May 2013 Archives

It should be obvious to anyone reading these words that it is never a good idea to lie to a court of law.  That's a pretty basic concept, right?  Lying in court documents is called "perjury," and it's a crime in every State in the union. 

So it's always interesting to hear a story about someone who failed to grasp this fairly simple concept -- and how they got caught doing it.  This time it was the Husains, longtime McDonald's franchisees, who lied to a court in Northern California in litigation against their franchisor.

The decision in Husain v. McDonald's Corp. was handed down by the California Court of Appeals on March 28, 2013.  The story goes something like this:

The Husains are longtime McDonald's franchisees, having owned up to five different McDonald's franchises located in northern California since the early 1980s.  In June 2005, the Husains entered into an agreement with a third party to purchase an additional 7 restaurants.  Of those, 3 of the franchise agreements were nearing the end of their 20-year franchise terms.  

As part of the purchase, the Husains asked McDonald's whether it would agree to provide them with new 20-year franchise agreements when the 3 expiring agreements came to the end of their respective terms. 

McDonald's offered to extend the Husains' expiring terms by letter, which offer had to be countersigned and agreed to by the Husains to become effective.  McDonald's claimed the offer was never accepted and expired on its own terms, leaving the Husains without renewal franchise agreements for the 3 expiring restaurants.  The Husains sued to enforce McDonald's alleged promise to them. McDonald's filed a cross-complaint to compel the Husains to relinquish the 3 restaurants to the company.

To "prove" that they had, indeed, accepted McDonald's offer to extend the expiring franchise terms, the Husains produced a certificate of mailing with a United States Postal Service postmark dated before the offer expired, alleging that the agreement had been properly accepted.  McDonald's countered by producing evidence that the post office that had supposedly provided the certificate of mailing was closed on the date bearing the postmark, and that the postmark stamp on the certificate was not in use until 2008.

Based on this evidence, McDonald's claimed that the Husains had committed perjury and fabricated evidence, and sought terminating sanctions -- in other words, McDonald's asked the Court to sanction the Husains by not permitting them to continue litigating their case. 

The trial court denied the motion, finding that at most McDonald's would be entitled only to dismissal of a cause of action the Husains had already dismissed, and that there was a factual dispute regarding the fabrication charges that could not be determined at the motion stage.

Renewed Motion for Terminating Sanctions

Four weeks into the trial and after the Husains had presented their case-in-chief, McDonald's filed a renewed motion for terminating sanctions. The motion was based on McDonald's contentions that Mr. Husain:

(1) presented falsified invoice information to overstate his investment in the franchise;

(2) falsified the certificate of mailing; and

(3) repeatedly mentioned his wife's recurring breast cancer in violation of a court order on a motion in limine on that subject. 

McDonald's argued that the sanctions were required under California Code of Civil Procedure Sec. 2023.030 and pursuant to the inherent power of the court.

The trial court found the Husains committed perjury, provided false evidence in discovery, and willfully and repeatedly violated its order on McDonald's motion in limine regarding the mention of Mrs. Husain's breast cancer. 

The court ordered terminating sanctions, finding that "[n]o lesser sanction would be appropriate or would ensure compliance and a fair trial." 

The court dismissed the Husains' complaint with prejudice, and struck their answer to McDonald's cross-complaint.  The court also dissolved the preliminary injunction in the Husains' favor and granted McDonald's an injunction preventing the Husains from continuing to occupy the restaurants and use its trademarks. 

The Husains appealed.

Appeal

The appellate court began by observing that "[b]ecause a terminating sanction is a drastic measure that denies a party the right to a trial on the merits, our courts have limited its use to only the rarest and most extreme cases of litigation misconduct when no lesser sanction can preserve the fairness of the trial and restore balance to the adversary system." 

The Court found the Husain's conduct reprehensible, but that it did not necessarily justify terminating sanctions.  

Examining the Husains' conduct, the appellate court reasoned that the discovery statutes relating to document production, depositions, and interrogatories do not authorize terminating sanctions unless a party refuses to obey a court order relating to that discovery. 

The court found that the Husains had not in fact disobeyed any discovery order by doctoring evidence, and that the end result of their tampering was "of little or no consequence to the litigation." Based on this, the court found that the discovery statutes did not authorize terminating sanctions.

The appellate court also found that the trial court's inherent powers did not justify terminating sanctions because McDonald's failed to show that "the Husains' misconduct deprived it of a fair adversary trial in any sense."  McDonald's, the appellate court reasoned, had the opportunity to effectively cross-examine Mr. Husain and place his credibility at doubt. 

In other words, McDonald's had the opportunity at trial to use Mr. Husain's actions against him. The court also found that Mr. Husain's violations of the trial court's orders on McDonald's motions in limine "could not have so impaired McDonald's ability to defend itself as to throw the fairness of the trial into question."  The court reasoned that some lesser sanctions would have fully protected McDonald's right to a fair trial.  

Because it found that terminating sanctions were not justified, the court of appeals set aside the terminating sanctions and ordered the trial court to schedule a new trial date -- in effect, permitting the Husains to continue litigating their case against McDonalds. 

Presumably, the serious issues of the franchisees' credibility, along with any lesser sanctions the trial court enters due to their perjury, will be a significant enough consequence to them to ensure that they are not able to benefit from their fraud on the court.

For so many years the quality of most of what passes for franchise investment opportunities has been so abysmally low that their selling risk has had to be hedged with capital punishment clauses galore in the franchise agreements and in the FDD materials.

Part of this is that the quality of the concept being sold has been marginal and worse almost all the time. Whole business segments are now populated junk offerings.

Along these lines one might mention sandwiches, ice cream yogurt and gelato shops, pizza, printing, car repair and maintenance and dozens more. For various reasons - a long list - these are not real business investment opportunities and only fools buy them. Since the market does not provide protection for fools, I am not going to waste any more time talking about what they are and how they are sold. Rather, I would prefer to discuss how one should sell a real, investment worthy franchise opportunity.

In a real investment opportunity you have demonstrable revenue credibility.

The franchisor, before embarking upon a franchising program, had a real business that made decent profits and showed substantial growth and could be operated by trained and monitored managers in several replications of the franchise model. This kind of franchisor paid attention to what was happening in his market and made adjustments and improvements as soon as the opportunities presented themselves, keeping the operating manual current and paying attention to detail. It is a fine tuned, well managed business at the moment that the decision is made to franchise it.

