When Can the Franchisor Withhold Approval?

Franchisee enters into a Purchase Agreement for the sale of 5 franchises.  Under the Purchase Agreement, the Purchase Price is $880,000.00 for each franchise or a total Purchase Price of $4,400,000.
The franchisor refuses approval for the sale of the franchises.  A over 4 million dollar sale on the line and the franchisor refuses to give approval for the transfer. Franchisor says it would only approve the sales transaction if the purchase price is reduced to $550,000, the estimated the value of the equipment of the five franchises.  How do you reconcile this?  The Franchisor will consent to the sale if the Purchase Price is reduced to 1/5 of what the franchisee seller and buyer agreed upon in the Purchase Agreement.
Can the franchisor do that?  Franchisee asserts not. The franchisor did not even evaluate the potential buyer to see if the buyer qualifies.  A look at the Purchase Price, approve withheld.  Franchisee files a complaint for more than a half dozen claims.  The case is Picktown Foods, LLC, et al. v. Tim Hortons USA, Inc.  In a claim by claim analysis, the Court dismissed claims in turn for lack of pleading or factual deficiencies.  But the Court upholds franchisee’s claim for Tortious Interference with Contract.

The franchisor is artificially freezing the Franchise Purchase Prices to ensure any new franchisee will have more resources to invest in the brand, building, and real estate owned by franchisor.

The premise of the franchisee claim is that the franchisor failed to act upon an obligation to proceed in good faith.  The franchisee alleges the franchisor is artificially freezing the Franchise Purchase Prices to ensure any new franchisee will have more resources to invest in the brand, building, and real estate owned by franchisor.

The Court rules there is sufficient evidence for the franchisee’s claims to be heard in court.

The Court rules there is sufficient evidence for the franchisee’s claims to be heard in court.  The conditions for franchisor approval of transfer as stated in the franchisee agreement did not state that the Purchase Price had to be equal to the franchise equipment value.  Item 17 of the franchise disclosure document did not state the Purchase Price must be equal to the franchise equipment value.  The franchisor did not evaluate the buyer qualifications.
Was the franchisor’s denial of the transfer in bad faith?  Was it Tortious Interference with Contract?  The case proceeds to trial for  determination.

How Your Trademark May Limit Expansion

To gain trademark rights all you have to do is begin using the trademark.  From the day that you begin using a trademark, you garner trademark rights without doing any more than using the trademark.  This is referred to common law trademarks rights.
Common law trademark rights give your superior exclusive rights to the trademark name, above all others henceforth in the area that you are doing business.  However, common law trademarks rights are limited to the area in which you do business.

 Common law trademarks rights are limited to the area in which you do business.

To get trademark rights beyond the area in which you do business, you must register the trademark with the USPTO [United States Patent and Trademark Office].  A USPTO trademark registration precludes anyone from using your trademark nationally post the registration even if you are not doing business nationally.  In addition, upon a USPTO registration, an infringer of your mark will be liable for greater damages including attorney fees.

  A USPTO trademark registration precludes anyone from using your trademark nationally post the registration.

The limits of common law trademark rights are being tested in a recent case reported to the Credit Union Times.  The Red River Bank has filed a trademark infringement complaint against Red River Federal Credit Union [FCU].  For years Red River Bank established 1999 in Louisiana and Red River FCU established 2008 in Texas coexisted without complaint.  Then Red River FCU acquired branches in Louisiana and Mississippi.  This was too close for comfort.  As reported in the Credit Union Times Red River Bank’s complaints states:

“RRB [Red River Bank] has received numerous inquiries from members of Shreveport Federal Credit Union and the community at large regarding their belief that RRB [Red River Bank] has taken over Shreveport Federal Credit Union.”


If you have an expansion plan or if you want to protect your name beyond the common law, a federal trademark is a must.

What a Moose of Trademark Case? 

When it comes to trademarks, it not just about words.  Trademark protections extends to words, images and, sounds.
Have you heard of Moosehead beer?  Well, they are hopping mad about Hop’N Moose Brewing Company.  Moosehead beer has been in existence since 1931.  Hop’N Moose Brewing Company began using an image of moose in connection with its beer in 2014.  After several cease and desist letters, Moosehead sued Hop’N Moose Brewing Company.

