August 2013 Archives

Our thoughts, so far, presuppose that you will be candid with a client or potential client once you have evaluated his position based on the available evidence.

If you will continue to tell folks that they are on the side of the angels when it is clear that the other side has something significant supporting it's position, and don't aggressively promote amicable resolution, then you need not read any further.

When Arthur Anderson accounting shredded documents regarding Enron's business, in the face of an obviously oncoming SEC and grand jury investigation, some fool concocted a position that they weren't doing that to conceal evidence or obstruct justice, but they were 'just' complying with their records retention policy. If you are at that level of stupidity, you are counting upon a jury of idiots, which, of course, Arthur Anderson didn't get.

And, amusingly, it was some dumb lawyer who concocted that scenario for the company. Delusional lawyers and desperate clients concoct fanciful stories that are not worthy of belief and try to sell them to a room full of ordinary folk with ordinary common sense. Most of the time it bites em in the ass. This article is not for such people.

We are now at the point at which our investigation about our client's position is telling us that we have a sound evidential and legal position, and we are not getting anywhere with initial efforts at reasonable settlement.

People will have to be deposed.

Now is when you prepare for trial -- not prepare for a deposition -- prepare for trial.

To me the deposition is the trial. I want my people to be as good in the deposition as they will be expected to be at trial. If that can be accomplished, the deposition transcript will not be useful in the witness' cross examination, for there will be no prior testimony inconsistent with his trial testimony. The deposition will serve to enhance chances of settlement.

Witness preparation begins with reassurance.

Tell the witness what you think about the case.

Tell the witness that the only thing he can do to hurt you is to be untruthful.

Tell the witness that if you have made a mistake and he spots it, the greatest favor he can do for you and for the company is tell you what that mistake is.

If his perception differs from yours, remember that he was there when it happened. You weren't.

Tell the witness that the plainer and simpler the telling of the truth is, the more believable a witness he will be.

Tell the witness that it is easy to remember the truth and difficult to tell untrue stories the same way more than once.

Tell the witness that what you are going to help him do is to tell the truth in the plainest and simplest and most direct form, eliminating extraneous noise that everyone has when they speak of events and their participation in them.

Tell the witness that not every fact in any case is going to be one hundred percent in support of your side of the case, and that the negatives have to be dealt with in equally straight forward a manner as the positives.

A witness who will, without hesitation, own up to a mistake is a believable witness. Having been up front about the bad stuff, what he says about the good stuff will be pure gold credibility.

If you have no confidence in your case because of the presence of negative facts, then you probably don't have a case and ought to settle it as soon as possible. Negative facts abound in every business dispute There are always mistakes in every single business project. Perfection is impossible, and pretense about never being wrong is a hallmark of a liar.

Now that you have had the conversations with the witness that have provided him with the requisite comfort level, and trust has been established between you, it is time to 'work' the documents and hear what he has to say -- round one.

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 2. This is Part 3 of 6 on How to Win Franchise Trials. Here is Part 4)

Most business owners do not realize that there is a difference between a franchise and a business opportunity.  Franchises are regulated by both the federal law (FTC regulation) and by certain state franchise laws.  

Business opportunities are also regulated under both certain states' laws and the FTC. 

What is a Franchise?

Franchises, under the federal franchise law are business arrangements that meet three criteria:

1) there is a trademark owned by the seller under which the investor operates;

2) the seller receives $500 or greater in the first 6 months that the investor is in business (for product, training or anything else);

3) the seller exercises sufficient control over the investor and the investor's business.  

If these criteria are met, the FTC franchise law states that the seller/franchisor must provide a regulated franchise disclosure document (FDD) to a prospective franchisee/investor at least 14 calendar days prior to accepting any money from the investor and prior to the investor signing any contract with the franchisor/seller.

What is a Business Opportunity?

What are business opportunity laws and why were they promulgated? The business opportunity laws were designed to reach distribution arrangements that are typically different than franchises, such as dealerships, vending machine businesses, certain work-at-home businesses and other "seller-assisted" marketing plans.

A business opportunity is defined as an arrangement in which a person:

1) offers, sells or distributes goods, commodities or services to another and;

2) the goods, services or commodities are provided by the seller of the opportunity or by someone affiliated with the seller or required by the seller and the seller secures business for the purchaser or retail outlets or accounts for the purchaser and;

3) the purchaser is required to pay or commit to pay to the seller or its affiliates at least $500 within six months after commencing operations.

The purpose of the business opportunity laws is to protect the investor in these business schemes from questionable or fraudulent offerings.

The legal definitions of a business opportunity are intentionally broad and unclear to cover a plethora of unconventional marketing schemes and businesses. Franchises are typically excluded from the definition of business opportunity in these laws.

However, without a specific exemption or exclusion, there may be franchises that will fit within the state definition of a business opportunity.

What are the requirements of the Business Opportunity laws?

The statutes typically require a disclosure document in a prescribed form be delivered to the prospective investor prior to the time any agreement is signed or any monies are paid for the business opportunity. This form varies from state to state and under the FTC.