In other words, it is a real business with an identifiable attainable breakeven point that will occur within a year in the right market.

The franchise's financial performance is sufficiently monitored both in company store mode and in the franchised mode, and differences in financial performance are accounted for in terms of what causes the differences. The franchisor knows his franchise and is not just some circus clown with a glib sales pitch chock a block with slogans and meaningless pseudo information.

A real franchise is not sold to every bozo with a temperature and a room temperature IQ who can write a check for the initial fee. A real franchise is not sold in any market where its anticipated performance is not responsibly projectable.

A real franchise skims the best markets first. In that manner the franchise itself, as a system, achieves early revenue credibility that enables the franchisor to begin writing a more aggressive FDD.

A real franchise is sold to carefully vetted franchisee prospects with more than enough money than will be needed and a proven business track record that includes actually having to make serious business risk decisions, not some marginal mid level "executive" who had to remortgage his house to meet the anticipated total initial investment.

Total initial investment, as presented in almost every FDD is an inadequate range of numbers intended to speak to the first 90 days after store opening and omits far too much to be remotely reasonable. In our real franchise, the Item 7 information will be a much higher number because the caliber of investor sought will not be scared off by it.

The number will also change frequently because its underlying information is being monitored carefully. The franchisor will have a good grasp on where breakeven can be expected to occur and how long it takes to get there. This enables more aggressive FDD information that is not misleading. This is the kind of information a real investor wants to know about. This is what sells franchises to intelligent investors.

If area development deals are sold, they are sold to people who have a track record demonstrating the capability to meet a development schedule. That schedule will describe the art of the possible in an area with defined top level geographic areas and good demographics specifically measured for this franchise.

With this approach the FDD can and will become more aggressively informative each year. There will be few surprises and those easily manageable. The franchisor will be willing to make adjustments for these surprises so that they do not result in serious economic disruption and the rise of disputes. The franchisor's willingness and ability to make adjustments and accommodations where appropriate, no matter what the franchise agreement may say, will mark that franchisor as the affiliation of choice for the best operators. Good reputations grow almost as fast as bad ones, and one does not become known as a chump for using good sense.

In this kind of franchise there is no danger in demanding compliance with the agreement terms, because the business is not financially impaired by the range of possible additional charges that could be made by the piggish franchisor. Good business partners know that everyone in the deal has to make money and that only a pig tries to squeeze every last nickel and dime out of it.

However, the extraneous revenue stream temptation will always be there, and an enlightened franchisor is all too often succeeded by more opportunistic types. For this reason it is critically important that franchisees establish an effective independent franchisee association long before abuses occur. It is far easier and less expensive to prevent abuse than it is to stop abuse.

Usually franchisees assume the best and leave themselves open to abuse until it is too late. That is a terrible mistake.

Franchisor established franchisee advisory boards are no substitute for the franchisees having their own independent organization. The franchisees of Quiznos and Marble Slab Creamery and many others learned this lesson the hard way. They are now dropping like flies.

For several years the franchise world has been populated mainly by mediocrities and worse, all sold to moron FranWads who were usually corporate middle management types - glorified clerks. They accumulated close to a million dollars in many instances through hard work and frugality, only to lose it all and end up in bankruptcy.

It is time for a higher level of investment quality. There are plenty of investors for those opportunities who are financially and experientially qualified. Following the plan suggested here and elsewhere on www.FranchiseRemedies.com a solid and credible franchise investment environment can again be established. I will be very happy to help guide them through their early years into their growth phase to maturity.

The information provided to franchisee candidates is meant to be read, understood and acted upon.

Some franchise sales processes are designed to run around this information, minimize its import or in some cases to blatantly contradict this information.

Consider this marketing piece put out for Mooyah Burgers.

The advertising clearly states & makes a financial performance claim: 2 to 1 sales/investment ratio.  

Now, let's check what the franchisor actually says in their FDD. 

Item 19 from Mooyah Burgers 2013 FDD

The FTC's Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchisedand/or franchisor-owned outlets, if there is a reasonable basis for the information, and the information is included in the disclosure document.

Financial performance information that differs from that included in ftem 19 may be given only if:

(1) a franchisor provides the actual records of an existing outlet you are considering buying; or

(2) a franchisor supplements the information provided in this ftem 19, for example, by providing information about  performance at a particular location or under particular circumstances.

This franchisor does not make any representations about a franchisee's future financial  performance or the past financial performance of company-owned or franchised outlets.

We also do not authorize our employees or representatives to make any such representations either orally or in writing.

If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet.

If you receive any other financial performance information or projections of your future income, 

you  should report it to the franchisor's management by contacting Michael Mabry or our Franchise Sales  Department at:

6100 Preston Road.

5212 Tennvson Parkwav Suite 240.

Frisco 120.

Piano. Texas

7503475024 or f2141 872 4313 310-0768.

the Federal Trade Commission, and the appropriate state regulatory agencies.

This is a clear case in which the sales process & the marketing materials are at odds with the 2013 Franchise Disclosure Document.  The presentation of this contradictory information likely harms the franchisor's sales process.

SALT LAKE CITY -- The U.S. Department of Labor has filed a lawsuit against Universal Contracting LLC, CSG Workforce Partners LLC, Decorative Enterprises LLC, Mountain Builders Inc., Cory Atkinson, Tracy Burnham and Ryan Pace after an investigation by its Wage and Hour Division disclosed evidence of willful violations of the Fair Labor Standards Act's overtime and record-keeping provisions.

The department's lawsuit seeks to recover unpaid overtime compensation and liquidated damages for more than 800 current and former laborers. It also requests the court to permanently enjoin the defendants from committing future violations of the FLSA.

Employment agencies Universal Contracting and CSG Workforce Partners provided laborers to contractors--Decorative Enterprises and Mountain Builders--and charged the laborers and contractors a fee for their employment placement services. Wage and Hour Division investigators found that the companies misclassified workers as something other than employees, claiming there was no employee-employer relationship, and denied the employees overtime compensation, as required by the FLSA.

"Universal Contracting, CSG Workforce Partners and their clients are intentionally skirting the law by willfully and wrongfully claiming that their workers are not employees because they are members or owners in a limited liability company," said Cynthia Watson, Wage and Hour Division southwest regional administrator. "As demonstrated by this lawsuit, the department is vigorously pursuing corrective action in those situations where misclassified workers are actually employees, to ensure that they are paid required wages and to level the playing field for employers who play by the rules."

