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If you answer ‘yes’ to that question, if may be considered a paid endorsement that should be disclosed on your Face Book page.  The Federal Trade Commission [FTC] has recently updated its Endorsement Guide FAQ.  The FAQ were updated to reflect questions received by the FTC and to cover the ‘trending and topical.”  The updated FAQ do not reflect changes in the rules, but rather interpretive guidance regarding application of the existing rules to social media and advertising trends.
 
Topics touched on in FAQs include:

• Blogging product reviews
• YouTube view reviews
• Informational Employee FaceBook page
• Celebrity tweet endorsements
• Television product placements

 
 
Here are several FAQ for the FTC guides about to make endorsement disclosure:
 
If I upload a video to YouTube and that video requires a disclosure, can I just put the disclosure in the description that I upload together with the video?
No, because it’s easy for consumers to miss disclosures in the video description. Many people might watch the video without even seeing the description page, and those who do might not read the disclosure. The disclosure has the most chance of being effective if it is made clearly and prominently in the video itself. That’s not to say that you couldn’t have disclosures in both the video and the description.
 
Would a button that says DISCLOSURE, LEGAL, or something like that which links to a full disclosure be sufficient?
No. A hyperlink like that isn’t likely to be sufficient. It does not convey the importance, nature, and relevance of the information to which it leads and it is likely that many consumers will not click on it and therefore miss necessary disclosures. The disclosures we are talking about are brief and there is no reason to hide them behind a hyperlink.
 
What about a platform like Twitter? How can I make a disclosure when my message is limited to 140 characters?
The FTC isn’t mandating the specific wording of disclosures. However, the same general principle – that people get the information they need to evaluate sponsored statements – applies across the board, regardless of the advertising medium. The words “Sponsored” and “Promotion” use only 9 characters. “Paid ad” only uses 7 characters. Starting a tweet with “Ad:” or “#ad” – which takes only 3 characters – would likely be effective.
 
To see all the FTC guides FAQ visit the FTC website at:  https://www.ftc.gov/tips-advice/business-center/guidance/ftcs-endorsement-guides-what-people-are-asking
 

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“How much will I make?’ is one of the first questions asked by many, if not every, prospective franchisee. Under the FTC franchise disclosure laws, franchisors are not allowed to answer that question unless they include a Financial Performance Representation disclosure in item 19 of the franchise disclosure document [FDD].
 
The requirement to include a financial performance representation in item 19 is optional. However, if the franchisor chooses not to disclosure a financial performance representation, the franchisor is not permitted discuss earnings or profits of existing or future franchises. And, a pre-proscribed FTC disclaimer must expressly be stated in item 19 of the FDD.
 
If franchisor does not include a financial performance representation in the item 19 of the FDD, when the prospective franchisee asks, ‘How much will I make?’ the franchisor must say, ‘I cannot tell you or give you information about how much you will make as a franchisee.’
 
What if the franchisor does? What if the franchisor gives information about franchisee’s outlet performance, earning, profits without including a financial performance representation [previous called earning claims] in item 19 the FDD? That is exactly the facts in a case out of Georgia. The Supreme Court of Georgia said, ‘too bad for you, franchisee. The ill doing is on you, franchisee. You didn’t read the FDD or the franchise agreement. The FDD and franchise agreement said the franchisor made no financial performance representations.’
 
In the original discussion, the jury awarded the franchisee 750,000 dollars in compensatory damages, 375,000 dollars in RICO damages, and 30,000 dollars in cost of litigation. The Supreme Court reversed the verdict and remanded the case for a new trail. The Supreme Court of George held that the franchisee should have read the franchise disclosure document, which included the item 19 disclaimer about no financial performance representations. The franchisee should have read the franchise agreement where the franchisee acknowledged that the franchisor made no representations about earning capability, levels of potential sales, income or profit.
 
