Blawg

Yes. No. Maybe. If franchisor owned outlet data can be used for franchise financial performance representation, it depends on:
 

• If there are franchise outlets
• What can kind of representations are being made, and
• If the franchisor owned outlet data is used alone are with franchise outlets

The NASAA’s [North American Securities Administrator Association] Franchise and Business Opportunity Project Group [Franchise Project Group] has released, for internal and public comment, a Proposed Franchise Commentary on Financial Performance Representations [FPR Commentary].
 
Discover 10 Franchise FPR Dos and Don’ts, click here  or visit http://wp.me/p4bshS-17i

In the FPR Commentary, clarity is provided about when and what franchise financial performance representations [FPR] can be made using company [franchisor] owned outlets.
 
To better understand the ifs and whens and okays, we made a symmetric.

 
Give us a call to review your exiting financial performance representation [FPR] or get help drafting a new FPR:  513-400-3895 or email at [email protected].

The NASAA’s [North American Securities Administrator Association] Franchise and Business Opportunity Project Group [Franchise Project Group] has released for internal and public comment a Proposed Franchise Commentary on Financial Performance Representations {FPR Commentary].
 
FPR are covered in Item 19 of the Franchise Disclosure Document [FDD].  And, the regulatory skinny is:  You can only tell prospective franchisees about the future or historic franchise earnings, if they are included in the Item 19 of the FDD.  If franchisors don’t include an Item 19, the franchisor cannot talk to franchisee about earnings.
 
That is the skinny, but there are lots and lots of rules, debates, and opinions about what can and should be in an Item 19 Financial Performance Representation.  The FPR Commentary is crafted to answer some of the questions.  It doesn’t replace or change the FTC Franchise Disclosure Rule and it does not cover everything.  You still have to read and know the Rules.
However, with those disclaimers, here are the Dos and Don’ts from the FPR Commentary.

 

 
California has amended it franchise laws!  The amendments  affect when, what, why, and how franchisors can terminate franchise agreement, prevent transfers, and choose not to renew franchises.  The California amendments are indicative of a climate change in franchising where franchisees are granted more legislative rights. The law has been mellowed from what strong franchisee advocates purposed, but the changes are still a strong movement for pro-franchisee advocates.  Below is an outline of the amendment requirements.
 
Termination:  Franchisor may only terminate the franchise agreement:

• Upon 60 day notice and cure period for ‘good cause;’ or
• Immediately upon notice in the event of
  • order for bankruptcy or insolvency
  • all or a substantial part of the assets thereof are assigned to a creditor,
  • franchisee admits his or her inability to pay his or her debts as they come due
  • franchisee fails to operate the business for 5 consecutive days during which the franchisee is required to operate the business [except in event of fire, flood, earthquake, or other similar causes ]
  • mutual agreement between franchisor and franchisee
  • material misrepresentations made in being granted franchise
  • franchisee engages in conduct which reflects materially and unfavorably upon the franchise or franchise system
  • franchisee is convicted of a felony
  • franchisee does not pay money due to franchisor or affiliates within 5 days from when due
  • franchisor believes continued franchise operations is an imminent danger to public health or safety

 
Mandated Franchise Purchase of Inventory, Supplies, Equipment, Fixtures, and Furnishing.  Even when the franchisor lawfully terminates or does not renew the franchise agreement the franchisor must purchase from the franchisee the inventory, supplies, equipment, fixtures, and furnishing.  And, the purchase price is determined by law as:
 

Franchisee Purchase Price  minus  Depreciation  equals  Franchisor’s Purchase Price

The mandate for the franchisor to purchase franchise inventory, supplies, equipment, fixtures, and furnishing is not required if:

• personalized items, inventory, supplies, equipment, fixtures, or furnishings are not reasonably required to conduct the operation of the franchise business
• franchisee does not have clear title the item
• franchisee opts not to renew
• franchisor does not prevent franchisee from retaining control of the franchise premises
• franchisor publically announces decision to withdraw from the ‘geographic market area’ where the franchise is located

 
And, yes.  The franchisor may offset against the amounts owed to a franchisee under this section any amounts owed by the franchisee to the franchisor.
 