The department's suit was filed in the Central District of Utah, Salt Lake City, following investigations by the Wage and Hour Division's Salt Lake City Office that found the defendants violated the FLSA by failing to maintain a record of hours worked by employees and failed to pay the employees the federally mandated overtime compensation, as required by the FLSA.

The violations committed by Universal Contracting and CSG Workforce Partners are considered willful because the companies had been notified previously by the Wage Hour Division that the workers are employees. As such, they are entitled to the wages and employment protections guaranteed by the FLSA. Universal Contracting and CSG Workforce Partners willfully and purposefully pursued an operational method that makes it difficult to determine the hours its laborers worked and the corresponding compensation received for those hours.

The department's lawsuit seeks to hold Universal Contracting and CSG Workforce Partner's clients, Mountain Builders and Decorative Enterprises, severally liable for the violations. Mountain Builders and Decorative Enterprises are in a joint employment relationship with Universal Contracting and CSG Workforce Partners. The department has also filed a motion for preliminary injunction seeking an order directing Universal Contracting and CSG Workforce Partners to immediately comply with the FLSA's overtime and recordkeeping provisions.

The misclassification of employees as something other than employees, such as independent contractors, presents a serious problem for affected employees, employers and to the economy. Misclassified employees are often denied access to critical benefits and protections, such as family and medical leave, overtime, minimum wage and unemployment insurance, to which they are entitled. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers' compensation funds.

The Wage and Hour Division's Salt Lake City Office and the Denver branch of the Office of the Solicitor, through an agency memorandum of understanding with the Utah Labor Commission, have been working on employee misclassification issues, including issues regarding this case, with the Commission, the Utah Division of Occupational and Professional Licensing and the Utah Industrial Accidents Division. Under the terms of a similar information-sharing memorandum of understanding, this is the type of case that the Labor Department may refer to the Internal Revenue Service.

Memorandums of understanding with state government agencies arose as part of the department's Misclassification Initiative, with the goal of preventing, detecting and remedying employee misclassification. More information is available on the department's misclassification Web page at http://www.dol.gov/misclassification.

The FLSA requires that covered, nonexempt employees be paid at least the federal minimum wage of $7.25 for all hours worked, plus time and one-half their regular rates, including commissions, bonuses and incentive pay, for hours worked beyond 40 per week. Additionally, employers must maintain accurate time and payroll records. Employers who violate the law are, as a general rule, liable to employees for their back wages and an equal amount in liquidated damages. Back wages and liquidated damages are paid directly to the affected employees.

For more information about federal wage laws, call the Wage and Hour Division's toll-free helpline at 866-4US-WAGE (487-9243) or its Salt Lake City office at 801-524-5706. Information also is available at http://www.dol.gov/whd.

This article deals with compliance with contract issues, not compliance with laws regulating franchise sales. Its opening major premise is that the concept of compliance has many dimensions, is seen from many different perspectives, and is in many instances more situational in its relevance that an institutionalized constant.

I don't mean to be flippant or casual when I suggest that compliance is a sometimes thing. The fact situations in which compliance becomes a do or die issue so often involve application of compliance standards in one situation that are not utilized or insisted upon in normal situations, that a legitimate question arises regarding selective enforcement.

Sometimes selective enforcement is justified, as in the case of a hard core recidivist constantly resisting conformity.

And, as the trial lawyers (myself included) so often say, that makes for the 'justiciable issues' revenue stream we know and love so well. It becomes in most instances a question for the trier of fact, judge or jury, whether the behavior of the parties in this particular case is acceptable, or aberrational and without just cause (whatever that means).

The general rule of contract construction is that the express terms are there for the purpose of being insisted upon. That's too elementary to be of much assistance in understanding how the contract language and the franchising agenda work together. It's one thing to be able to read and quite another to understand the 'system'.

But that's what you agreed to, so that's the standard to which you will be held, unless of course you were induced to sign the contract by misrepresentation and can prove that.

Stupidity/ignorance is not a defense, but it is still unlawful to cheat the stupid (in most states).

General rules of construction, however, are themselves subject to selective application when the ambient circumstances suggest that to do otherwise would work injustice. One important point is that whenever a variance from strict compliance is in order, the contract is written so that it is the franchisee's burden to prove that it is in order. That fact alone gives the franchisor most of the options in deciding what level of compliance may be insisted upon in any individual situation. Inasmuch as the franchise contract is written to give the franchisee the fewest possible options in time of trouble, reading the contract does not inform a potential franchisee of the 'quality' of the investment being offered.

A potential franchisee has to start out with the understanding that the contract favors the franchisor at every turn and on every question. With that level of riskiness staring you in the face, the due diligence on the quality of the investment being offered is the most critical area of inquiry. Unfortunately, new franchisees almost never go to a franchise industry specialist for that due diligence. They go to their cousin or their divorce lawyer who has absolutely no ability to inform them about what they are getting into. Is it any wonder that about 70 % of them go broke in the first three years?

What the International Franchise Association says about survival chances being enhanced if you are a franchisee is thought, by many who have good reason to know, not to be true. Judging the prospects of the newer franchise offerings by the success track of the more mature franchisors is not a reliable risk assessment technique.

There is a curious analogy that I often joke about (See 'The Ultimate Franchise' at www.SeamusMuldoon.com ). Most of us casual compliance folks think of the fundamental mandates of the Bible in terms of the Ten Commandments, supposedly a contractual construct given by our Creator and accepted by the Israelites at the theophany on Mount Sinai. Like the Sherman Antitrust Act, the Ten Commandments have sufficient constitutional vagueness to allow them to be interpreted and applied to the ambient circumstances of an ever changing world.

The more compulsive amongst us have, however, scoured the Bible and found at least 613 commandments. People like this write franchise contracts. Compliance with 613 commandments requires the dedication of life itself to compliance, with little time or energy left over to do much else. Franchise contracts are so convoluted, especially when viewed in conjunction with franchise operating manuals, compliance with which is mandated in all franchise contracts, that running a normal business can be obstructed rather than facilitated by over zealous devotion to compliance. Where is the line to be drawn that demarcates reasonable compliance from fanaticism? The answer is that it is an ever moving line.

This article is intended to suggest an approach to how to find the line in the particular situation that you face today.