Franchisors don’t get too giddy. The Franchisee claims were based in fraud misrepresentation and RICO. The issue of the per se violation of the FTC disclosure rule was not raised. Probably because the franchise agreement was signed 14 years ago, 10 years after the franchisee was in business and the update FTC rule was not in effect. And, there were not state franchise disclosure laws discussed in the case.
 
And, did you see the jury verdict? If the Supreme Court had not reversed, the franchisor would have owed: 750,000 dollars in compensatory damages, 375,000 dollars in RICO damages, and 30,000 dollars in cost of litigation. Do want to risk that kind of money?
 
Franchisees heed the warning from the court. Read the franchise agreement and disclosure document. It is no excuse to say that the franchisor pressured me to sign the franchise agreement and I did not have time to read it.
 

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I review a good number of Franchise Disclosure Documents [FDD] for prospective franchisees. And, I write and update FDD for franchisors. More and more, plentifully so, I have noticed the increase in franchise systems that use customer satisfaction surveys. Franchisors historically have maintained the right to inspect franchise location. So that is not new.
Both poor franchise outlet inspections and customer surveys can be grounds for termination under the express terms of the franchise agreement. Are the termination provisions in the franchise agreement for poor or failing marks on an inspection and consumer surveys enforceable? Or, is franchisor’s right to termination for failing inspections and satisfaction survey considered a breach of the franchisor’s duty of good faith and fair dealing?
 
Good faith and fair dealing is a promise that every party makes when entering into a contract. Good faith and fair dealing is not written down in the agreement. It is simply understood. The court will not enforce a party’s right under a contract unless it is fair and the party is acting in good faith.
 
The rationale beyond franchise inspections and customer surveys is brand quality, goodwill, and reputation. If a franchise location is not maintaining good customer service or not following standard protocols, the franchise system as a whole may suffer.
 
In a recent court case HLT Existing Franchise Holding LLC v. Worcester Hospitality Group, LLC the Second Court of Appeals Court upheld a franchisor’s right to terminate a franchise based upon failed evaluation scores as a result of poor customer satisfaction survey scores. And, the Court showed a little favoritism to customer satisfaction surveys over franchise inspections.
 
Per the Court, customer surveys have independent basis. Survey scores are the doing or opinion of the franchisor. Customer surveys are the views, judgment, and opinion of the customer. And, the franchisor conducted customer satisfaction surveys in the normal course of business in all franchisor locations. The consumer surveys were processed by a recognized third party.
 
Thereby, the Court in its decision said:
 

‘…..HLT terminated the franchising agreement based on a contractually permitted, rational, and non-arbitrary factor–the poor guest survey scores–it did not breach the implied covenant of good faith and fair dealing or act arbitrarily or irrationally.’

 
So thumbs up for consumer surveys from the Second Circuit in this case. Note, when reviewing the customer surveys, the court found it important that:
 

1. The surveys were done as part of the franchise model and not as an isolated location specific occurrence.

2. There were objective franchise system standard requirements for grades on the customer surveys

3. The customer surveys were conducted by an independent third party.

 

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Franchiseregistry.com is the site for the Small Business Administration’s [SBA] national online listing of franchise systems [Franchise Registry]. The site is maintained by Frandata. Franchise systems listed on the Franchise Registry receive expedited loan process when franchisees and prospective franchisees are applying for financial assistance from the U.S. Small Business Administration SBA.
 
Click here to learn about comment period for SBA lending process or visit:  https://gettinslaw.com/franchising/2015/01/05/what-do-you-think-about-the-sba-lending-process/
 
Here are benefits of being listed as SBA eligible on the Franchise Registry [per Frandata’s website]:
 
Benefits for Franchisors:
 

• Expedited loan processing. Eliminate weeks of processing time for new franchisees during purchase and existing franchisees looking to upgrade or remodel their existing location with an SBA loan. Help to ensure that loans will not be held up by a local SBA office and royalty streams will not be delayed.

