Category: Franchise

Just because there are words in a franchise agreement signed by a franchisor and franchisee, does not make the words enforceable.  In the case of non-competes, it is a matter of the Rule of Reason.
As stated by a Michigan court in the case of LITTLE CAESAR ENTERPRISES, INC. et al.  v. CREATIVE RESTAURANT, INC., et al., [Case No. 2:16-cv-14263] whether a noncompetition [the franchisee’s promises not to operate a like business post-termination, nonrenewal, transfer, or expiration of the franchise agreement] depend on if the noncompete clause is reasonable under the Rule of Reason.

Generally, federal courts assess commercial noncompete agreements under the rule of reason[i].  A contract clause “violates the rule of reason if it `may suppress or even destroy competition,’ rather than promote competition[ii].  

The key concern is possible suppression or destroying of competition.  No actual suppression or destruction is required.  The Rule of Reason uses the word ‘may.’  There is also a special focus on the geographic area were non-compete sought to be enforced and the market for the product or service of the competing business.

To survive under the rule of reason, a party challenging a contract must allege that the contract ‘produced adverse anticompetitive effects within relevant product and geographic markets.’[iii]

For a non-compete  to be found unreasonable and therefore unenforceable, a franchisee must show that the non-competition covenant ‘produces[d] adverse anticompetitive effects within relevant product and geographic markets[iii].

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[i]  LITTLE CAESAR ENTERPRISES, INC. et al.  v. CREATIVE RESTAURANT, INC., et al., [Case No. 2:16-cv-14263] citing Innovation Ventures, 499 Mich. at 514 (compiling cases).
[ii] Id quoting United States v. Blue Cross Blue Shield of Mich., 809 F. Supp. 2d 665, 671 (E.D. Mich. 2011) (quoting American Needle, Inc v. National Football League, 560 U.S. 183, 203 n.10 (2010)); see also Perceptron, Inc. v. Sensor Adaptive Machs., Inc., 221 F.3d 913, 919 (6th Cir. 2000)
[iii] Id

You buy a franchise with great hopes of success. During discovery day, you meet franchisees that are successful. The franchisor layouts out processes and systems that are in place aimed to help you and other franchisees be successful. But, what if does not come to fruition? Your franchise is not successful. You lose money and then finally close the doors. Can you sue the franchisor claiming “it was understood when I bought this franchise it would be successful? I relied on what you said. I reasonably believed that your system would lead to a successful franchise business for me.”
That is one of the many claims made by David and Denis Wojcik and their corporation in a recent case against the Saladworks franchisor and Saladworks designated vendors. The case is David J. Wojcik et al v. Interarh, Inc. et. al. The court said there is no general implied promise of success. A global promise of success just does not fly. A franchisee cannot just sue a franchisor because their franchise is not a success. In order for a franchisee to make a case, the franchisee must specifically plead a breach of an express or implied franchise covenant or misrepresentation to make a viable case.
In addition to the overall complaint that their franchise was not a success, the Wojcik made other specific claims for breach of the franchise agreement. The claims are congruent with common franchise business issues. Let’s take a look at their other complaints and see if they can withstand summary judgment. Here they are:

• Problems with site selection, specifically the site selected was too small to provide adequate income and the site build-out costs were high, because of the prior use of the site.
•  Altering of the franchise model such as discontinuation of the fountain machines in exchange for bottled beverages and reduction of POS system terminal which lead to lower consumer sales.
• Designating inexperienced vendors and contractors that had little or no knowledge of local laws or regulations, which lead to construction cost overruns.
• Understating labor and food estimates in the franchise disclosure document (FDD) that lead to faulty business plans and projects.
• Failing to apply adequate national brand and market fund dollars for the benefit of the franchisee’s market and new business.
•  Misinforming them about Saladworks loan default rates.

