Category: Uncategorized

 
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.
 

Keep informed about franchising.  Signup for our free newsletter.

Click here

 

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.
 

Discover more about business and franchising.  Get our free newsletter.

Click here!

 
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].
 

Sign-up for newsletter.  Discover more information for franchisors and franchisees.

Click here

 
.

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.
 

Get our Free Newsletter!

Click here

 

 
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.

Discover more about Franchising; sign-up to get our free Newsletter!

Click here

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.
 

Discover more about Franchising.  Sign-up for our Newsletter!

Click here

 
There has been a smothering dispute between Steak n’ Shake franchisor and franchisees.  The dispute centers around Steak n’ Shake’s 4 dollar menu.  In June, the Steak n’ Shake franchisor had a major victory.  The case is Steak ‘n Shake Enters, Inc. v. Globex Co.  The case is out of Colorado.
 
The 2 second elevator facts are this:  Franchisee Globex adamantly opposed Steak ‘n Shake’s menu. When franchisee efforts to work with the franchise to end the 4 dollar menu, failed.  Franchisee Globex printed secondary menus raising some 4 dollar items to 5.08.  He reprogramed POS cash registers to allow al a carte pricing.  He did not remove 4 dollar menu promotion items from the restaurant.  He reduced the size of large beverage cups.  When the franchisor discovered Franchisee Globex’s actions, the sent him a default notice and demanded that he stop.  When Franchisee Globex did not stop, the Steak ‘n Shake Franchisor terminated Franchisee Globex and filed suit.  Franchisee Globex filed counter claims.
 
This is not the first case involving Steak ‘n Shake’s $4 menu.  But on this one, the Franchisor is looking to come out the winner.  The Colorado court held that the franchise agreement language requiring the franchisee to comply with the ‘System’ including honoring and promoting the $4 menu, and franchisee’s failure to do so constituted a material breach warranting termination of the franchise agreement.  The franchise agreement did not explicitly state price setting.  Instead, the price setting requirement was boot strapped to the idea of the System.
 
It is common, if not universal, for franchise agreements to mandate compliance with the franchise ‘System’ standard.  This case exemplifies the breath of the ‘System’ uniformity and compliance mandates.
 
As with every case there is an admonishment about not all courts reaching the same conclusion and differing outcomes based on difference facts.  And, this case is no exception.  The concept of the $4 and $1 menus has long been an area of dispute between franchisors and franchisees.  It is unlikely that a simple conclusion that pricing is part of ‘System’ standards will settle the dispute. 
 

Discover more information about franchising.  Get our free newsletter!

Click here

 

Buying a franchise is typically a 10 year commitment. But, what if you get into a franchisee business and decide, oh, this is not for me. What if a couple of years go by and you decide, hey, I don’t want to do this anymore. Do you just stop operating? Close the doors one night and never come back.
 
That is what happened in the case of Super 8 Worldwide, Inc., formerly known as Super 8 Motels, Inc. [Franchisor] and Anu, Inc. et al. Or, supposedly this is what  happened. Anu, a Motel 8 franchisee [Franchisee], stopped operating. Franchisor has pictures to prove it. Anu just stopped operating his Motel 8 franchise. Who knows why? So what is a franchisor going to do? What can the franchisor do?
 
In this case the Franchisor sent Franchisee an acknowledgment of termination notice. And, sued the Franchisee and the individual franchisee owners for breach of contract. Franchisor wanted 114, 000 dollars from Franchisee for breach of contract. The Franchisee did not answer the complaint. Franchisor filed a motion for summary judgement. In an unpublished decision, the Federal District Court in New Jersey granted the Franchisor’s motion for judgement and orders the Franchisee to 317,591.65 dollars in liquidated damages.
 
In order to prevail in breach of contract case, as stipulated by the court, you need:
 

1. A valid contract
2. Breach of the contract [aka failure to perform under the contract]
3. Damages to the complaining party

 
Sounds fairly simple. The Court thought so, too. The franchise agreement was a valid contract. Under the franchise agreement, Franchisee was ‘permitted’ to operate a Motel 8 franchise.  Even though the franchise agreement said Franchisee was ‘permitted’ to operate a franchisee, the Franchisee was truly obligated to operate the franchise business and the Franchisee did not. As a result of not operating the franchisee business, Franchisor did not get royalties; therefore the Franchisor was damaged.
 
So what are the take-a-ways? First, if you don’t answer a complaint in court, a judgement most probably will be entered against you and you may be ordered to pay damages.
 