• Minimize legal reviews and expenses. Have your franchise documents reviewed once, instead of being subjected to negotiations and different interpretations among local SBA offices.

• Service to franchisees. Demonstrate up-front to franchisees your commitment to a successful relationship by helping them to secure financing.

• SBA stamp of approval. Provides a feeling of security to franchisees because SBA has determined that there are no unacceptable franchisor control provisions in the franchise agreement. Franchisors can announce and market their listing on the Franchise Registry to prospective franchisees.

• Improves relationships with SBA lenders. Being listed decreases risks for PLP lenders and eases the approval process for local and regional lenders who are increasingly participating in SBA financing. This is particularly helpful for franchisees who prefer to continue their relationship with their own lender. It also raises awareness of your brand in the lending community.

Benefits for Franchisees & Potential Franchisees:
 

• Franchisors who are part of the Franchise Registry are doing their best to make your financing as easy and quick as possible. Need we say more?

Now inversely, not being on the franchise registry does not mean that SBA funding is not available. It simply means the loan process is going to be protracted [by 4-8 weeks] while the franchise disclosures and agreements are reviewed.
 
Click here to read What are the SBA’s Franchise Bug-a-Boos? or visit:  https://gettinslaw.com/franchising/2015/01/21/what-are-the-sbas-franchise-bug-a-boos/
 
And, you can get a basic listing on Franchise Registry, without going the through the SBA Eligibility Review. As part of the Franchise Registry, FranData offers other services. They offer BCR service to assist franchisors in getting a Bank Credit Report. There is also a Find-A-Lender matchmaking service, which matches franchise and lenders.
 
A basic listing on the Franchise Registry is free, but the SBA eligibility review and other services cost money.
 

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I am not sure who else is adopting the NASAA Multi-Territory Definition, but FranData says they are adopting the definitions. Back in September of 2014, Franchise and Business Opportunity Project Group of The National Association of State Administrators Association [NASAA] adopted Multi-Unit Commentary. The Multi-Unit sought to universalize terms nomenclature used to identify various franchise relationships.
 
The NASAA Multi-Unit nomenclature was set to be adopted by franchisors with their 2015 updates. For those franchisors who have not updated their franchise disclosure documents [FDD], this may be one more reason to update FDD with the new NASAA Multi-Unit nomenclature.
 
Frandata boosts of:
 

Having the largest database of FDDs in the world, with close to 40,000 and counting, consisting of brands actively franchising in the United States and going back 25+ years.

FranData is also the host of the Small Business Association’s [SBA] franchise registry.
 

Visit our blog next week to learn more about SBA registry.

As part of FranData’s announcing the adoption the NASAA Multi-Unit definition, FranData provided a nice skinny on the nomenclature definitions. Here it is:
 

• Unit [Unit]—The usual offering of a single franchise unit.

• Area Developer [AD]—The right to open and operate multiple units within a designated geographic area. FDDs may also use such terms as multi-unit, area franchisee, or regional developer.

• Area Representative [AR]—The right to recruit third parties as unit franchisees, and/or provide support to third parties entering into unit agreements. The AR may or may not have their own unit. FDDs may also use such terms as regional developer, area developer, or development agent. NASAA has mandated that separate FDDs be created for franchisors offering area representative agreements.

• Sub-franchisor [Sub]—Grants unit franchises to third parties with a designated territory. Third parties signing the unit agreements are sub-franchisees. FDDs may also use such terms as area franchisor, master franchisee, or regional franchisor. [We use the term “Master” for such offerings outside the U.S.]

Click here to read more about the New Multi-Franchise Disclosure Changes or visit:  https://gettinslaw.com/franchising/2015/02/02/are-you-ready-for-the-new-multi-franchise-disclosure-changes/

 
Per Edith Wiseman, President of FranData:
 

When franchisors ask us to benchmark their performance against their peers, it’s important that we all agree on the types of franchising programs being used and their relative historical results. Franchisors use single-unit franchising, multi-unit  franchising, area representatives, sub-franchising, master franchisees, licensing and other growth channels. It is crucial that we are able to do apples-to-apples comparisons when gauging the relative success of their efforts.