So let’s take a look at these objections. Franchisors modify their system model from time to time. Franchisors make estimates in Item 7 of the FDD regarding initial costs. Franchisors designate vendors that franchisees must buy from for purposes of uniformity. Franchisors make judgment call about how national advertising fund dollars will be used. These are all things that franchisors commonly do. Can all these decision lead to an implied breach of the franchise agreement or misrepresentation?
Yes, is the court’s answer. If under the express terms of the franchise agreement, the franchisor is given the right to use its discretion, then “yes” the franchisor can be held liable for breach of implied duty of the good faith and fair dealing if the franchisor uses its discretion improperly. So for franchisors, when you use your discretion or make judgment calls, consideration should be given to the impact on franchisees. It is a balancing act. Not all decisions will result in positive impact for all franchisees. One way to protect against vulnerabilities is to get buy-in and feedback from franchisees. This can be done in a number of ways. Here are several ways:
1. Ask franchisees to complete satisfaction surveys regarding their use of the approved and designated vendors.
2. Present system changes to the Franchisee Advisory Counsel for input and feedback.
3. Ask select franchisees to beta test system changes before implementing wide-spread system changes.
4. Survey franchisees about their operating cost to obtain better estimates of operating and start-up costs.
 

If you have a website, you may be asking yourself: “Do I need a notice of privacy posted on my website?” Well it is “strongly recommended but it is not required” unless your website collects information from persons under 13 years of age or you are a financial institution or HIPAA covered entity. That is the federal law answer.
Some states however, may require you to have a privacy notice on your website. California just passed a law this summer, which requires such a notice. Undoubtedly with the continued focus on privacy and personal information, we will see heightened requirements for privacy policies and safeguards for personal information. When it comes to privacy policies and the internet, the answer is “Yes” you should have a privacy notice. But, use caution. You will be held to what is contained in your privacy notice.
Caution, if you have a privacy notice on your website. If it is false or misleading, you may be liable. Nebraska and Pennsylvania have laws about making false or misleading states in website privacy notices. Here is an admonishment from the Bureau of Consumer Protection:
Think your company doesn’t make any privacy claims? Think again — and reread your privacy policy to make sure you’re honoring the promises you’ve pledged. Consumers care about the privacy of their personal information and savvy businesses understand the importance of being clear about what you do with their data.
For more information about privacy notice or to get assistance in drafting a privacy notice contact us at 513-400-3895 or by email at [email protected]
 

The internet is the new Wild West. Courts have repeatedly refused to enter into the fray of arbitrating disputes involving the internet. If entities secure a URL address or domain name using your name, you may be left without a remedy. This situation happens in franchising. Either third party entities or even franchisees within the system register or secure a URL using the name of the franchisor or franchise system. Franchisors are often left without recourse; powerless to take down the URL.
Listen to one novel approach taken by a business attempting to protect its name and presence on the internet. Petroleum National Berhad, an oil company based in Malaysia and owner of the Petronas trademark, sued Godaddy.com, Inc. for contributory cybersquatting based upon a third party’s use of the Godaddy.com’s domain forwarding service. Godaddy.com’s domain forwarding services allows registrant of a URL or domain name to automatically and seamlessly forward internet traffic from one domain website to another website. In this case a third party registrant owner of the domain “petronastower.net” and “petronastowers.net” employed Godaddy.com’s domain forwarding services to forward traffic to “camfunchat.com,” an adult website.
Both the US government and the Malysian government contacted Godaddy.com on behalf of Petroleum National Berhad. To no avail, Godaddy.com refused to take action against the third party owner of “petronastower.net.” The stance case of PETRONAS V. GODADDY.COM ensued. Court action like the governments’ efforts, however, proved unsuccessful. The court in the case held there is no such thing as contributory cybersquatting. The law simply does not provide for a contributory claim under the cybersquatting laws. So for now [I have not confirmed this] all internet traffic to “petronastower.net” shall continued to be forward to the adult website, “camfunchat.com.”
Note, however, the court’s decision in this case is not universal. Courts in other cases have upheld a cause of action for contributory cybersquatting, including a case in California involving Verizon, a case in Washington involving Microsoft and a case in Michigan involving Ford Motor Company.
So what should franchisors do? Here are 3 suggestions:
1. Google your franchise system name often to see if your name is being used. Consider setting up Google alert that will tell you when your name is being used.
2. Include a provision in your franchise agreement that franchisees are not permitted to register or establish a URL address or domain name using the franchise name and enforce this prohibition.
3. Address trademark issues when they arise. Allowing time to pass without addressing issues will result in diminished enforceability.
 