A franchise contract is written to cover every conceivable situation and to maximize the likelihood that in any dispute the franchisor will have the upper hand. Those of us who draft franchise contracts have been fine tuning every provision and adding provisions over at least the last 40 years since I have been in practice to keep the advantage as far over in the franchisor's corner as possible through changes in statutes and regulations and to accommodate the variant approaches to dispute issues that have come out of court decisions and opinions.

It requires constant vigilance to counter any change that might erode a franchisor's control options regarding the franchisor's name, system, identity and the enforcement of the franchisor's will in all situations.

Because the franchise contract is written to be the ultimate safety net to enforce franchisor control options, no matter what, it may not be/is not correct to think of it as the standard for normal day-to-day operations. It deals with emergency preparedness, and emergencies simply do not occur all the time. In some companies it may seem like emergencies occur all the time, but those are not system wide emergencies unless the company is not competently managed.

There are usually different emergencies amongst many franchisee scenarios. Even the operations manual, which is supposed to be the micro management reference source, is a 'best case' construct that itself changes several times each year. What does not evolve does not survive. Once protecting the crown jewels is accounted for, no one wants the documentation to stifle progress.

The contract itself is not the crown jewel. The business relationship and its prospects for success and growth are the crown jewels, and the contract is to serve that, not to usurp that -- no matter what lawyers think.

I submit for the sake of this argument that in a well run organization, on a day-to-day basis, neither the franchise contract nor the manual is fully observed/complied with.

They are target benchmarks that are rarely/never one hundred percent met in a well run business that is making money.

Technically speaking, therefore, there is non-compliance/breach occurring every single minute of every single day.

And in a 'management by exception' mode, what we do is react to activity that it outside the margins of tolerance and perceived to be pernicious. Outside the margins of tolerance and not perceived to be pernicious is called innovation. Innovation, once field tested, is brought into the tent and becomes part of the operational fabric.

Given that 'breach' is always occurring, one must then, I think, concede that the critical talent that must come into play in any enforcement decision is management discretion.

As we say in Texas, that's why they pay us the big bucks -- to use excellent management discretion, to be able to balance competing interests and prioritize issues so that the best result with the least adverse risk becomes the most likely outcome in any situation.

There are limits on discretion. What one might wish to do in a seemingly deserving situation is sometimes influenced by considerations of precedent. What might be a salvaged relationship is sometimes lost to considerations of precedential impact, and more frequently lost to management ego issues.

Here is where a great deal of error creeps in, as many situations feared to be precedent setting are actually not precedent setting. Competent analysis is required to distinguish between the two. If I let this franchisee off the hook on this default, everyone will think they can get away with it too. Even though there is no regulation or law that requires uniform enforcement of any contract provision, there are erosion and dilution issues that can become acute if the perception amongst the franchisees is that the franchisor is not militant about enforcing the franchisor's rights and authority.

Rabble rousers are all too frequently looking for some wiggle room to find issues to use as rallying points to promote the formation of adverse constituencies around some agenda or other. And sometimes there is a situation in which tolerance should be exercised, especially if the franchisor is not blame free. Confrontations over enforcement issues that end up in court/arbitration and that go against the franchisor become worse precedents and more virulent in their impact. 

The nature of the event(s) of compliance failure, the level of gravity, is always the first step in the process of trying to decide whether to actually declare/give notice of a default under the franchise contract. The second step is due diligence. All too often the second step is ego driven/agenda driven rather than objective investigation. That's a wrong turn in practically every instance. It matters much less who is in issue here than the ability to provide adequate documentation of the default, including the ambient circumstances leading up to the default. Files must be marshaled, people interviewed and statements taken and signed.

This is lawyers' work. If management does the interviewing, there will be more concern on the part of the employees being interviewed that they respond in harmony with what the think the boss' agenda is rather than a straightforward fact statement. That concern will be there even if the lawyers do the interviews, but it will be much more palpable if the executives do or are present during the interviews. Even with the lawyers doing the interviews, it is often the case that the employees have met to assure that they are all on the same page, and sometimes there has even been a meeting with the boss where they are made keenly aware what the boss' agenda is. The employee may give false statements effectively while on his home turf with wishful thinking friendly folks in the room. He can't reliably be expected to do as well under cross examination by opposing counsel with unfriendly folks in the room and a transcript being made that can be evidence of perjury. This is the very essence of ego driven procedure, and the worst possible scenario for the production of a high quality result. When you impair the quality of your own company's due diligence, bad things happen. I ought not even have to say that. But I have seen so much of it that in my opinion it merits comment. But this article really isn't about the ego driven boss. After the facts are marshaled and able to be examined in a sensible mode, then agenda can rationally come into play. Having an agenda isn't bad per se. Letting the agenda get in the way of accuracy is very often extremely bad in the results obtained. If the agenda is a constructive agenda, accuracy won't dilute it or thwart its advancement. You really can't have an agenda that depends for its effectiveness upon management never making mistakes. Management is human, and mistakes will happen. The agenda must work despite management mistakes if it is a positive agenda, a substantive (non fluff) agenda.

The vast majority of compliance failure is dealt with at the level of the inspection report. In a well run company, copies of inspection reports are left with the franchisee at the end of the inspection visit, after discussion with the franchisee/manager of what inadequacies were found. If the problems were more than marginal, there may be a follow up inspection at an earlier date than would normally occur to be sure of cure or a detailed written cure report required of the franchisee. If people are using good sense, it ends there. If people are not using good sense, deficiencies persist and may get bucked up to operations and an operations manager may call or send an email to the franchisee requesting an explanation of why 'stuff' wasn't fixed when it should have been fixed. If compliance failure continues and the problem is significant, the director of operations will usually make personal contact to inform the franchisee of the risk of default notice, and ask if there is some agenda at work that is making the deficiencies persist. This makes good sense and it makes for a good paper trail to show a judge or jury that the franchisor is really trying to be as reasonable as possible before whipping out the big gun. Persistent compliance failure always gets more aggressive treatment in court than occasional events of compliance failure. Only the persistent failure gets the big gun treatment unless the nature of the event is such that there is an emergency need to take immediate remedial action. This is the regime for dealing with operational defaults, and I have seen CEO and COO type people get on the phone personally before resorting to the heavy hand. Default notices usually need to be approved at the top anyway, even if the honcho does not insert executive authority into the mix -- sometimes because the executive really doesn't want to be a witness if that can be avoided. Apex witnesses are a phenomenon to be avoided. They frequently make terrible witnesses, and often judges and juries simply don't buy the notion that the executive really doesn't get involved personally in the day to day operations. The Enron executive is the worst case scenario for this problem.