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In the state of Washington, the franchise registrations are renewable annually. If the franchise registration is effective May 15, 2014, it does not expire until May 15, 2015.
 
The FTC franchise disclosure rule says that the franchise disclosure document [FDD] must be updated 120 days after the fiscal year. Fiscal year ends December 31. That means the FDD must be updated April 30th.
 
The question is: can you still sell in Washington post April 30th until the registration expires on May 15th?
 
Here is the FTC Answer as posted in the Amended Franchise Rule FAQ:
 

Answer: As a matter of enforcement policy, FTC staff would not recommend initiation of an enforcement action against a franchisor that continues – after the 120-day annual update deadline, pending either completion of the state registration of the franchisor’s updated FDD or expiration of the franchisor’s prior registration (whichever comes first) – to make sales in a registration state using an FDD registered in that state. Nevertheless, after the annual update deadline, a franchisor may not use an FDD without updating it to make sales in any state other than a state with a franchise investment law in which the franchisor’s registration remains in effect.

Section 436.7(a) of the Amended Rule establishes a firm deadline for the required annual update and gives a franchisor 120 days after the close of its fiscal year to complete the update. (This is 30 days longer than the original Franchise Rule allowed.) The deadline ensures that prospective franchisees receive a disclosure document that is not stale, since many of the required disclosures provide information only for the prior fiscal year. Consequently, it is important that the annual update deadline be firm.

FTC staff recognizes, however, that although several state registration laws also require annual updates within 120 days after the close of a franchisor’s fiscal year, the time required for completion of the registration process means that registration of an updated FDD may not occur until weeks or months after the deadline. If the Rule’s annual update deadline were inflexibly enforced in those states, it would require a franchisor with a valid registration under state law to stop selling franchises until completion of the registration of its updated FDD. To resolve this tension between the amended Rule and state requirements, FTC staff do not interpret the amended Rule as requiring a franchisor with an FDD validly registered in a state to suspend sales in that state after the update deadline pending either completion of the registration of its updated FDD in that state, or expiration of the existing registration. Nevertheless, to ensure that prospective franchisees receive the most up-to-date information possible in non-registration states, a franchisor must use only an updated FDD after the annual update deadline.

As a matter of enforcement policy, FTC staff would not recommend initiation of an enforcement action against a franchisor. That is comforting. The FTC did not say it is compliant with the rule to continue to use the old FDD in the registration state. So, you are not in conformity with the Rule, but the FTC, as matter of policy, may not decide to go after you?
 
Better answer: Don’t distribute your old FDD post the 120 days after the close of the fiscal year. If the registration has not expired, submit the registration renewal application early. The FTC is trying to be polite and respectful of the states. But, the Rule is to update 120 days from the fiscal year.
 

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Let’s say a deal is negotiated where a manufacturer provides logo napkins to franchisees for $5 [I am in to simple math]. The manufacture deal for the napkins is negotiated by a third party business that is owned by founders of the franchise system. The third party business entity makes $.50 from each napkin purchase. Is that a kickback?
 
In this hypothetical, we use napkins. But, it could be cleaning products, raw ingredients to make food products, beverages. It could be anything. Are franchisors or franchisors’ officers making a profit off of franchisee purchases, is it a kickback?
 
That is the heart of 17 allegations of Moe’s Southwest Grill against the franchisor and founders that lasted 8 years. The case is finally over. But, the question remains. The case was decided in favor of the franchisor. However, the case did not rest on the determination of whether a kickback was present or not.
 
There is no resolution to the 8 year old question. Are franchisor and founder profits on a franchisee purchase a kickback? The court did not answer the question. The court’s said- “Hey, franchisees you should have looked into it. You knew it existed. You can’t claim you were defrauded if you knew.”
 