 
 
 

 
The world of franchising has become layered with complexity. In every franchise system there is always a franchisor that grants the license and owns the trademark. There is always a franchisee that uses the trademark and operates the franchise location or unit. But there may be many layers in between. There could be subfranchises, area developers, and representatives.
What is a Subfranchise? What is an Area Developer? What is an Area Representative? How are they the same? How are they different? The 3 concepts are somewhat fungible and there is much confusion about the overlap and the differences. Recognizing this, the Franchise and Business Opportunity Project of the North American Security Administrators Association, Inc. [NASAA] post consultation with the Federal Trade Commission [FTC] has published Multi-Unit Commentary [“Commentary”] for public comment.
In the words of the Commentary:
These structures [Area Developer, Subfranchise, and Area Representative] are not mutually exclusive; that is, a franchisor may use just 1 structure or may use a combination of 2 or 3 structures. There are no universally accepted terms for these structures within the franchise industry. The terms used to describe the structures in different franchise systems, and in different laws and regulations, vary widely.
Previously on our blog we discussed Area Developers. Click here to see our post on Area Developers.
Today we are going to discuss Subfranchises. The Commentary defines Subfranchisor as: a person [or entity] that is granted, for consideration paid to the franchisor, the right to grant unit franchises to third parties, generally within a delineated geographic area. So in essence, within a defined geographic area, the Subfranchisor steps in the shoes of the franchisor. The Subfranchisor is given some portion of the initial franchise and royalty fee paid by the franchisee. The franchisee, under the subfranchisee model, is referred to as the Subfranchisee.
Now, you may be saying: ‘I have never heard the word Subfranchisor.’ You are not alone. This term is rarely used in the industry. Subfranchisees are typically referred to as master franchisees or regional franchisors.
This is the graphic depiction provided in the Commentary:

So how disclosure issues handled under a subfranchising relationship?  Take a listen.
Again, let’s keep things in prospective. The Commentary has not been adopted. It is only being published for public comment. The Commentary may change, be modified, or redrafted after public comment. The Commentary is not intended to override Federal Franchise Disclosure Laws.
Look for our Post on Area Representatives.
 

What is an Area Developer? What is a Subfranchise? What is an Area Representative? How are they the same? How are they different? The 3 concepts are somewhat fungible and there is much confusion about the overlap and the differences. Recognizing this, the Franchise and Business Opportunity Project of the North American Security Administrators Association, Inc. [NASAA] post consultation with the Federal Trade Commission [FTC] has published Multi-Unit Commentary [“Commentary”] for public comment.
In the words of the Commentary:
These structures [Area Developer, Subfranchise, and Area Representative] are not mutually exclusive; that is, a franchisor may use just 1 structure or may use a combination of 2 or 3 structures. There are no universally accepted terms for these structures within the franchise industry. The terms used to describe the structures in different franchise systems, and in different laws and regulations, vary widely.
So let’s start with the Area Developer. Here’s the definition provided in the Commentary: An Area Developer is an agreement where the franchisor grants a right to open multiple franchise units in a designated time period in a designated area. An area development agreement itself does not itself grant a right to operate a franchise unit. Area Developer has many different aliases. Area Developers are sometimes called master franchisee, multi-unit developers, and regional developer. The nomenclature changes and are used interchangeably.
This is the graphic depiction provided in the Commentary:

 

 In addition to defining Area Developer, the Commentary some great FAQs with insights and watch-outs for people looking to buy a franchise and franchisors.  Take a listen:
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Now let’s keep things in prospective. The Commentary has not been adopted. It is only being published for public comment. The Commentary may change, be modified, or redrafted after public comment. The Commentary is not intended to override Federal Franchise Disclosure Laws.
Look for our Post on Subfranchise.