Transfers:  The franchisor CAN NOT prevent a franchisee transfer if the person meets the franchisor’s then-existing standards for franchisees made available to the franchisee.
 
This prohibition does not negate the franchisor’s right to approve or any franchisor’s right to first refusal.
 
The amendment [presumption ally] prescribes the protocol franchisor should use in the transfer.  It says:

• Franchisor must approve or disapprove the transfer within 60 days in writing [or the transfer is approved].
• The approval or disapproval is matter of fact, which can be determined by court motion for summary judgment.
• Franchisor does not have to exercise its first right of refusal in the notice of approval or disapproval
• If the franchisor exercises the first right of refusal it must be equal in offer.

 
These amendments go into effect in 2016.  To effectuate these changes, franchisors need to amend their franchise agreements or the California addendum to their franchise agreements and FDD.

Need assistance with making the changes.  Call us at 513-400-3895 or send an email to [email protected] for assistance!

 

 
The way it usually works is the franchisor grants a franchisee a development area, franchisee selects a site where the franchisee wants the franchise business to be located, and the franchisee submits the proposed site to the franchisor for approval. It is a back and forth process. Franchisors may provide varying levels of support, but at the end of the day, franchisors have the final approval on where a franchise is located. And, not all the time do franchisees and franchisors agree. But, when does site selection process become a matter of discrimination? How?
 
The Case is MICHAEL ANTHONY G. WILBERN and WILBERN ENTERPRISES, LLC v. CULVER FRANCHISING SYSTEM, INC. Michael Wilbern purchased a Culver franchise, formed Wilbern Enterprises, LLC in hopes of opening a Culver franchise in the south side of Chicago. However, being persuaded by a Culver franchise consultant, Wilbern opened 2 franchises in the west side of Chicago, Franklin Park and Hilliside. Wilbern proposed a site in the south side of the Chicago in Marshfield Plaza, but the Culver franchisor never approved the site. The Culver franchisor never responded to Wilbern’s proposal for a franchise in the south side location.
 
Wilbern believed that opening a Culver franchise would bring jobs to the lower economic south side of Chicago and that he could receive public funding and extremely favorable rent or purchase opportunities in the south side of Chicago. Instead, Wilbern opened a franchise location in Franklin Park, which later failed, went into bankruptcy,  was evicted from the property, and the franchise was terminated.
 
Wilbern filed suit in the United States District Court, N.D. Illinois, Eastern Division alleging the Culver franchisor engaged in a pattern and practice of racial discrimination in violation of 42 U.S.C. § 1981, Federal Antidiscrimination Statutes.   Racial discrimination? Culver franchisor did not discriminate against Michael Wilbern, because he was black, African American. It is alleged that the Culver franchisor violated racial discrimination, because Culver did not approve a Culver franchise in the south side of  Chicago and the south side of Chicago has predominately African American residents.
 
The outcome of the case is yet to be determined, but it provokes a conversation about franchisors’ site selection processes and approval. Most probably, the Culver franchise does not have a policy or site selection criteria, which bars Culver franchises in communities with predominantly Africa American residents. However, even if the franchisor does not intend to prevent franchises in predominately African American [or other racial groups] residential communities, the acts or practices may have ‘disparaging impact’ or practice that inadvertently and unintentionally has a racial impact and can/may be actionable in court.
 

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Common boiler plate, in many if not all agreements, will say what law governs the agreement and  where litigation may take place. Franchise agreements are no different. But if an agreement says what laws and where litigation can take place, does that make it so?
 
Law is the similar to grammar. As in grammar where there are many rules, there are many exceptions. I before e, except after c.  The law has many statutes and rules, but there are many exceptions. Legally, the answer is sometimes and it depends. A contract can set forth what state’s law may govern the agreement. A contract may set forth where disputes under the agreement may be litigated, but language in a contract cannot override statutes.
 