Above operational compliance failure would probably be financial defaults. Things don't get paid when they should get paid. This is more serious than not putting date labels on the inventory in the walk in cooler. This also goes to another part of the franchisor organization, the accounting and finance people, who should be less tolerant than operations people. Financial compliance failure is more frequently a harbinger of greater and more fundamental failures of compliance, and if they are not nipped in the bud, blossom very quickly into situations requiring surgery.

This is dealt with more effectively where the franchisor is professionally managed. When the founder is still at the helm, the franchisees are often seen as his children, and too much forgiveness of tardy financial compliance leads to systemic evils of enormous proportions. Allowing franchisees to fail in compliance with financial responsibility issues is never beneficent. Immediate resolution is the best resolution. The issue should get kicked upstairs sooner, and executive approval of default notices should be given after one attempt to find out if some emergency/calamity has befallen the franchisee that might justify exceptional consideration. The recent hurricane season on the gulf coast and health calamities epitomize the level of calamity called for. The level of clemency allowed will fit the particular situation.

If it is not done in this sanguine fashion, it is always the case that the slow paying franchisee starts to feel that the need to account and to pay up is not acute. The obligations to the franchisor go to a lower order of priority. Even in the normal pecking order of things, paying the franchisor is all too often on the lowest rung after all other expenses of operation. The psychic influence always buried in the mind of the franchisee is that the franchisor doesn't deserve to be paid if profits are down, regardless of the reason. If you don't kill this germ immediately, it grows into a monster. Franchisors who, absent calamity, allow franchisees to sign promissory notes for past due obligations are not helping anyone. The more the franchisor relents on financial performance, the worse the situation will always become, until ultimately the franchisor has a drawer full of promissory notes that are of dubious value and the auditors make you take a write off on your operating statement and balance sheet. Shame on you if this ever happens. And if you let people give you promissory notes instead of cash, you deserve what will happen to you. This is not a legitimate form of kindness. The franchisees who owe you money will eventually try to find a way to get out of paying you. The more of them who owe you money, the more enticed they will be to share costs of litigation, and the more prone they will be to foment any kind of problems within the system. This kind of kindness never goes unpunished. Any CFO with promissory notes in lieu of cash needs to be relieved of duty. If the founder owns the company and wants to throw away his/her money, that's their business. In a professionally managed company that is per se incompetence. And they brag about not paying you to each other. That leads to 'why should I pay if Charlie aint paying?' How far do I have to go on this scenario before the point is made?

The other category of defaults, neither operational nor financial, fall under the heading structural compliance failure. This includes using the name/mark in an unauthorized manner, establishment of unauthorized stores (almost always accompanied with under reporting of sales and royalties), unauthorized assignment of the franchise.

Hijacking the franchisor's identity is rarely other than intentional. Someone would have to make a clear and convincing case that is almost impossible to make to explain away anything like this. Every now and then, a franchisee who sees termination coming will find a sucker to dump it on, getting cash money at closing and hitting the road. Sometimes the sucker is really a bumpkin with money (like an immigrant) or just an opportunist. The immigrants with money may not be money bumpkins, but they are often bumpkins when it comes to how franchise assignments work. Part of this is simply that they come from countries where business is simply not done this way. Many come from cultures in which without deception it is impossible to get anything done. Bribery/extortion is so pervasive that open disclosure is suicide. I have seen many of these situations in real life. In one an established franchisor bought a major market from an area developer who had just received notice of termination of the area development agreement for failure to meet the development schedule (and who had no hope of meeting it with a reasonable extension). He bought it for cash. He did no due diligence. The deal just seemed too good to take any chance that it would get away. The buyer then called the franchisor to introduce himself as the new owner of Detroit, only to learn that the rights he just bought for cash had been terminated. He should have known better. He was impulsive about many things. If his gut told him it was a good deal, he went for it. I had to bail him out of several deals in the middle of the night over the phone from some long distance venue. Years before that, he had been talked out of the opportunity to buy Michigan from Colonel Sanders (by a lawyer who said it was a scam) when the Colonel was just getting started. He hated lawyers. He vowed never again to miss out on grabbing the gold ring. How he had gotten to trust me and start calling me first at the last minute before writing big checks is just good luck on my part, I guess. He was a sucker for any fried chicken deal.

When he learnt he had been bamboozled out of big bucks for the Detroit rights to a very hot franchise name, he called me and, with murder in his heart, ordered me to get injunctions and tie everybody up in court until they begged for mercy. As we had no case against anyone against whom a judgment might be helpful, I infuriated him all the more by telling him that was not the way to approach this. I suggested begging. He blew his stack. He was not a beggar and no one was gonna beg on his behalf. When I explained to him that all he would do by going into court was make a public record of his own stupidity, and that he would become the butt of franchise jokes all over the country for the next five years at least, he started to calm down. I learnt that I am really a wonderful beggar. We flew to the franchisor's office, met with the right people and walked out of there with a 40 store market worth of franchise rights. Maybe that's why he called me whenever people offered him the moon after a big dinner with cocktails, wine and after dinner drinks.

I have had a few immigrant situations also. Many immigrants with a lot of money have very poor insight into the intricacies of how franchising works. Many come from environments/cultures in which concealment and devious business behavior is considered to be the only way to survive. They bring these perspectives with them to every deal. Frequently they view contract signing as theater. They know how to act out the part, but have a non-compliant agenda. They would not hesitate to rip off their own countrymen, and certainly would not hesitate to do the same to a stranger. Only in recent years has franchising really made big inroads into many areas of the world other than the European Union. Pre-contract execution cultural conditioning helps a lot. You owe it to yourself to inform the potential immigrant franchisee that your contract is not a social document and that you will police compliance. That should be done in addition to the formal franchise contract language that, of course, says it will be done, but says it in lawyerese. At every franchise sale closing event there ought to be a 'Come to Jesus' discussion in which the franchisee-to-be is told rather frankly what compliance is going to be like in reality. There are a number of steps that could be taken at the closing event that could make life a great deal easier for franchisors when trouble raises its ugly head.