To prove its case, Moosehead must show that Hop’N Moose Brewing Company’s use of the moose will lead to customer confusion as to who is the make or manufacture of the beer.

The founder of Hop’N Moose Brewing Company reports ‘he chose the animal for the brewery’s logo because growing up in Quebec his family often went moose hunting.’ https://vtdigger.org/2017/11/05/canadian-beer-maker-hopping-mad-over-rutland-brewpubs-moose/#.WgBm52hSyUk
However, the reason for choosing the moose is immaterial.  Trademarks [unlike copyright and patents] is not about protecting the trademark owner.  It is about protecting consumers.

What?  You Can Use Competitor’s Names for SEO Purposes?

That is the decision of the FTC Initial Law Judge Decision in the case of 1-800 Contacts, Inc, In the Matter of.  1-800 Contacts entered into at least 14 agreements with contact lenses competitors.  Pursuant to these agreements 1-800 Contacts’ competitors promised and agreed not to use the word 1-800 contacts for search engine optimization [SEO] purposes.  As a result of these agreements, customers paid higher prices for contact lenses.

The Challenged Agreements restricted advertisements for the sale of contact lenses on the internet by prohibiting competitors from presenting paid advertisements on the search engine results page in response to searches for 1-800 Contacts’ trademarks.” Chief Administrative Law Judge D. Michael Chappell

We have all experienced this.  You enter a brand name into Google, and the search engine results yield a stream of the competitor websites.  Why is that?  One reason is brands commonly use the names of their competitors for search engine optimization or SEO purposes.
1-800 Contacts and others have historically and successfully argued that this practice is a trademark infringement.  Now the FTC is arguing it is a bidding agreement that

eliminated competition in auctions to place advertisements on the search results page generated by online search engines such as Google and Bing. The complaint alleges that these bidding agreements constituted an unfair method of competition in violation of federal law, by unreasonably suppressing price competition in certain online search advertising auctions, and restricting truthful and non-misleading advertising to consumers. As a result, some consumers paid higher retail prices for contact lenses, the complaint stated.

It is an interesting proposition that could turn SEO sideways.  Trademark owners may no longer be able to prohibit others from using their trademarks for SEO purposes.  Asserting SEO trademark infringement is misleading advertising?
To buttress its argument, the FTC reports having evidence that consumers paid higher prices because 1-800 Contracts entered into an agreement with competitors to prevent SEO trademark infringement.  It is a head-on conflict between trademark protection and advertising laws, two laws designed to protect the consumer.  Trademark protection is designed to protect consumers by ensuring that consumers know whom they are buying products and services from.  Which consumer protection law will win?
1-800 Contacts has a right to appeal the FTC Initial Law Judge Decision to the full Federal Trade Commission.  If no appeal is filed, the Initial Judge’s decision will become effective.
It is not recommended that you change your SEO search terms just yet.  Wait 30 days to see what happens.  If the FTC Initial Law Judge Decision becomes final, it may open the floodgates open to SEO competition.  But, will evidence of actual higher prices be required?

Why White Collar Exemptions Concerns May Be for Not. 

Remember all the fuss around the rise of salary thresholds for white-collar exemptions?  The fuss may have been for not.  The current Labor Secretary is pointing to a lower salary threshold.

Background: In order, not to pay an employees overtime, the employee must be paid a minimum salary threshold and perform exempt job duties.   
The previous Department of Labor [DOL] Secretary proposed to increase the white-collar salary threshold requirement to $47,000. 

A new Fifth Circuit Appeal Court has agreed to stay its decision challenging increase of the salary threshold.  Read the article on Bloomberg BNA:   https://www.bna.com/labor-department-continue-n73014471445/

What FPR are You Making This Year?