Unlike franchise laws, there is no uniformly accepted business opportunity disclosure format that all states and the FTC accept.

Many states also require that the business opportunity disclosure document be filed or registered with the state prior to selling any business opportunities in that state.

Many states also require that a surety bond or trust account or letter of credit be posted so any future claims by business opportunity investors can be paid. Some states also require escrow accounts if greater than 20% down payments are required prior to the investor's receipt of the goods promised. Many states also have certain required language in the business opportunity contract with the investor, including cancelation rights.

There are also typically prohibited acts, such as making earnings claims without substantiation.

In certain states a violation of their laws on business opportunities may be a felony or misdemeanor.

A seller of any type of business opportunity, including franchises, should be cautious about meeting the requirements of the various state and federal laws governing the sale of the opportunity.

Penalties for failure to comply can be steep and should be avoided.

As I've reported previously, the California legislature has during this session been considering a bill that would add additional regulation to the franchisor-franchisee relationship. 

As proposed, Senate Bill 610 would have modified the existing California Franchise Relationship Act (the "CFRA") by:

1. Requiring franchisors to deal in good faith with their franchisees;
2. Expressly permitting franchisees to join or participate in an association of franchisees; and
3. Allowing a franchisee to sue a franchisor or subfranchisor that violates the CFRA for damages, rescission, or other relief deemed appropriate by a court.

All consideration of SB 610 ended for the year when, last night, the bill's sponsor pulled the legislation off the docket.

Apparently, this was because the bill had little support among the Democrats and Republicans on the California Assembly's Business, Professions & Consumer Protections Committee, which was scheduled to consider the bill today. 

The International Franchise Association, which lobbied strenuously against SB 610, called last night's actions "a critically important victory for the IFA and the franchising industry." 

The IFA further commented that "SB 610 undermined brand integrity by allowing substandard operators to remain in operation. . . [which] in turn hurts franchise brands and the equity and investment of both franchisors and franchisees."  

Robert Purvin, Chair of the American Association of Franchisees and Dealers (which co-sponsored the bill) commented that "[i]t was clear that we wouldn't have the votes [this year], although we discerned sympathy for the cause." 

Consideration of SB 610 has been tabled for now, but may be reconsidered by the Business, Professions & Consumer Protections Committee next year.

If we have a good case, and the opposition cannot be convinced of that, then we do have to go to trial, and we have to have our people testify in a way that makes them practically immune to effective cross-examination.

How you go about doing that is the lesson of this tutorial.

People come in all varieties of personality. The most scrupulously honest person may be the most boring, confused, frightened individual who, though he would only tell the truth, would tell it so badly that his testimony is worthless or worse.

Among the sentiments at work in the mind of a potential witness are, in addition to an inclination to truthfulness, fear of being embarrassed; for embarrassing others and his company; for not being able to provide affirmative support for his side of the case; for his position in the company should he be seen not to have been helpful; for his financial future; for his references, promotions; for his being included in significant projects; for his dignity; for his family; for his masculinity; for ... the list could go on and on.

• Is he boring?
• Is he a smartass?
• Does he have nervous tics that can be interpreted adversely?
• Does he get quickly to the point or wander around it forever?
• Is he into self-justification?
• Is he ostentatiously religious?
• Does he have his own agenda?
• Is he intelligent?
• What are his language skills?
• What are his reasoning skills?
• Does he try too hard to please, either you or, when the time comes, opposing counsel?
• Will your time spent trying to help him be simply truthful be seen as an inappropriate attempt to coach your client's agenda?

Does he fear you are trying to make him someone other than who he really is, and that he won't be able to do it the way you want.

If the witness is the high panjandrum who is always treated with deference to an extreme -- used to having his own way - there is another cart full of baggage to be accounted for.

All these and many more fears and attitudes are strongly present in the mind of a potential witness. They will have a physical effect upon him. They must be recognized and addressed in an effective relationship-building manner, so that in the end you have built confidence and trust, not fear and loathing.

The central goal of all you do to prepare a witness to testify has to be to show him how to tell the truth in a way that is obviously truthful. One by one you must help him overcome each of his fears and each of his adverse tendencies. You must spend time with a witness. You must show him how to do his homework.

And you must do it before he testifies in his first deposition, as changes in testimony later on may be used to impeach credibility, comparisons of his trial statements against his prior, seemingly or actual, inconsistent statements. It is not an issue of rote memorization. That is almost as bad as ineptitude. The goal is that he knows what the truth is and how best he can state it with the least fear of confusion or of being ambushed on cross-examination.

In my experience, even if they superficially portray an air of modest pliability, just beneath the surface is a thick layer of 'How dare you?' With this person the relationship building is tougher, because he can fire you and find a 'real' lawyer who appreciates who this person really is and how he is to be treated.

His ego is engaged far more than any other witness in the company. He expects to appear for a deposition and at trial and have the judge, jury and opposing counsel rise when he enters the room, and that he will be able to control the questioning, not the lawyers or the judge. If you have never seen such a person on the witness stand, you have missed a spectacle.

When his side loses, his analysis is that the company's lawyer would have won if he had just 'put me back up on the stand'. Yeah right!

