and reasonable price
was challenged in the case of Brewer v. Money Mailer, LLC. 
The court declined
to state a bright line rule about what is an unreasonable price.  But did say:

Selling printing services to a franchisee at more than twice what those services cost violates this provision.


ORDER GRANTING IN PART BREWER’S MOTION FOR SUMMARY JUDGMENT – 5

The court’s in its order
granting summary judgment solely looked at the franchisor’s actual cost of
services and the fee charged franchisees. 
The court did not, and it is
unknown if the parties present evidence regarding of fair market valve or
competitor pricing for like services.  The
court, in hand, disregarded per se the franchisor’s argument that it provided considerable
benefit for the fees charged franchisees.

As a matter of law, huge markups in the price of a product or service that a franchisee is required to purchase from the franchisor are simply not permitted.

Id.

The take away is when determining fees charged franchisee.  Look at the cost.  Irrespective of the benefits bestowed or
competitor pricing, the fees charged franchisee must be reasonable something
less than twice the actual cost. 

Source: franchise blaw

Is Your Franchise Claim Subject to Arbitration?

Back in 1925, Congress passed a law allowing for the enforceability of arbitration clause in contracts.  

A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.  9 U. S. C. §2.

Throughout the almost a hundred years later since enactment,
the enforceability of arbitration clauses has repeatedly been upheld.  In a case argued before the United Supreme
Court on October 29, 2019[i],
the high court has again reinforced the
bounds of arbitration.  The question at issue
before the high court was:

Who decides if a dispute is subject to arbitration pursuant to a contractual arbitration clause- an arbitrator or a judge in a court of law?

The Supreme Court says, if the contract clause such, it is an arbitrator’s place to determine if a dispute is required to resolved by arbitrated.

When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.

HENRY SCHEIN, INC., ET AL. v. ARCHER & WHITE SALES, INC. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 17–1272. Argued October 29, 2018—Decided January 8, 2019.

Here are a few quick statements
regarding arbitration in general and franchising. 

  • Yes, arbitration offers a quicker resolution than litigation. On average, US District Court cases take more than twelve months longer to get to trial than cases adjudicated by arbitration (24.2 months vs. 11.6 months)[i].
  • Your right to challenge an arbitration decision is considerably more limited than in litigation. 
  • Arbitration decisions, unlike litigation, are not public; however, both must be disclosed in the Franchise Disclosure Document congruently.

[i] A New AAA Study Confirms That Arbitration Is Faster To Resolution Than Court – And The Difference Can Be Assessed Monetarily. Posted by John P. Ahlers  https://www.acslawyers.com/a-new-aaa-study-confirms-that-arbitration-is-faster-to-resolution-than-court-and-the-difference-can-bassessed-monetarily/

[i] HENRY
SCHEIN, INC., ET AL. v. ARCHER & WHITE SALES, INC. CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 17–1272. Argued October 29,
2018—Decided January 8, 2019

Source: franchise blaw

What is the Recourse for the Filing of a Franchisee Bankruptcy?

Almost universally, franchise agreements expressly state
that the filing of a claim in bankruptcy is grounds for immediate termination
of the franchise agreement.  But, in reality,
bankruptcy laws, prohibit the franchisor from terminating the franchise
agreement based on the franchisee’s
filing in bankruptcy.  This is referred to
as a stay in bankruptcy. 

A debtor [franchisee] in bankruptcy is shielded by the automatic stay under Sec. 362 of the Bankruptcy Code [11 U.S.C. 362] from debt-related proceedings brought by creditors [franchisor] based on pre-petition events.

A bankruptcy stay means the franchisor is not permitted to terminate
or default a franchisee because of the
filing of bankruptcy, delinquent royalties, or any other deficiencies that are
pre-date the bankruptcy filing. 

So what recourse does a franchisor have against a franchisee in bankruptcy?  Two options include moving to dismiss the bankruptcy
and seeking to lift the automatic bankruptcy stay, may be available.  Either way, the franchisor must file a petition
with the bankruptcy court.  This is not a
matter that can be handled by simply
sending a notice to the franchisee or the
franchisee’s attorney. 

These two options were pursued by GNC in the case of In re:
Meena, Inc[i].
While GNC was not successful in getting the franchisees’ bankruptcy
dismissed or the automatic stay lifted,[ii]
the court provided a nice outline of what
is required for dismissal of bankruptcy claim and was is required to the lift
the automatic bankruptcy stay.

The bankruptcy may be dismissed if:

  1. the continuing loss to or diminution of the estate [franchised business] and absence of a reasonable likelihood of rehabilitation;
  2. inability to effectuate a plan;
  3. unreasonable delay by the debtor [franchisee] that is prejudicial to creditors [franchisor]; [or]
  4. failure to propose a plan under section 1121 of this title [the federal bankruptcy law] within any time period fixed by the court.4[iii]

To the lift the automatic bankruptcy stay, the franchisor
must show:

  1. the debor [franchisee] lack of adequate
    protection of an interest in property [franchise agreement or franchised
    business assets] of such party in interest; or
  2. the debtor [franchisee] does not have an equity
    in such property [franchise agreement or franchised business assets], and such property is not necessary for an
    effective reorganization.

[i] In
re: Meena, Inc., Debtor. In re: Desa of NY, Inc., Debtor. In re: SDA, Inc.,
Debtor. In re: Choudry Sajid Javaid and Gulmeena Javaid, Debtors. ¶16,304. U.S.
Bankruptcy Court, E.D. New York. Case Nos. 8-18-74693-reg, 8-18-74694-reg,
8-18-74695-reg, 8-18-74804-reg. Dated November 6, 2018.

[ii] GNC
was not successful in getting the franchisees’ bankruptcy dismissed or the
automatic stay lifted in part due to issues non-conveyance of the franchise
agreement and money security agreement from the individual franchisees to the business
entity franchisee.  See are previous blog
http://gettinslaw.com/franchising/2018/12/20/who-owns-this-franchise/

[iii]
In re C-TC 9 th Avenue Partnership , 113 F.3d. 1304, at 1311 (2d Cir. 1997).

Source: franchise blaw

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