The Moe’s Southwest Grill franchise disclosure document [FDD], back when the dispute arose was called the Uniform Offering Circular [UFOC], disclosed that the founders of the franchisor were owners of a brokerage company named SOC, which negotiated food supply agreements for Moe’s Southwest Grill franchisees. The court said, disclosure of SOS was sufficient notice to franchisees there may be a kickback scheme and they should look into it. The disclosure document [then called the offering circular] also said and disclosed that “we will not derive a profit from franchisees’ purchases.“
 
Okay, that sounds bad. If franchisor officers, directors, founders own an entity that negotiates deals for the franchisee, check it out because there may be a kickback. How about if an entity provides services to franchisee? How about if an entity sells a product to franchisees? Should that be checked-out, too?
 
As part of the Item 8 in the Franchise Disclosure Document [FDD], franchisors must disclose if they receive a profit from franchisees’ required purchases from affiliates or vendors. And, franchisors must disclose, in item 8, any franchise supplier, in which an officer of the franchisor owns an interest.
 
Note, there is no requirement to disclose franchisor or affiliate profits from non-required purchases. Nor is there a requirement to disclose profits derived by officer owned business entities. Sometimes what is not said is as important as what is said.
 
But, wait. Is it not deductive reasoning to assume that if an affiliate offers services to franchisees, or an officer owned business entity negotiates deals for franchisee purchases, there is a kickback? Yes. It is deductive. And, maybe there is plausible benefit or justification. Yes. There are reasons and benefits for negotiated deals and closely held transactions.
 

• Required purchases from franchisors or its affiliates or designated supply may foster franchise brand uniformity.

• Designating suppliers ensures quality standards and reduces time expenditure for locating and securing suppliers.

• Requiring franchisees to buy from one supplier [whether affiliate suppliers or designated third party suppliers] leverages the buying power of the whole franchisee system.

There are caveats. If the franchisees are paying higher prices than their competitors, the franchisees are less competitive or franchisee profits may suffer.
 
Whether officer ownership of suppliers is a benefit or negative, is question to investigate. If requiring purchase from a designated supplier is good thing, is question to answer for each system and each transaction. And, just because someone earns a profit is not proof positive of a problem.
 
If benefit is given or cost and expense are incurred by the franchisor, affiliate of officer owned entities, profit franchisee purchases may be justified. Franchisees should ask the questions and franchisors should be prepared to give answers. Required purchases and franchisor profits are an area of scrutiny.
 

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The franchise disclosure document [FDD] has been updated for the New Year. There are prospective franchisees in the pipeline. You have been talking to them, they may have attended discovery day. But, they have not signed the franchise agreement. The updated FDD is issued. Should you give them a copy of the new updated disclosure document?
 
The best answer is: give prospective franchisees a copy of the updated franchise disclosure document and wait another 14 days [or 10 business days] before signing the franchise agreement.
 
That is my answer, but let’s see what the FTC says. As part of FTC Amended Franchise Rule FAQ’s, this question is posed:
 

If a prospective franchisee has received a UFOC disclosure document prior to July 1, 2008, but has not purchased a franchise by that date, must the franchisor provide the prospective franchisee with its Franchise Disclosure Document (“FDD”) 14 calendar days before he or she pays any money or signs a binding agreement in connection with the proposed franchise sale?

Answer: The Rule does not require a franchisor to give its FDD to a prospective franchisee who has already received a UFOC disclosure document prior to July 1, 2008, unless he or she makes a reasonable request for the most recent disclosure document and quarterly updates pursuant to Section 436.9(f) of the Rule.

A little history is in order. Previously the franchise disclosure document [FDD] was called the UFOC or Uniform Franchise Offering Circular. The FTC amended franchise disclosure rules and the UFOC became the FDD.
 