Second, the decision to stop operating a franchise business, before the franchise agreement term ends can result in a judgement and order to pay money to the franchisor for royalties that would have been paid in the future.  Most courts will award such damages, but courts may reduce or limit the amount of damages based on the franchisor’s duty to find a new franchisee.
 

Discover more about franchising!

Click here get our free newsletter.

 
The Fairness in Class Action Litigation Act of 2015 has been sent to the House or Senate for consideration.  The Act introduced is summarized in only two sentences, but it could have a large impact.
 

Fairness in Class Action Litigation Act of 2015

Amends the federal judicial code to prohibit federal courts from certifying any proposed class unless the party seeking to maintain a class action affirmatively demonstrates through admissible evidentiary proof that each proposed class member suffered an injury of the same type and extent as the injury of the named class representatives.

 

It defines “injury” as the alleged impact of the defendant’s actions on the plaintiff’s body or property.

 
Let’s look at franchisee class actions against franchisors.  While franchisees may claim the same type or injury [for example a franchise disclosure violation or a breach in the implied duty of good faith and fair dealing], will franchisees have the same extent of injury?  Will all franchisees alleging a disclosure violation have the same losses?   Could one franchisee have suffered more monetary damages than another?  The answer is probably yes.  How many times are franchisee positions and injuries alike- the same?
 
The Act is not law yet.  It is on the long road to enactment.  We will keep you posted.
 

Discovery more about franchising.  Sign-up for our free newsletter.

Click here!

 
Prior to signing a franchise agreement, many franchisors ask prospective franchisees to complete a disclosure questionnaire. The franchise disclosure questionnaire is designed to be an affirmation from the prospective franchisee that they received the franchise disclosure document 14 days and the agreements 7 days before signing, and that no unauthorized financial performance representations were made. The completed disclosure questionnaire is evidence that the franchisor complied with the federal FTC franchise disclosure laws.
 
But, what if the questionnaire does just the opposite? What? How? What if the prospective franchisee checks that he did not get the disclosure document 14 days before signing? Or, what if the prospective franchisee notes that financial performance representation was made, which was not included in the franchise disclosure document [FDD].
 
Would it not follow that the completed questionnaire would then be evidence that the franchisor violated the franchise disclosure law? The outcome may surprise you!
 
The case is Braatz, LLC v. Red Mango FC, LLC. The facts of the case go like this. Prospective franchisees, Mr. and Ms. Braatz sign a franchisee agreement and complete a ‘Franchise Compliance Questionnaire.’ As part of their completed questionnaire they mark ‘No’ to the following:
 
 

• It is true no employee or other person speaking on our [the Franchisor’] behalf made any statements or promise regarding the costs involved in the operating a RED MANGO Store franchise that is not contained in the Franchise Disclosure Document……….

 

• It is true no employee or other person speaking on our [Franchisor’] behalf made any statement or promise regarding the actual, average or projected profits or earnings………..

 
The Braatzes were given a business plan and financial projects from an existing RED MANGO by the Franchisor’s Regional Manager. That is part of the facts of the case. It is a fact they were given a business plan and financial projects; therefore  Mr. and Ms. Braatz marked no on the questionnaire and signed the franchise agreement.
 
 
The franchisor gets the signed franchise agreement, completed questionnaire, and a check from the Braatzes. The franchisor deposits the check, signs the franchise agreement, but contacts the Braatzes and says they cannot open a RED MANGO until they correct their answers on the questionnaire. The franchisor does not give the Braatzes a copy of the franchise agreement signed by the franchisor, but instead gives them a second questionnaire to complete.
 
Now remember, the franchisor has signed the franchise agreement and cashed the check. The Braatzes complete a second questionnaire answering ‘Yes’ to the questions, return the second completed questionnaire to the Franchisor, form Braatz, LLC limited liability company, open the franchise, and several years latter file bankruptcy and want to rescind the franchise agreement.
 
 
No go. The Court dismisses their claim. Yes. The franchisor may have improperly given financial projects, information about cost, but the Court reasoned the Braatzes did not materially rely on the Regional Manager’s disclosures, because when they were asked to correct the questionnaire, the Braatzes corrected the form and formed their limited liability company and opened their franchise. The Regional Manager’s disclosure may have been contrary to the FTC disclosure law, but they were not material.
 
 
Unexpected outcome. Not one to rest your hat on. The franchisees’ compliant was dismissed, but the court left room for the franchisees to amend and refile their claim against the franchisor.
 

Get free access to our Perfect the Deal Calculator, when you sign-up for our email newsletter.  It calculates the FTC holding period so you don’t have to!

Click here.