Franchise transfer is one of the events in which the franchisor's compliance expectations often have little to do with the seller's intended course of action. Sometimes, if the seller of a business is one of their countrymen, the greenhorn wrongfully assumes that some trust ought to be extended. This is what a crook trades on. They buy rights that a seller has no authority to sell, for cash of course. The seller hits the trail back to his homeland and finding the money is hopeless. The franchisor has the unpleasant task to tell the buyer that he bought nothing. In most of these situations, but not all, the only way to approach the nightmare in representing the buyer is expert begging. Hopefully the buyer has good business credentials of some kind that may suffice to convince a franchisor to accept him and make the distinction between the sucker who got scammed and the person who scammed him. Hopefully also, the buyer really is someone who was actually taken in, and not an active co-conspirator in a scheme to hijack a franchise.

Probably the main obstacle to be overcome in this scenario, assuming that the buyer would be a good operator and can handle the responsibility, is that if the franchisor rejects the buyer as a potential franchisee, the franchisor then has a profitable store that has now become a company store that the franchisor can sell to a new or old franchisee for its going concern value, without itself having to pay going concern value to get the store. The sucker who bought from the non-compliant franchisee is out all his investment, and the franchisor will get the going concern value if it refuses to accept that person as a new franchisee. The franchisor may not have ripped the poor bastard off in the first instance, but the franchisor will end up receiving the fair market value of this going concern by refusing to recognize the duped buyer as a new franchisee (assuming the buyer is willing to sign a then current franchise agreement). The attractiveness of that windfall is sometimes more than a franchisor can resist. Not at least allowing the buyer to sell out and recoup his investment could be viewed by a court or jury as an actionable form of over reaching, assuming that there are other operative facts that weigh heavily in favor of the buyer as a competent operator. The situation is too easily portrayed as plain old greed. Does the franchisor have the right under the applicable contract documents to do that? Of course it does. But the buyer may not yet be a party to such a contract, and the contract escape mechanisms may not apply to a buyer who has not yet been approved. That's why being able to perceive the difference between the duped buyer and the swindling former franchisee who sold the business improperly may in the long run be something worth consideration. It isn't really giving away/making gifts of corporate assets when a franchisor decides to accept the buyer in such a transaction. It's a legitimate officer's bona fide judgment call about what is the best business practice in any individual situation. Doing it does not set a precedent that could be used to require that the same be done for every unauthorized buyer. It depends upon the circumstances in each instance.

These are always cliff hangers. The situation gets sorted out very fast once the franchisor realizes what has happened, but there are several days and nights of sheer terror. The Buyer usually has everything he owns in the world tied up in this transaction and will lose his home and have to enter bankruptcy. His entire positive business history will be destroyed in a flash if the franchisor cannot be convinced to give him a break. The franchisor has to get really good results from investigating these deals to even think of the possibility of giving these folks a break. Even something like the buyer's ethnicity can work against him. Having to get a 'pass' for someone in that fix who is from the Middle East or Russia is a much tougher road. Feelings just run higher against them. There is a definite angst about whether an intentional hijack really is happening. [Cross reference 'Infiltration of Franchise Systems', another in this series of Specialized Tutorials] Even the slightest threat of litigation by the buyer is an act of suicide. Save the threats. If the deal goes south in its entirety -- the buyer isn't even allowed to sell what he bought to save his investment -- you sue if you can find something to sue about. But you never talk about it. You just do it when the time comes. If you know what you are doing and have a decent litigating reputation, the franchisor knows what's coming if some way to 'work it out' can't be found. There's no need to talk about it.

Before I will agree to be the beggar, I do my own investigation. I think that my reputation has some weight in the process. I never misrepresent and I make full disclosure up front so that the franchisor's investigation will not uncover anything I haven't already disclosed. I have to disclose the good, the bad and the ugly -- no one is all good all the time. If I can satisfy myself that my client is deserving of some consideration, then I think I can do a better job for him. If I don't believe him, why take his money and fake it? I won't be able to help him and it will hurt my own reputation. And if the client isn't fully forthcoming with me, this approach will certainly sink his ship. I tell them that so that they will come clean to me. If they don't, they are very likely to get caught, and their investment goes down the drain. So far, my reception by franchisors in these situations has been very positive. I don't always get what I hope for. Sometimes it just isn't in the cards. All too often I get the client after his so-called regular lawyer has done all the wrong things and the whole situation has become acrimonious. That's hard to overcome. People always seem to start out on any tough problem by calling each other awful names. That's really stupid.

This tour of default management issues is certainly not encyclopedic. Even if it were, someone will think of something new next week, and there will be more fodder for litigators. And there are, of course, many flavors of compliance failure within each of the major categories I have suggested.

There is one universal constant in the resolution of all this. If the decision is made to forego terminating a defaulting franchisee, the franchisor should always exact a quid pro quo.

If you have the right to send a termination notice, but opt instead for a peaceable resolution that leaves the offending franchisee with his investments intact, get the benefit at least of an acknowledgment that from that moment on you are free and clear of any claims against yourself. Get a bankable status of effectiveness confirmation. Don't let someone off the hook who may be saving in his back pocket a claim that was about to be asserted against you in the event of confrontation. In commercial leasing this is known as an estoppel certificate. In franchising, I call it a reaffirmation and ratification (ReRat). This agreement says that the franchisee acknowledges that the franchisor is foregoing the exercise of enforcement rights under the franchise agreement; that the exercise of enforcement rights by the franchisor would be a reasonable and proper act under the terms of the franchise agreement; that in consideration of that forbearance the franchisee acknowledges that the franchise agreement(s) is/are in full force and effect in accordance with the written terms and that the franchisee has no defense to the assertion by the franchisor of any term of the agreement; that the franchisee is not aware of any claim that it has against the franchisor, and none are under consideration that have not already been asserted; that the franchisee releases and waives any and every claim that it may have against the franchisor, of any kind or nature whatsoever, whether known or unknown; and that the franchisee hereby ratifies the franchise agreement and all other agreements in force between the franchisee and the franchisor, including any related entities. Be aware that in some states a release of unknown claims must be separately stated from a general release, and put a separately stated release of unknown claims in every ReRat agreement.

