Do You Collect Customer Data?

A Utah-based technology company [InfoTrax Systems, L.C. that provides operational services to multi-level marketers] has agreed to implement a comprehensive data security program to settle Federal Trade Commission [FTC] allegations that the company failed to put in place reasonable security safeguards, which allowed a hacker to access the personal information of a million consumers.

InfoTrax stored personal information from approximately 11.8 million consumers, yet failed to implement ‘low-cost, and readily available security protections’ including:

  • Inventory and delete personal information is no longer needed;
  • conduct code review of its software and testing of its network;
  • detect malicious file uploads;
  • adequately segment its network; and
  • implement cybersecurity safeguards to detect unusual activity on its network.

The customer data collected included Social Security numbers, payment card information, bank account information, and user names and passwords—in clear, readable text on its network. 

Service providers like InfoTrax don’t get a pass on protecting sensitive data they handle just because their clients are other businesses rather than individual consumers,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. 

The FTC gave 3 insights that other company can glean from the case

  1. Readily available security tools can reduce risks.
  2. Inventory the data in your possession and securely dispose of it when there’s no longer a need to maintain it.
  3. Consider the impact security failures have on clients and customers.

Unless or until InfoTrax implements a conforming information security program, InfoTrax and InfoTrax’s former CEO is prohibited from collecting, selling, sharing, or storing personal information per the FTC settlement.  This includes; assessing and documenting internal and external security risks;

implementing safeguards to protect personal information from cybersecurity risks; and

  • assessing and documenting internal and external security risks;
    • implementing safeguards to protect personal information from cybersecurity risks; and
    • testing and monitoring the effectiveness of those safeguards.

The FTC settlement requires InfoTrax to obtain third-party assessments of its information security program every two years.

What Price Can Franchisors Charge Franchisees for Products or Services?

The state of Washington has a franchise relationship law that requires franchisors to only charge franchisee fair and reasonable price for products and services that it sell to franchisees. 

State franchise relationship laws establish limitations on franchisors’ right to act cases in terminations, renewals, and defaults.  There no federal franchise relationship laws.  The federal franchise laws only govern the sale of franchises — however, there almost 2 dozen states that have enacted franchise relationship laws. 

The Washington franchise relationship law beckons the question of what is fair and reasonable pricing? In a recent case[i], the Washington Supreme Court gives some insight into considerations of what is a fair and responsible price to charge franchisee for products or services. 

  1. What is the fair market value of the product or services?
  2. What price did the franchise pay for the product or service?
  3. What do competitors charge for the product or service?
  4. Are all franchisees charged the same amount for the same or similar products or services?
  5. What is the franchisor’s profit margin on the product or service?

The court gives this example of unreasonable and unfair pricing:

For example, if the franchisor obtains a product for price x, and the franchisee could only obtain it on the open market for 5x, then selling it at the price of 2x might not be unfair or unreasonable—but if all other similarly situated franchisors are selling it for 1.5x, then the price of 2x may be unfair or unreasonable.

[i] MONEY MAILER, LLC v.  BREWER No. 96304-5 Washington Supreme Court, September 19, 2019

Are Franchise Application ADR Provisions Enforceable?

ADR is an abbreviation for alternative dispute resolution. Arbitrate and mediate are types of alternative dispute resolution.

Following the general rule, the court in the case of Doctor’s Associates, Inc. [Subway franchisor] v. Alemayehu held that arbitration and mediation agreements are enforceable if there is adequate consideration for a binding agreement and the intent of the parties is to arbitrate or mediate disputes.

Consideration is required for arbitration and mediation to provisions to be binding.  For without consideration there can be no binding agreement or contract.

“consideration may consist of a performance or of a return promise,” 

Restatement (Second) of Contracts § 71, cmt. d 

This case involved an arbitration provision in Subway’s prospective franchise application. Alemayehu was seeking to purchase a Subway franchise via a transfer from another Subway franchisee and thereby was required to complete a franchise application.    Alemayehu’s application was ultimately denied, and Alemayehu was found unfit to be a Subway franchise.  Alemayehu filed suit against Subway. 

The court held that Alemayehu’s claim must be held via arbitration.  Alemayehu submitted the application in exchange for Subway reviewing of the application and Alemayehu candidacy to become a Subway franchisee. 

The court held that an arbitration clause with the franchise application was enforceable. 

Franchisor Auditors and Inspections

Do you complete inspections and audits of your franchise locations?  Are the inspections done as a matter of routine practice? Do you only complete audits and inspections if a problem is reported?  If an inspection yields findings of subpar operating standards, what do you do with the results? 