Many states have enacted laws that say that if the franchisee lives in this state or if the franchise business operates in this state, then the franchisee [or franchisor] may file litigation in this state irrespective of what the franchise agreement says.
 
A recent case in point is Rob & Bud’s Pizza, LLC v. Papa Murphy’s Int’l, Inc.   Rob & Bud’s Pizza, a Papa Murphy franchisee, sued its franchisor, Papa Murphy’s Int’l, Inc. in Arkansas complaining of retaliatory termination for the franchisee’s  failure to accept a settlement in an existing class action case in Washington state court.
 
The Papa Murphy franchisor attempted to dismiss or move the case to Washington, citing language in the franchise agreement that said claims should be filed in Washington. The court did not agree. Arkansas has a statute that says:

‘Neither a franchisee nor a franchisor shall be deprived of the application and benefits of this subchapter [Arkansas Law] by a provision of a franchise purporting to designate the law of another jurisdiction as governing or interpreting the franchise, or to designate a venue outside of Arkansas for the resolution of disputes.’

 
That means, per Arkansas law, a franchise agreement can say that another state law governs and the franchise agreement can say that complaints can be filed in another state. That is okay. But if it is a restaurant franchise that is owned by a resident of Arkansas or if the restaurant is in Arkansas, nothing in the franchise agreement can prevent the franchisee [or franchisor] from filing a complaint in Arkansas.
 
Arkansas is not unique. Many states have laws that say if you are a franchisee and you live here or your franchise is here, you can sue here. And, it does not matter what the franchise agreement says.
 

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TCPA is an acronym that you should know.  It stands for the Telephone Consumer Protection Act.  It is the law that has historically governed and restricted robocalls to residential telephone lines.  However, TCPA restrictions also apply to cellphone and texting.  The claims, actions, violations, and citations for cellphones and texting are expanding exponentially.  In July 2015, the FCC [Federal Communication Commission] released a Declaratory Ruling and Order and the cases to continue to fly in.  The most recent came in the form of 2 FCC TCPA citations issued this month.  Both citations center on consent.
TCPA’s consent for the telephone, cellphone, and texting calls requires an agreement that:

• Is in writing; and
• Is signed by the recipient of the calls and texts; and
• Clearly authorizes the delivery of the advertising and telemarketing calls/messages via ‘autodial calls, texts, or robocalls;’  and
• Lists the telephone numbers to receive the calls and texts; and
• The provisions must contain the following messages:
  • By executing the agreement, the person signing authorizes the caller to deliver or cause to be delivered ads or telemarketing messages via autodialed calls, texts, or robocalls; and
  • The person signing the agreement is not required to sign the agreement [directly or indirectly], or agree to enter into such an agreement as a condition of purchasing any property, goods, or services.

Also of special concern, it is important to note that the TCPA says that:

1. ‘It is unlawful to require a consumer to consent to receive auto dialed or prerecorded telemarketing or advertising calls/texts as a condition of purchasing any property, goods, or service.’
2. Consumer must have the ability to revoke consent to texts and calls “in any reasonable way at any time.”
3. Consent is limited to the specific number listed in the consent and the specific consumer signing the consent. Text messages or calls cannot be sent to other telephone or cell phone number of the consumer signing the consent.  It can only sent to the telephone or cells of the consenting consumer.  And, if notified the number is no longer that of the consenting consumer, a new consent agreement must be signed by new telephone or cellphone owner.
4. Liability attaches even if a third party is hired to send the text or make the cases

Case under the TCPA has been asserted in every industry including franchising.  Both Taco Bell and Jiffy Lube have fallen victim to allegations of TCPA violations.  The stakes under TCPA are significant.  Each violation is $500.  And, TCPA is ripe for class action.  Text marketing is typically a wide sweeping consumer advertising campaign that can touch tens, hundreds, thousands of consumers.
 