image from morgue file
image from morgue file

One of the foremost questions prospective franchisees ask is ‘How much will I make?’  Unless you include an item 19, Financial Performance Representation [FPR], you must say ‘I am not at liberty to tell you that’ or you can say: ‘Don’t ask me.  Ask them.’  Them referring to existing franchisees.  Either way is not a good answer.  More and more franchisors are including an FPR in the franchise disclosure document [FPR] enabling them to ask this question and to further sales conversations with prospective franchisees.
As discussed on our Blawg previously, the NASAA [North American Securities Admiration Association] has come forth with guidance regarding an FPR.  While the guidance is not set to be effective until next year, state examiners and drafters of the NASAA guidelines take the position that the guidance embodied is the Rule and should be adhered to now!
At the ABA Franchise Legal Symposium back in November, Dale Cantone from the Maryland Attorney General’s Office and lawyers from Witmer, Karp, Warner & Ryan LLP and Gray Plant Mooty presented some wonderful feedback and takeaways from the NASAA guidance.
Here is list of the common mistakes taken from the ABA Legal Symposium materials:
Pages from w13-advanced-drafting 2

SBA’s One Size Fits All Franchise Addendum

Image provided by: https://morguefile.com
Image provided by: https://morguefile.com

Historically, when funding franchisee startups, the federal Small Business Administration [SBA] would examine the franchisor specific franchise agreement, and draft an individualized franchise specific addendum.  The process was laborious.  Each franchise agreement was reviewed.  A franchise addendum was crafted for each specific franchise agreement.  The crafting of the franchise specific addendum sometimes included jockeying over the exact verbiage.  All this took time.  The SBA complains it was draining on SBA resources.  And, for prospective franchisees, it delayed the sales and franchise startup.
No more.  Gone are the days of the franchise specific SBA addendums.  The SBA has adopted a franchise agreement addendum template- One Size Fits All.  It is a plain, simple, 1 ½ page document.  It covers only 4 provisions:
Employment– Franchisor CANNOT hire, fire or schedule franchisee employees
Real Property Leasing– Franchisor MAY NOT record environmental restrictions of use or branding requirements if the property is the franchisor owns the property
Forced Asset Sales-the purchase price must be set by mutual agreement or by appraiser selected by franchisor and franchisee
Change of Owner– Franchisor shall not unreasonably hold consent for franchisee transfer and franchisor shall have first right of refusal for partial transfers among existing franchisees.
Note:  the amended and abridged franchise addendum process does not alter SBA eligibility requirements.  Franchisors and Franchisee have to follow the same eligibility process and requirements.  Per the SBA addendum:
Note to Parties: This Addendum only addresses ‘affiliation’ between the Franchisor and Franchisee.  Additionally, the applicant Franchisee and the franchise system must meet all SBA eligibility requirements.

Message from the USPTO: Use it or lose it.

A pilot program launched in 2012 by the United States Patent and Trademark Office (USPTO), suggests that many trademarks registered may not actually be used.  Per remarks by the Trademark Commission regarding the pilot program,  more than half of the trademark registrations selected in the pilot program were unable to verify the actual use of the mark for the goods or services queried.

To date, in just over half of the registrations selected for the pilot, the trademark owners failed to meet the requirement to verify the previously claimed use on particular goods and/or services.  173 of the registrations, or 35%, involved deletions of the goods and/or services queried under the pilot.  In another 80 registrations, or 16%, the trademark owners failed to respond to the requirements of the pilot and any other issues raised during examination of the underlying maintenance filing, resulting in cancellation of the registration.  Accordingly, of the 500 registrations selected for the pilot, to date a total of 253 registrations, or 51%, were unable to verify the previously claimed use in their Section 8 or 71 Declarations.  Post Registration Proof of Use Pilot Status Report

The Trademark Commissioners on the blog remarked:

When selecting a mark for a new product or service, a business will search the USPTO database of registered marks to determine wfree-knock-out-searchhether a particular mark is
available. Registered trademarks that are not actually in use in commerce unnecessarily block someone else from registering the mark.

The gap between the use of trademarks and registrations detracts from the validity of the trademarks registration status and dilutes the trademarks processes.
Renewal filing requirements are meant to preclude this exact problem.  5 years from initially registering a trademarks and every 10 years thereafter, trademark owners are required to submit use samples [referred to as specimens] to the USPTO.
In response to the widespread issue of false renewal trademarks, the USPTO has changed the renewal process.  As part of the renewing trademarks every 5 and 10 years, trademark owners have always been required to sign a sworn declaration saying that the mark is being used.  The USPTO has made the sworn declaration easier to read and more blatant.