Let's shift gears for a moment to another compliance dimension. There is a point at which, no matter how one sided a franchise contract may be written, the franchisor's own exercise of its perceived prerogatives may be sufficiently extreme that franchisees look for ways to 'get even'. Every industry has this experience where the basic protocol of the business relationship is extremely one sided. The insurance industry is an example of this. The practice takes the form or reducing the number of items included in the franchise package without additional charges being made for them -- adding 'fees' for what used to be compris -- or adding non-essential services as compulsory items and tacking fees on for those. In this second category, I include items that may already be in the package and that the franchisees purchase from unrelated vendors, but requiring that they be obtained from a new and related entity at a higher price without improvement in quality. My most recent exposure to this phenomenon involved electronic in-store ambience systems that suddenly have to be purchased from the relative of an officer of the franchisor for substantially more than was paid in an open market transaction. This was also done in a very heavy handed manner. The officer's relative didn't even have the grace to provide a reliably working product or reasonable tech support when it didn't work. New store opening approvals were delayed if the system was not up and running, and many times the delays were due to poor response to technical support requests. When franchisees refused to pay for systems that were installed but not operating, the late payment became a cause for denial of store opening approval and for notices of default being sent out by the franchisor. It was an episode right out of 'The Sopranos', except that it was really happening to people. While this may seem an extreme example of morale destroying avarice on the part of the franchisor, it serves the purpose of demonstrating the kind of franchisor action that causes compliance morale to go into decline. That these actions tend to stack upon one another as similar opportunities to impose additional charges/revenue streams arise should not come as a surprise to anyone.

When the franchisor is doing these kinds of things, it usually is accompanied with programs of 'cheerleading' propaganda about the quality of the relationship and the opportunity. This is seen as utterly venal and cynical, and never has a morale boosting effect. Baloney is always baloney, no matter how you slice it. An excellent example of this kind of baloney is the recent General Motors advert campaign. While its competitors in Europe and Japan are producing better quality vehicles and eating General Motors' lunch out in the market place, GM elects to produce the same crapola products year after year and ride its market share and financial performance history into the toilet. The advert campaign proclaims that 'We are professional grade people'. The obvious absurdity of it is that all those professional grade people at GM can't produce reliable vehicles that can be sold at a profit. DUH! When the message is ridiculous, the relationships to which they apply can't really be expected to improve, can they? This is a B School case study for corporate stupidity. You might as well hang out a sign 'Company In Deep Trouble'. Who thinks up these ridiculous campaigns?

When any franchisor looks at compliance, neglecting to do an examination of the extent, if any, that things being done by the franchisor may be contributing to compliance problems will always produce skewed/unreliable diagnostics. In psychology it's called being in denial. Denying the obvious never produces a cure, does it? I fully understand the temptation to engage in piling on of non-essential items as a way to enhance financial performance, It's not really unlike a person who decides that he likes Martinis and drinks more of them every day than he did last year, while denying that he is becoming an alcoholic. Looking in the mirror isn't always pleasant. But if you dont look, how are you going to know what you look like? 'Nuf said?

Ultimately I must add a disclaimer. This is not intended to be legal advice to any company or person upon which they may rely in resolving or evaluating any claim or event. Each situation you encounter that may involve the assertion of contract rights and invocation of remedies requires that you consult with a competent attorney to assist in the evaluation of that specific situation. Sometimes the decision whether to go forward turns on the personalities of the people involved. I know that doesn't sound right, but based on my experience it is right. Much more is involved in making enforcement decisions than just a technical legalistic sorting out of rights and wrongs.

Under the FTC's Franchise Rule, a franchisor is permitted, but not required, to answer that all-important question asked by would-be franchise buyers: "How much Money Can I Make?"  

A franchisor that chooses to make a "financial performance representation" ("FPR") must put the representation in its Franchise Disclosure Document ("FDD"). 

The representation can take one of two forms.  It can be: (1) an earnings claim based on historical performance of operating units; or (2) a projection of possible future performance. 

Allowing franchisors to make FPRs based on projections of future performance is still fairly new to franchising; the allowance of "future projections" was added when the Franchise Rule was amended in 2007. 

In either case, the touchstone requirement for an FPR is whether the franchisor has a reasonable basis for making it. As a related requirement, the franchise company must also be able to produce written substantiation for any claim to prove the "reasonable basis."

Since the Franchise Rule was amended in 2007, there hasn't been much litigation over financial performance representations.  Cases regarding representations of future performance are even more rare, which makes a recent Maryland court decision on the topic, Hanley v. Doctors Express Franchising, LLC, all the more noteworthy.

Doctors Express Franchising, LLC ("DRX") is a Maryland-based franchisor of urgent medical care centers.[1] Hanley is a former franchisee that owned a DRX franchise in Des Peres, Missouri. 

Hanley sued DRX alleging (among other things) violations of Maryland Franchise Registration and Disclosure Law[2], as well as common law fraud through both active misrepresentation and intentional failure to disclose material facts.  Hanley also named several of DRX officers individually, contending that they are joint and severally liable for DRX's violations of Maryland law.  The decision is on a Rule 12(b)(6) Motion to Dismiss brought by DRX.   

The Alleged Misrepresentations

Hanley alleged that DRX made misrepresentations in its 2009 Franchise Disclosure Document ("FDD"), which Hanley received from DRX in January 2010, as well as in other pre-sale documents given to Hanley by DRX.  These included a document entitled "Doctors Express Financial Data and Operating Assumptions" given to Hanley by his lender, First Financial, a lending institution apparently affiliated with DRX. Hanley alleged that he relied on the representations when he signed his franchise agreement in March 2010. 

The allegedly fraudulent statements included FPRs made both in Item 19 of DRX's FDD and in the "Operating Assumptions" document he received from First Financial.  The FPRs were based on the experience and data of DRX's affiliate, which had been operating since 2006, and provided information for its performance in 2007 and 2008.  The allegedly false statements included:

• FPRs stating that DRX franchisees would open with and sustain average per-patient revenue of $125, with a volume of 45 patients per day. 
• Hanley alleged that DRX knew that, because medical service providers must be credentialed and contract with third-party (insurance / Medicare) payers, franchisees average per-patient revenues were "far below" $100, and that even its highest-performing franchisee treated an average of 27 patients per day.
• An estimated initial investment range of between $466,220 and $602,720.
• Hanley alleged that DRX knew this number to be too low, and that in DRX's 2010 FDD (filed with the California Department of Corporations 2 weeks after Hanley executed his agreement), the number was stated to be between $508,500 and $693,000.  Hanley alleged his actual investment to be more than $1 million.
•  An "additional funds" / working capital line item as part of the initial investment Item 7, estimated by DRX to be between $50,000 and $90,000 for the first 3 months of operation.
• Hanley alleged that DRX knew these numbers to be low because (due to 2009 changes in Medicare law) franchisees were not able to become fully credentialed / contracted with insurance payers by the time they opened, and that while waiting for credentials, franchisees were forced to accept substantial reductions in fees. Hanley alleged that the approval of many insurance company contracts are delayed far past the opening date, a fact that DRX knew and concealed from him.