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Perhaps you have heard the buzz and fear surrounding franchising joint employment. Under a recent NLRB action, franchisors could be deemed per se the ‘Employer’ of franchisee employees. This designation of the franchisor as an ‘Employer’ of franchisee employees has serious consequences. If, in fact, franchisors are considered the ‘Employer,’ the franchisor would be liable for franchisee wage and hour violations and perhaps many other employee liability claims.
 
How can this be? In a recent NLRB decision, it is all about sharing, collaborating, and codetermining. In a footnote to the NLRB decision is says:
 

In some cases [or as to certain issues], employers may engage in genuinely shared decision-making, e.g., they confer or collaborate directly to set a term of employment. See NLRB v. Checker Cab Co., 367 F.2d 692, 698 [6th Cir. 1966] [noting that employers ‘banded themselves together so as to set up joint machinery for hiring employees, for establishing working rules for employees, for giving operating instructions to employees, for disciplining employees for violation of rules, for disciplining employees for violation of safety regulations’].

 
Think about this.

• Many Franchises have online worker application portals which offer a machinery for hiring employees.
• Franchisor provides initial and ongoing training class to franchisee managers and perhaps franchisee employees.
• Franchise manuals provide rules and instructions for franchised business operations.

 
Training and franchise manuals are essential for teaching,  setting out brand standards, and ensuring brand uniformity of franchise product and service offers. Online applications and other employee assistance tools make franchise operations efficient and competitive. Yet these items can be used as a weapon against franchisors in the joint employment argument.
 
In order to restore the balance in the joint employment argument, a bill has been in to congress. It is a short bill. But, it has the potential to restore balance. The House of the Representatives’ bill referred to as The Protecting Local Business Opportunity Act [H.R. 3459, S. 2015] states:
 

‘Notwithstanding any other provision of this Act, two or more employers may be considered joint employers 2 for purposes of this Act only if each shares and exercises control over essential terms and conditions of employment and such control over these matters is actual, direct, and immediate.’

The Bill takes collaborating and codetermining out of the joint employment decision. In essence, it returns the joint employer determination back to before the NLRB decision. Going back to government 101, the NLRB is part of the executive branch of government charged with enforcing statutes enacted by Congress. If the Bill is pasted, the NLRB is bound to adhere to the standard set out in the Bill. This is so dictated by the separation of the powers and checks and balances innate to our form of government.
 
Regardless of current state of the law, the joint employment is a real concern for franchisors. Being considered a joint employer can expose Franchisors to liability for wage and hour overtime violations, employee discrimination claims, and third party claims of negligent hiring and supervision.
 
For more information about how to avoid joint employment, email us for a copy of White Paper: 5 Steps to Avoiding Joint Employment at [email protected].
 

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With every franchise agreement, comes the duty to refurbish, upgrade, and maintain current design and brand standards. The wording is different, but the obligation is the same. Franchisors, generally, have a nearly an unfetter right to require refurbishing. The duty to refurbish- rebrand is seen as essential to maintaining the relativeness and competitiveness of the franchise brand.
 
In August, Quest Apartment Hotels ‘relaunched’ franchises with a 10 million dollar re-brand initiative in Australia. Yes, re-branding is expensive.  It can hit the franchisees’ bottom line hard. It is important to sell the concept of the rebranding not only to consumers, but also to franchisees. Franchisors have the right to require refurbishments, but failing to sell it to franchisee can lead to the dreaded assertion that the franchisor is acting contrary to the ‘implied duty of good faith and fair dealing.’
 
Here is an outline of Quest’s plan:
 

1. Garner system energy by unveiling the re-branding at the franchisee annual conference.
2. Pair up with the right people by inviting members of franchisee’s advisor counsel to be in on re-branding planning and implementation.
3. Have a plan for recouping the cost of the re-branding by tying the re-brand upgrades to justification for high prices.
4. Proudly announce the re-branding to consumers via an advertising campaign.

