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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. 

https://www.ftc.gov/news-events/press-releases/2019/11/utah-company-settles-ftc-allegations-it-failed-safeguard-consumer

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.

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.”

https://en.wikipedia.org/wiki/Disgorgement

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. 

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[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

Within the franchise world, there has been a lot of buzz about joint employment.  Being held accountable as an employer creates exposure to wage, discrimination, and other employee claims. 

The legal determination of who is an employer can be swishy.  The US Department of Labor has put out for comment new regulations that would clear the issue up, to some extent.  Under the purposed regulations set forth a 4 prong test.  Under the test an employer:

• hires or fires the employee;
• supervises and controls the employee’s work schedules or conditions of employment;
• determines the employee’s rate and method of payment; and
• maintains the employee’s employment records.
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As part of the purposed regulations, the US Department of Labor posted hypotheticals under the test.  Can you determinate if an employer relationship is present?

(1) Example (National Restaurant Franchise)

An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment affiliated with the same nationwide franchise. These establishments are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Are they joint employers of the cook? [i]

(2) Example (Same Owner, Multiple Restaurants)

An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment owned by the same person. Each week, the restaurants coordinate and set the cook’s schedule of hours at each location, and the cook works interchangeably at both restaurants. The restaurants decided together to pay the cook the same hourly rate. Are they joint employers of the cook? [ii]

(3) Example (Janitorial Services)

An office park company hires a janitorial services company to clean the office park building after-hours. According to a contractual agreement with the office park and the janitorial company, the office park agrees to pay the janitorial company a fixed fee for these services and reserves the right to supervise the janitorial employees in their performance of those cleaning services. However, office park personnel do not set the janitorial employees’ pay rates or individual schedules and do not in fact supervise the workers’ performance of their work in any way. Is the office park a joint employer of the janitorial employees? [iii]

(5) Example (Hotel Industry Franchise)

Franchisor A is a global organization representing a hospitality brand with several thousand hotels under franchise agreements. Franchisee B owns one of these hotels and is a licensee of A’s brand. In addition, A provides B with a sample employment application, a sample employee handbook, and other forms and documents for use in operating the franchise. The licensing agreement is an industry-standard document explaining that B is solely responsible for all day-to-day operations, including hiring and firing of employees, setting the rate and method of pay, maintaining records, and supervising and controlling conditions of employment. Is A a joint employer of B’s employees? [iv]

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[i] Application [the answer]: Under these facts, the restaurant establishments are not joint employers of the cook because they are not associated in any meaningful way with respect to the cook’s employment. The similarity of the cook’s work at each restaurant, and the fact that both restaurants are part of the same nationwide franchise, are not relevant to the joint employer analysis, because those facts have no bearing on the question whether the restaurants are acting directly or indirectly in each other’s interest in relation to the cook.

[ii] Application [the answer]: Under these facts, the restaurant establishments are joint employers of the cook because they share common ownership, coordinate the cook’s schedule of hours at the restaurants, and jointly decide the cook’s terms and conditions of employment, such as the pay rate. Because the restaurants are sufficiently associated with respect to the cook’s employment, they must aggregate the cook’s hours worked across the two restaurants for purposes of complying with the act.

[iii] Application [the answer]: Under these facts, the office park is not a joint employer of the janitorial employees because it does not hire or fire the employees, determine their rate or method of payment, or exercise control over their conditions of employment. The office park’s reserved contractual right to control the employee’s conditions of employment does not demonstrate that it is a joint employer.

[iv]  Application : Under these facts, A is not a joint employer of B’s employees. A does not exercise direct or indirect control over B’s employees. Providing samples, forms, and documents does not amount to direct or indirect control over B’s employees that would establish joint liability.

When signing the franchise agreement, prospective franchisees usually form a business entity to own and operate the franchise.  But, who can sign the franchise agreement on behalf of the franchise business entity? 

The recent case of Extremely Clean Cleaning Services, LLC, Alisia Burks v. CAAT, Inc.[i]  ponders this question.  In this case, co-plaintiff Alisia Burk (“Ms. Burk”), a prospective franchise formed the business entity Extremely Clean Cleaning Services, LLC to be the franchisee business entity. Defendant CAAT, Inc. was the franchisor.  Burk’s mother Kearl Ash (“Ms. Ash”) signed the franchise agreement on behalf of business entity Extremely Clean Cleaning Services, LLC; however, Ms. Ash, Ms. Burk’s mother did not have any ownership interest in the franchise. 

Immediately post the signing of the franchise agreement, Ms. Burk registered a complaint about her mother Ms. Ash signing the franchise agreement saying Ms. Ash did not have authority to the sign the franchise agreement on the franchisee’s behalf.  Irrespective of the complaint about the signing, Ms. Burk opened and operated the franchise.  After three years of business, Ms. Burk abandons the franchise asserting that the franchise agreement was not properly signed.

Ratification means the adoption of that which was done for and in the name of another without authority. It is in the nature of a cure for [lack of] authorization. When ratification takes place, the act stands as an authorized one, and makes the whole act, transaction, or contract well from the beginning. Ratification is a question of fact, and ordinarily may be inferred from the conduct of the parties. The acts, words, silence, dealings, and knowledge of the principal, as well as many other facts and circumstances, may be shown as evidence tending to warrant the inference or finding of the ultimate fact of ratification. Knowingly accepting benefits of unauthorized employment amounts to a ratification of such contract of employment and is in the nature of estoppel to deny the authority to make such contract. Ratification by a corporation may be shown by conduct, without any formal action of its board of directors.

Indiana Law

Was there a binding franchise agreement, even though Ms. Ash did not have authority to sign the franchise agreement on the franchisee’s behalf.  Does the subsequent three years operation of the franchise business ratify or translate to affirmation and enforceability of the franchise agreement? 

The court remanded the case for the more factual determinations.  It is possible that irrespective of the improper signing of the franchise agreement, the franchisee’s act of operating the franchise business resulted in a binding franchise agreement.  The inverse may also be true.

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[i] Business Franchise Guide – Explanations, Laws, cases, rulings, new developments, Extremely Clean Cleaning Services, LLC, Alisia Burks, Plaintiffs v. CAAT, Inc., an Ohio Corporation, Anago Cleaning Systems, Inc., a Florida Corporation, Anago Franchising, Inc., a Florida Corporation, Albertson Family Janitorial Holdings, Inc., an Ohio Corporation, Curt Albertson, an individual, Corey Albertson, an individual, Teresa Albertson, an individual, David R. Povlitz, Defendants., U.S. District Court, S.D. Indiana, ¶16,372, (Feb. 25, 2019)

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.