Following brand standards, reporting revenues, and paying royalties
goes to the core of the franchise relationship. Failure to follow the franchisor’s brand standards can irreparably harms the goodwill of the franchisor and the franchise system.

Franchise audits and inspection can be way to ensure brand uniformity, quality, and compliance with operating standards. Read about:

  • How Are Compliance Audits are being Conducted
  • When Are Compliance Audits Done
  • Franchisee Perspective On Compliance Audits
  • What Courts Have To Say About Compliance Audits

See our article that appeared in Franchise Law Journal!

Compliance Audits Rule!

or visit:

Read the article!

Liquidated Damages for Breach of Franchise Agreement?

Liquidated damages (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).

Yes, was the answer of court in the case of Howard Johnson International, Inc. v. Manomay, LLC.  The franchise agreement, in this case, had a liquidated damage provision, which allowed the franchisor, Howard Johnson, to collect liquidated damages in the event that the franchisee breached the franchise agreement.  The franchisee breached the franchise agreement by not paying.  Howard Johnson terminated the franchise agreement and demand payment of unpaid royalties and liquidated damages. 

The court awarded the Howard Johnson the payment of unpaid royalties, attorney fees, and liquidated damages totaling $89,691.60.

[W]hen a liquidated damages clause for a commercial transaction is negotiated by parties with comparable bargaining power, the ultimate issue is whether the amount of liquidated damages is reasonable, either at the time of contract formation or the breach.

Ramada, 2018 WL 3105421, at *5

The court citing case precedent held that liquidated damages in commercial contracts negotiated by parties with comparable bargaining power are enforceable if the amount of liquidated damages is set at the time of contacting and the amount is a reasonable forecast of the harm resulting from breach.

Tipped Employees are Not Cheap General Labor

I am writing case updates for the upcoming American Bar Association (ABA) Fair Labor Standard Act (FLSA) Midwinter Report.  The annual FLSA Midwinter Report will be presented at the February 2020 Midwinter Meeting of the Federal Labor Standards Legislation Committee, and I will be listed as a contributor in the printed version.

In the first case that I am reviewing, the court expanded on some legal background worthy of a blog. 

Historically, we thought of tipped employees as waitresses.  However, the world of tipped employees has expanded.  As consumers, we tip a large number of service persons including quick-service restaurant works, uber or cab drivers, bellhops, hair and nail stylist.  The list goes on. 

What qualifies as a tipped employee and what does the Fair Labor Standard Act (FLSA) require for classification of a tipped employee. Here is what the court[i] said in response to these questions. 

Who qualifies as an FLSA tipped employee?

“any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”

29 U.S.C. § 203(t); accord Iowa Admin. Code r. 875-217.50(2).

What are the criteria for a tipped employee?

 Employers may pay tipped employees a lower base per hour rate instead of the federally mandated minimum per hour wage rate, so long as tips make up the difference lower base per hour rate and minimum wage.

Except, however, if the employee performs untipped duties related to the employee’s tipped occupation take up a substantial amount of his or her work time—more than 20%— or duties unrelated to the employee’s tipped occupation, than the employee is entitled to be paid minimum wage for that non-tipped labor.[i] 

There is another call-out.  The classification of the tipped employees described above is based on the Federal Fair Labor Standard Act.  States may and do have statutes and regulations regarding minimum wage, tipped employees rates and qualifications.

[i]  The DOL’s Field Operations Handbook

[i] HOWE v. JOHNNY’S ITALIAN STEAKHOUSE, L.L.C., 2018 WL 6521496 United States District Court, S.D. Iowa, Central Division, Case No. 4:16-CV-00086-SMR-HCA.  September 11, 2018.

You May Need More Capital To Offer and Sells Franchises in California

There are no hard and fast rules about how much capital or money a franchisor is required to have in the bank.  If a franchisor has limited amounts of funds in the bank, a state may require the franchisor to include a risk factor on the state cover sheet of the franchise disclosure document [FDD].  For new franchisors or franchisors that have limited amount of funds, a state may require a franchisor to defer initial franchise fees, initial escrow fees, or secure a bond. 

Based on a new policy, California is requiring Franchisors to have additional capital.

However, based on recent comment letters and conversations with the examiners in California, California requires something new.  Based on a new policy, California requires Franchisors to have additional capital.  The amount required is still convoluted.  However, when registering in California, franchisor should plan on having an amount equal to the initial franchise fee in the bank.  Without sufficient funds in the bank, the state of California may refuse the franchise registration application. 