Old Attestation


New Attestation

To the further address this issue, the USPTO is looking at instituting a new ‘Expungement’ status for trademarks that have never been used and streamlining procedures to delete trademarks that has been abandoned or that use-requirements were not met.
Based on the pilot program findings, the USPTO has announced its intention to continue random on-going checks of registered trademarks.

What are sufficient grounds for terminating a franchise?

image from https://morguefile.com
image from https://morguefile.com

What are sufficient grounds for terminating a franchise?

  • Franchisee adds unauthorized food items to the menu.
  • Franchisee make takes artistic liabilities with the Brand Logo in published advertisements
  • Franchisee fails to name the franchisor as an additional insured on its insurance policies.

Are these sufficient grounds for the franchisor to terminate the franchise agreement?  An arbitration panel deciding question followed a two-step process to determine the answer.

  • Does the franchise agreement allow termination for these violations?
  • Is there a lesser available alternative to termination?

termination_page_2The case was Benihana, Inc. [BI] v.  Benihana of Tokyo, LLC [BOT].  The franchise agreement at issue had two applicable termination provisions.

If [BOT] violates any [] substantial term or condition of this Agreement and [BOT] fails to cure such violation within thirty [30] days after written notice from [BI] to cure same; [or]

If [BI] gives [] three [] notices of any default hereunder [and such defaults are thereafter cured], within any consecutive twelve [] month period ….

The arbitration panel majority found that the franchisor had a contract right to terminate the franchise agreement, but failed uphold a termination of the franchise agreement saying that a less harsh alternative of injunction compelling the franchisee compliance existed.   This is a bizarre finding by the arbitration panel, which the court reviewing the case questioned, but was powerless to change.
This case highlights the uncertainty associated with the arbitration and court reviews of the franchise terminations and defaults.  Though questionable, uncertain, bizarre, and perhaps not required, the arbitration panel’s process of asking about less harsh alternatives to termination is worth consideration.  Franchise termination carries a high probability for arbitration or litigation challenges and the outcome of such challenges is never certain.

Franchise Settlement: How much is Confidentiality Worth?

hushTo resolve a litigation dispute, franchisor and franchisee enter into settlement agreements.  Settlement Agreements can be a way to avoid costs and time of litigation.  An added benefit is confidentiality.  Litigation is a matter of public record, but settlements can include a confidentiality provisions that prevent the parties from discussing the particulars of case and terms of settlement. Covenants of confidentiality can be a great incentive for entering into a settlement. 
Franchisors may not want the terms of the settlement released or discussed for fear that other franchisees will want that same deal.  Franchisors likewise most likely don’t want prospective franchisees to learn any more about the case than what is required to be disclosed in the FDD.  The inverse may also be true.  Franchisees, may not want their business wrongdoings and possible loss of franchise business discussed with others. 
Both rely on the confidentiality provision in settlement agreement.  What if the confidentiality is broken or violated?  The person with loose lips should be held responsible, right.  They should be made to pay.  Not in the case of Jana Caudill, et al., Plaintiffs-Appellants v. Keller Williams Realty, Inc. In this case, the Franchisor distributed the FDD [Franchise Disclosure Document] to 2,000 persons.  This is overwhelming beyond the persons and entities required to be disclosure to under the FTC Rule and other franchise disclosure laws.  As part of the FTC franchise disclosure laws, franchisors must outline in item 3, claims filed by and against the franchisor, including the claims, demands, and outcome. 
Because the franchisor gave the FDD to more people than required by franchise disclosure laws, the franchisee asserted this constituted a breach of the confidentiality agreement in the settlement agreement.  The court agreed, but refused to award the franchisee liquid damages.  For each incident violation, damages would have totaled $20 million.  The court said there was no evidence that the franchisee suffered any actual monetary damages and without a showing that the franchisee suffered monetary losses, the court awarded the franchisee nothing.  The court simply issued a permanent injunction preventing the franchisor from disclosing or publishing the FDD beyond what is required under the FTC Franchise Disclosures laws.
Disturbing outcome.  To fend against such an outcome, make sure to build-in contractual incentives into settlement agreements aimed at fostering adherence to confidentiality provision.   And, if violations occurs, be prepared to site actual evidence of monetary loses caused by the violation. 

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