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 1. This is Part 2 of 6 on How to Win Franchise Trials.  Here is Part 3)

The FDD is required to be written in "plain English". What exactly does plain English mean? Section 436.1 of the FTC's Franchise Rule (16 C.F.R. §436.1(o)) states that "Plain English means the organization of information and language usage understandable by a person unfamiliar with the franchise business.

It incorporates short sentences; definite, concrete, everyday language; active voice; and tabular presentation of information, where possible. It avoids legal jargon, highly technical business terms, and multiple negatives."

As you can see, plain English is the opposite of legalese.

With that said, I am shocked how often we encounter FDDs written by attorneys using anything but "plain English".  

Long run-on sentences with many convoluted technical terms, passive tense and multiple negatives, are not unusual in certain FDDs.  

My advice to my clients who are prospective franchisees is to read through the FDD, it is "supposed" to be written in plain English.  Unfortunately, often this is completely impossible for the average person to do without legal knowledge.

The client must then rely on counsel to not only interpret the franchise agreement (which can be written in legalese), but on the 23 disclosure items as well. That is not the intent of the FTC in promulgating the Franchise Rule requiring plain English.

The purpose of the FDD is to provide the prospective franchisee with knowledge/disclosure about the franchise he or she is buying.  

As the FTC rule states, the language should be understandable by a person unfamiliar with the franchise business.  

I would add that the language should be understandable by a person who is unfamiliar with legalese and other technical language.  

As stated in the Franchise Rule, it should use everyday language.

Unfortunately certain attorneys and certain franchise systems have failed to understand the requirements of the Rule regarding plain English so that reading the 23 items of the FDD becomes next to impossible for the average person.

Dispute resolution management requires realism and maturity.

People, and their lawyers who think that they can prevail despite the facts, despite the law, and that all they have to do is tell the story a certain way, usually fail. Sometimes they get away with murder, but it is very rare. 

Justice usually works the way the justice system is intended to work. And that is even more reliable in business disputes where the burden of proof is simply that your side of the case is more appealing that that of the opponent.

More appealing in this context is not just a sympathy contest. More appealing really means that what you are telling the judge, jury or arbitrators is corroborated by extrinsic evidence that was created when there was no dispute, usually in the normal course of business -- what you honestly wrote about what was happening at the time it was actually happening.

True, there are companies that have such a bad reputation that even the truth won't help them, and it is a delight to sue them in their own home towns where everyone knows them and their prospect of picking an unbiased jury is slim.

But that usually isn't the case. Nor is it usually the case that 'home cooking' spoils the prospects for the correct result. Sometimes that happens. Usually it does not.

Where does that leave us? It usually leaves us with a level playing field in which the correct result is the most likely result.

The purpose of this article is to suggest that it is probably not going to be possible to change that by concocting fanciful stories contrary to the true facts.

On the criminal side, executives can rob a company and its shareholders and employees blind and get away with 'I did nothing wrong!' or, if they are 'society criminals', a light sentence in a country club prison.

On the civil side it is a different story.

One critical reason is the difference in the burden of proof.

Another critical reason is that on the civil side they are confronted by a better class of opposing counsel -- one who probably can expect compensation only if he wins -- an arena in which razor sharp cross examination is the rule, not the exception.

Arrogant executives to whom everyone has always been afraid to tell the unvarnished truth without polishing it to reflect positively upon their ego often get their comeuppance because they can't imagine anyone having the unmitigated gall to challenge their veracity and shove their own paperwork up their ass in a public forum.

But, as they learn too late (and for which they blame their lawyers, not themselves), shoving your corporate records up your ass in broad daylight in front of a crowd of people is what a good trial lawyer does for a living.

In over fifty years of trying business cases, I have so often seen disputes that should have been resolved reasonably and properly long before trial, go to trial because someone who did something wrong, mistakenly or intentionally, was insisting that the facts be found and the result be rendered in his favor no matter what.

And since that kind of person will pay anything to 'have his way', he is fair game for any lawyer who will pretend to agree with him for the purpose of generating a big fee.

Later, when everything has come a cropper, the lawyer will simply say that the judge ruled incorrectly and we should appeal (also stupid in almost every instance); the witnesses against us were lying; the jury was crooked; opposing counsel rigged the result; and any number of other stupid excuses. Then, of course, the fractured executive will go find another lawyer and tell him to sue the first lawyer for malpractice. And the cycle may go on and on. It just depends on the degree to which ego rules over intellect.

I have my own way to evaluate a case and to prepare a witness.

I am absolutely brutal on my own side of the case. If it can pass my sniff test, it will probably pass that of any judge, jury or arbitrator. And if it can't pass my sniff test, I tell the client about my concerns.

The client can then consider my advice and seek a reasonable resolution, or look elsewhere for less challenging counsel.

In my experience, if you are forthright about the situation early on, and have not called everyone on the other side a no good son of a bitch, rational resolutions are readily available and, in the long run, much less costly.

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

(This is Part 1 of 6 on Franchise Trials.  Here is Part 2)