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

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!

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.

Are You a Joint Employer?

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.

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]

[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.

Who Can Sign The Franchise Agreement?

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.

[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)

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. 

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