 
It is harder to build the case of unreasonableness and unfairness if franchisee’s advisory council has some ownership to the re-branding. If there is plan to bring in higher revenue dollars by increasing prices or attracting new consumers via advertising, the re-branding has business investment value. These step can help to reduce claims that the franchisor breached its duty of good faith and fair dealing.
 

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Jared Fogle, dubbed as the former “Subways celebrated pitchman” by USA [http://www.usatoday.com/story/news/nation/2015/08/19/jared-fogle-court/31979091/] has accepted a plea in regarding child sex and porn charges. Not good for public relations. Franchise Disclosures are probably not the first thing on Subway’s mind, but let’s take a look.
 
The FTC Franchise Disclosure Rule [FTC Rule] and NASAA guidelines [Guidelines] require Franchisors in Item 18 to disclose:

Any compensation or other benefit given or promised to a public figure arising from either the use of the public figure in the franchise name or symbol, or the public figure’s endorsement or recommendation of the franchise to prospective franchisees.

The FTC Rule and Guidelines go on to define who a ‘public figure’ is by saying:

[P]public figure means a person whose name or physical appearance is generally known to the public in the geographic area where the franchise will be located.

The FTC Franchise Rule Compliance Guide [FTC Guide] sites sports stars, actors, musicians and similar celebrities as typical figures.
 
Read closely, FTC Guide makes one important caveat public figures. It is not just any star or musician generally know. It has to be someone who endorses or recommends the franchise to prospective franchises.
 
The FTC draws out this distinction by saying:

Item 18 is limited to circumstances when a public figure’s identification with a system is for the purpose of selling franchises. Merely using a public figure as a spokesperson to promote a system’s products or services sold to consumers does not bring a franchisor within the ambit of the amended Rule’s Item 18 requirements.

So in the case of Subway’s requirement to disclose Jared Fogle in their Franchise Disclosure Document [FDD], provided he only promoted the purchasing of subway sandwiches and not the buying of Subway franchises, Jared Fogle would not have been disclosed in the FDD.
 
Here is a sample of Item 18 provided in the FTC Guide:

Belmont has paid Ralph Doister $50,000 for the right to use his name in promoting the sale of our franchise. This right expires on December 31, 2008. Belmont has produced newspaper ads, a brochure, and a video which feature Mr. Doister. Mr. Doister does not manage or own an interest in Belmont.

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Must franchise agreements say that franchisees are solely responsible and liable for franchisee operations. But saying, writing it, does not make it, so. There are times that customers claim it is the franchisor that is liable. And, there are times that the franchisor is right.
 
One such case is the one filed in Philadelphia County Court of Common Pleas against Massage Envy.   Massage Envy has been plague by a rash of  complaints regarding sexual assaults. The Court House News Service reports more than 50 complaints in more than 15 states. http://www.courthousenews.com/2015/07/31/client-ties-massage-envy-assaults-to-lax-policy.htm .
 
Per Daily News: http://www.delcotimes.com/general-news/20150803/suit-filed-against-west-goshen-massage-spa
 

In addition to monetary damages, the suit asks that the national chain be held responsible for putting policies in place that would change the way the attorneys contend allegations of sexual assault against massage therapists are handled now.

 
The Daily News goes on to quote attorney for the plaintiff as saying:

“The pattern that you see across the country is that there is a report made by a female customer against a therapist, and that the therapist is either transferred or rehired by another franchise, but no one reports it to law enforcement. In this case, from our understanding, there was little done”

 
In essence the plaintiff’s attorney is saying, if there is a pervasive problem with the franchise system, the franchisor is responsible to make policies to address the problem and if the franchisor instead does nothing to the address problem within a system, the franchisor is liable.
 
Is that deductive reasoning? Is that the assertion? Is omission, a lack of responsiveness sufficient to create franchisor liability? Or, did Massage Envy do something to further the barrage of alleged sexual assaults within its franchise system. We will see as the case progresses. However the assertions, either way, are profound.
 

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