The FTC’s response above suggests re-disclosure is not indicated unless the prospective franchisee asks for a copy. But, think about it. The information in the previous year’s FDD is dated. There are new audited financials. There may be changes to the numbers of franchise outlets. Many things have happened over the past year. Some of those things may change if franchisee chooses to buy a franchise or not. They are material.
 
After the franchise sale, you don’t want the franchisee to say: ‘If I knew, I won’t have bought the franchise.’ Don’t give a franchisee a reason to complain. If things go awry, one of the primary franchisee allegations is that they were not disclosed properly – they were not given the material information- they were misled.
 
Give prospective franchisees a copy of the updated disclosure document. Allow another hold period to elapse before signing the franchise agreement.
 

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In our companion Privacy and Security Blawg, we post about privacy and security issues affecting the health care industry.  However, sometimes the information we post is important to the wider business community.

Here is one such issue:  The Business E-mail Compromise.
 
The Internet Crime Compliant Center [IC3] issued a warning to business owners- small and large. The warning alerts business owners to a scam being dubbed the Business E-mail Compromise [BEC] A.K.A. Man-in-the-Email Scam. The end game of the BEC scam is to generate false wire transfers. And, the scammers are using the names of your staff and vendors to do it.
 
Here are some 2 sample versions restated from the IC3 warning:
 

Version 1
A business, which often has a long standing relationship with a supplier, is asked to wire funds for invoice payment to an alternate, fraudulent account. The request may be made via telephone, facsimile or email. If an email is received, the subject will spoof the email request so it appears very similar to a legitimate account that would take very close scrutiny to determine it was fraudulent. Likewise, if a facsimile or telephone call is received, it will closely mimic a legitimate request. This particular version has also been referred to as “The Bogus Invoice Scheme,” “The Supplier Swindle,” and “Invoice Modification Scheme.”

Version 2
An employee of a business has his/her personal email hacked. Requests for invoice payments to fraudster-controlled bank accounts are sent from this employee’s personal email to multiple vendors identified from this employee’s contact list. The business may not become aware of the fraudulent requests until they are contacted by their vendors to follow up on the status of their invoice payment.

 

Visit our privacy and security blawg at https://gettinslaw.com/hipaa/2015/03/16/have-you-heard-about-the-business-e-mail-compromise/  or click here.

 
Discover some watch-outs to help spot a BEC scam and  What can you do to protect yourself!

Previously on our blog we talked about franchise registration. As part of franchise registration, state examiners, in some of the registration states, will review the contents of the franchise disclosure document [FDD]. The examiners look to see if the FDD conforms with state and federal laws and there are no facial inconsistencies.
 
Click here to read  Which States Require a Filing or Franchise Registration?  or visit:  https://gettinslaw.com/franchising/2015/03/31/what-states-require-a-filing-or-registration/
 
What the examiners zero in on is difficult to determine. There are pages and pages of disclosures. There are pages and pages of rules about the required disclosures. Information is repeated, restated, referenced in a patchwork of the disclosures. Examiners may call out updated information or the examiners may take exception to disclosures and wording that was present in last year’s FDD where no issue was raised before. Everything is fair game.
 
When an examiner takes issue, a comment letter is issued. The franchise registration is stalled until the comments from the examiner are addressed.
 
Here is a listing of Common Mistakes to Avoid published by the Maryland Security Division:
 

1. When renewing or amending, make sure your application includes a black-lined copy of the complete revised FDD, including exhibits.

2. Do not ignore the requirement in Item 12 to specifically disclose whether or not the franchisor provides an “exclusive territory.”

3. Make sure the dollar figures on the FTC cover page match the corresponding dollar figures disclosed in Items 5 and 7, and that the franchise and company owned outlet totals disclosed in Table 1 of Item 20 match the corresponding totals in Table 3 and Table 4.

4. Include the correct “issuance date” on both the FTC cover page and receipt pages of the FDD.

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