The New and Expanded Franchise State Cover Page

On May 19, 2019, the NASAA [North American Securities Administrators Association] Membership issued instructions for the new Franchise Disclosure Document [FDD] state cover page.  The state cover sheet is expanding.  It is now 3 pages, not just one.  The pages include:

  • How to Use This Franchise Disclosure Document
  • What You Need to Know About Franchising Generally
  • Special Risk(s) to Consider About This Franchise

The first page, How to Use This Franchise Disclosure Document, is a table with 8 questions in the first column and in the second column, a cross-reference in the franchise disclosure document.  A narrative above tables states the mission of the table. The narrative reads:

Here are some questions you may be asking about buying a franchise and tips on how to find more information:

The question includes:

  1. How much can I earn?
  2. How much will I need to invest?
  3. Does the franchisor have the financial ability to provide support to my business?
  4. Is the franchise system stable, growing, or shrinking?
  5. Will my business be the only [XYZ] business in my area?
  6. Does the franchisor have a troubled legal history?
  7. What’s it like to be [an XYZ] franchisee?
  8. What else should I know?

The next page, What You Need to Know About Franchising Generally, is 7 general statements about franchising on the topics including:

  1. Continuing responsibility to pay fees.
  2. Business model can change.
  3. Supplier restrictions.
  4. Operating restrictions.
  5. Competition from franchisor.
  6. Renewal.
  7. When your franchise ends

The final page, special risk factors page, is kin to the risk factors required by the prior version of the state cover sheet. 

Franchisors must comply with the new state cover page requirements by January 1, 2020.

Don’t Infringe on Me.

Dickey’s Barbecue Restaurants, Inc. ran a national promotion using a pitch that infringed on the Boise Idaho BBQ 4 LIFE  restaurant.   BBQ 4 LIFE demanded disgorgement of Dickey’s Barbecue Restaurants, Inc.’s national profits[i]

Disgorgement is defined by Black’s Law Dictionary as “the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.”

Dickey’s Barbecue Restaurants, Inc. pushed back.  BBQ 4 LIFE only has restaurants in Boise, Idaho. Why should Dickey’s Barbecue Restaurants, Inc. be disgorged of national profits and pay BBQ 4 LIFE all of its profits earned nationally. 

The court said they should.  Dickey’s Barbecue Restaurants, Inc.  willfully infringed on  BBQ 4 LIFE’s trademark.  Dickey’s Barbecue Restaurants, Inc., need a disincentive.  Besides, the  BBQ 4 LIFE infringement increased sales nationally; therefore, national sales should be disgorged. 

After all, Dickey’s has willfully infringed plaintiffs’ trademark and used it nation-wide for a reason – to increase sales throughout its operations, not just in areas where it competes with plaintiffs. Such an award would, according to Maier, remove the motive for infringements, deter future infringements, and protect the intangible value associated with trade-marks.

BBQ Id. citing Maier, 390 F.2d at 122.

The takeaway, infringement is expensive.  Infringe of even a small local brand can result in national disgorgement of profits. 

[i] BBQ 4 Life, LLC, et al. v. Dickey’s Barbecue Restaurants, Inc., Business Franchise Guide – Explanations, Laws, cases, rulings, new developments Issued Apr 23, 2019 Case No. 1:18-cv-140-BLW

Is a Franchise Default Notice Grounds for Wrongful Termination?

The liability for the wrongful termination of a franchise agreement can be considerable, lost profit for the remainder of the franchise term and perhaps other damages. 

Here is the facts Franchisor requests licensee to remodel the franchise location to conform to current standards.  Licensee does not.  Franchisor sends franchisee a default notice for failing to update the location.  Licensee still does not update.  Franchisor sends the licensee a notice of termination, files a complaint in court staying the termination.  Licensee de-brands and continues to operate under a new name. 

Can the Franchisor be held liable for wrongful termination? 

The case is Buffalo Wild Wings, Inc.,  v. BW-3 of Akron, Inc., et al.[i]   No, said the court.  Since the Licensee closed the business, de-branded, and opened under a different name, the Licensee abandoned the business.  The Franchisor never terminated the license.  The Franchisor is not liable for wrongful termination.

Interesting case, but would the come be different if the franchisor had not stayed the termination?   

[i] No. 17-4291

Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,378

Buffalo Wild Wings, Inc., Plaintiff/Counter-Defendant-Appellee v. BW-3 of Akron, Inc., et al.