Hanley alleged that DRX knew that using the experience and data of its affiliate for its FPRs and advertising was materially misleading to prospective franchisees because the affiliate was not representative of the experience of new franchisees.  This is because the affiliate opened in 2006, several years before major changes to Medicare enrollment procedures made it difficult or impossible to open fully credentialed and contracted, and the affiliate was not required to use expensive vendors.

DRX's Motion to Dismiss

DRX moved to dismiss the fraud claims by arguing: (1) the representations in the FDD were labeled as estimates and projections, not statements of fact, and therefore were not actionable; and (2) Hanley expressly disclaimed his reliance on statements outside of the FDD and Franchise Agreement, and as a result could not claim that his reliance on them was reasonable.

            1.         Estimates and Projections Can Be Actionable

As to the first argument, DRX argued that its FDD warned prospective franchisees that the projections and estimates could not be relied upon to accurately predict future performance.  In essence, DRX argued that its statements based on the affiliate's performance were not misrepresented, and therefore, could not be fraudulent. 

Quoting Jaguar Land Rover North America, LLC. v. Manhattan Imported Cars, Inc., 738 F.Supp.2d 640 (D. Md. 2010), Hanley responded by arguing that "inaccurate projections of . . . future profitability and inaccurate planning volumes could . . . be considered fraudulent if there was evidence that the [defendant] knew they were inaccurate at the time they were made." 

The Court agreed with Hanley and refused to dismiss the fraud claim, citing Motor City Bagels, LLC v. American Bagel Co., 50 F.Supp.2d 460 (D. Md. 1999) (by providing estimate of projected startup costs, "the defendants thus also made a representation of a present fact -- that they knew of no information that would make the projection in the UFOC improbable").  The Court also found that Maryland law specifically prohibits "[a] disclosure that is knowingly inaccurate because it omits material information known to the franchisor." Md. Code. Bus. Reg. §14-227(a)(1)(ii). 

            2.         Disclaimers Do Not Make Reliance by Franchisee Unreasonable

In support of its second argument, DRX pointed to disclaimers in Item 19 of DRX's FDD that warned prospective franchisees that actual expenses would vary from business to business, and that prospects should make their own independent investigation prior to buying a franchise.  Similarly, DRX argued that Item 7 of the FDD warned prospects that it was an estimate only.  DRX also argued that the Franchise Agreement's: (a) integration clause; and (b) contractual acknowledgement that Hanley was not relying on any representations outside of the FDD or Franchise Agreement defeated any claim by Hanley that his reliance was reasonable.

The Court disagreed, finding that Maryland law prohibits a franchisor "from requiring a prospective franchisee to agree to a release, assignment, novation, waiver, or estoppel that would relieve a person from liability" under Maryland franchise law. Md. Code. Bus. Reg. §14-226. As such, the Court found the disclaimer void.[3]

Based on the findings summarized above, the Court refused to dismiss Hanley's fraud claims.  Hanley will be permitted to take discovery and continue pursuing his claims against DRX.

The Hanley case serves as a reminder to franchisors of the importance of ensuring that they have a reasonable basis for each of their financial representations and cost projections.  When basing FPRs or cost projections on the results of company-owned operations, it is critical to ensure that significant variations between the franchise business model and company-owned businesses are both accounted for and adequately explained to prospective franchisees.

[1] Franchisees for Doctors Express are not necessarily physicians. Franchisees in the system handle the administration, marketing, facilities and equipment, and file maintenance aspects of the urgent care business, and contract with physicians, nurses, and medical technicians employed by a separate entity to provide medical services to patients.    

[2] Md. Code. Bus. Reg. §14-201 et seq. Although Hanley lives, and operated the franchise, in Missouri, the parties did not dispute the application of Maryland's franchise law because DRX made the offer to sell in that state.  See Md. Code. Bus. Reg. §14-203(a)(1). 

[3] The Court did note its agreement with the decision in Long John Silver's, Inc. v. Nickleson, ___ F.Supp.2d ___, 2013 WL 557258, *9 (W.D. Ky. Feb. 12, 2013).  In that case, the Kentucky court found that, while disclaimers could not be used to defeat the franchisee's fraud claims (under Minnesota law), "[t]he disclaimers will no doubt influence a jury's determination of whether [the franchisee's] reliance on the alleged untrue statements was reasonable."

An update to my previous post regarding the "fair franchising bill" being considered in California's Senate: on Tuesday, April 16, 2013, the California Senate Judiciary Committee approved the proposed legislation (SB 610), which is being supported by the American Association of Franchisees and Dealers ("AAFD") and opposed by the International Franchise Association ("IFA"). 

If passed, SB 610 would make the following amendments to the California Franchise Relations Act ("CFRA"):

• The parties to a franchise relationship would be required to deal with one another in good faith (essentially, making the implied covenant of good faith and fair dealing an express statutory requirement); and
• Franchisors (or subfranchisors) would be prohibited from restricting a franchisee from joining or participating in an association of franchisees.

SB 610 would also amend the CFRA by permitting a franchisee to sue a franchisor or subfranchisor who violates the CFRA for damages, rescission, or other relief deemed appropriate by a court.  Moreover, SB 610 would authorize a court in its discretion to award treble (3 times) damages to the suing franchisee, as well as reasonable costs and attorney's fees. 

The AAFD, in support of the bill, argues that:

Modern franchise relationships are most always governed by one-sided "take it or leave it" adhesion contracts that elicit substantial monetary investment from franchise owners, provide substantial protection for franchisors, but severely limit a franchisee's rights in franchise relationship.  Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive manner.

The IFA, on the other hand, argues that the good faith requirement is problematic because "good faith" is:

[An] amorphous term to be applied to the franchisor in its relationship with the franchisee.  The  concept of "good faith" was created in the Uniform Commercial Code to fill in the blanks on short form contracts for the sale of goods.  However, it provides no benefit in the context of detailed franchise contracts which govern complex and ongoing business relationships.

The bill was passed in the California Senate Judiciary Committee with a vote of 5-2.  Next, the bill will be voted on by the full Senate.  If passed, it would go before the California Assembly for consideration.