October 2013 Archives

In 2012, I led a Independent Franchisee Association Roundtable Discussion at the IFA Legal Symposium in Washington D.C. Below is a summary of the discussion.

Predominantly we had franchisor attorneys at our table, although in the first session I was not the only attorney who primarily represents franchisees or dealers.

1. Recent FTC Rule

The table members did not see much effect from the recent amendment to the FTC Rule in the way that franchisors deal with their associations.

This would be disappointing for franchisee advocates to hear, as there was hope that the amended rule might create more market pressure in favor of the associations.

2. Decision Making by Association

Overall the franchisor attorneys at our table, and Mr. Saukas, a franchisor, displayed what I personally found to be a surprising level of resistance to the idea that franchisees, through their independent association, should play any role in the franchisor's decision-making process with respect to the brand.

This view was forcibly stated by several participants and none of the franchisor attorneys in attendance seemed to dissent.

The sentiment seemed to be that independent associations have no business seeking to invade the franchisor's decision-making province. Franchisee arguments to the contrary did not seem to persuade this crowd.

3. Why an Association instead of an Advisory Council?

 The franchisor attorneys also questioned why the franchisees would need an independent association in systems where there is a franchisor-sponsored advisory council. Obviously, it was recognized that franchisees may tend to regard a FAC as a rubberstamp, which is often the impetus for forming an independent association.

But again there was not much sympathy expressed for this position.

4. Incentives offered by an Association

One incentive offered to encourage franchisor acceptance of associations was the notion that, on any given issue if the franchisor can persuade the association of the merits of its position, the fact that the association approved the franchisor's decision could be evidence of the franchisor's good faith, which could be useful to the franchisor in the event of any challenge by any other dissenting franchisees.

This has worked in systems in which I have represented the association. But there did not seem to be much enthusiasm at our table for this carrot.

5. When to Recognize an Association

The question of what constitutes recognition of the association was also discussed. There is no formal process for this, unless of course in a given system the franchisor and the association enter into a contract. Experience teaches that this usually happens after a lawsuit.

The question of when the association represents a sufficient number of franchisees to have standing was discussed. There is no clear bright line. 

Last week, I described a new approach to dispute resolution within a franchise system.

Are there some situations in which this new approach simply will not work? Of course. Nothing works in every situation. Here are two examples.

1. Think of an over the hill or "very" mature franchise company with franchisees departing or about to depart who do not intend to comply with the post term covenants not to compete in their franchise agreements. The typical company position is that any departing franchisee that seeks to avoid the covenant not to compete must be financially destroyed or every franchisee in the system will leave.

The view is that this is do or die with no middle ground. I have seen this dozens of times and made a lot of money over the years trying these cases.

As the outside trial lawyer I know that I have been called in later rather than earlier and that all heels are by now fully dug in.

If I were even to suggest compromise at this moment I would be removed and a more tractable trial counsel retained.

If I win the lesson is taught and the non compliant departing franchisee has been made to pay a price that will deter all the others.

But, I have made non compliance vastly more costly than compliance. The other franchisees become less inclined to make a fight over this and everyone goes back to loathing each other in a business relationship that one side is milking into its eventual grave and the other side is too disorganized to be creative about a business positive solution.

The lawyers made out like bandits. The parties are still as miserable as before the whole process began.

2. Think of a business organization leader who is simply so egotistical and insecure that he could never be introduced to any compromise.

With him everything is always and immediately "The principle of the thing". He refuses or cannot see that it is almost never a matter of a single principle. It is always a matter of several principles in competition for attention and waiting for some rational person to sort them out according to their value priorities.

When ego forecloses rational business valuations, everyone loses.

If this boss owns the company, well then it is his money and he can very well do as he chooses with it.

Often, however, he has other investors and it is also their value that is wasted even more than his (if they tolerate the ego aggrandizement).

These are the two most often encountered situations in which there is usually no opportunity to achieve a rational economic disposition of a coming conflict.  (Actually even in these two there are other rational approaches, but few listen.)

When you need competent advice on how to change your franchise business model, connect with me on LinkedIn and let's chat.

The Board of Directors of the North American Securities Administrators Association, Inc. (NASAA) has authorized the release, for both public and internal comment, of a  proposed Multi‐Unit Commentary related to state franchise disclosure laws.

The proposal defines certain multi‐unit franchising arrangements that have become common in franchising and provides guidance for disclosing those arrangements in franchise disclosure documents. 

The proposal addresses specific disclosure questions raised by franchise attorneys and state franchise examiners about multi‐unit franchising.

The comment period begins on 10/15/13 and will remain open for 30 days. All comments should be submitted on or before 11/15/13 .

Download: Proposed Multi‐Unit Commentary

Comments should be directed by e‐mail or in writing to:

Franchise and Business Opportunity Project Group
Dale E. Cantone, Chair
Office of the Attorney General, Securities Division
200 St. Paul Place
Baltimore, Maryland 21202‐2020
[email protected]

NASAA, Legal Department
Rick Fleming, Deputy General Counsel
NASAA
750 First Street, Suite 1140
Washington, DC 20002
[email protected]

In a move that will affect a number of franchise companies, yesterday California Governor Jerry Brown signed a new law that will require private home care agencies to become licensed in the State before providing service.

In addition to requiring licenses for home care organizations, the law requires individuals who provide services for those organizations -- called "home care aides" -- to be listed on California's home care aide registry.

To be listed, an individual must show that she or he is "of reputable and responsible character" and undergo a criminal background check. 

A home care aide applicant also must acknowledge having read and understood California's laws that apply to people and companies private home care services. The full text of the bill is available here for review. 

Governor Brown issued the following statement regarding the new law:

To the Members of the California State Assembly:

Assembly Bill 1217 would create a regulatory framework for the private homecare industry and home care aides.

Last year, I vetoed a more expansive bill, because I did not think that the time was right to create costly new regulatory burdens, given the economic uncertainty for many businesses and families in the homecare world.

I am signing AB 121 7 because it strikes a better balance between consumer protection and industry regulation, and because the author's office and legislative leadership have committed to delay the bill's effective date by one year to January 1, 2016.

The delay, coupled with other clarifying changes, will give the Department of Social Services enough time to accomplish what the bill seeks to achieve, and ultimately provide for smoother implementation of these good consumer protections.

Sincerely,

 

Edmund G. Brown, Jr.

As stated in Governor Brown's explanation, the law will not be implemented until January 1, 2016.

Because the law will make important changes to the way these agencies are regulated, however, franchisors and franchisees that provide private home care services in California should familiarize themselves with the law and begin planning for compliance.

Should a prospective franchisee work with a franchise broker or consultant?

I am often asked that question by prospective franchisees.

Alternatively, someone will contact me and after speaking with me may decide that they want to look at other franchise opportunities.

Typically, in those situations I refer the prospective franchisee to both the IFA website (www.franchise.org) and to a franchise broker or franchise consultant who does not charge the prospective franchisee.

A franchise consultant or franchise broker works with the "candidate" or prospective franchisee by performing almost a matchmaking service.

A good broker learns about the prospective franchisee's financial and personal background and determines franchises that would be a good fit, both financially and personally, for the candidate.

Once the prospective franchisee narrows down his or her selection to a few franchises, typically the franchise broker will recommend that the prospective franchisee speak with existing franchisees of those systems, make suggestions to perform validation of the franchise and encourage the candidate to attend the franchisor's Discovery Day.

The best franchise brokers or franchise consultants also understand the importance of encouraging the prospective franchisees to utilize experienced franchise attorneys as part of their candidate's validation or due diligence.

They are not concerned about losing the deal, but rather making sure that the prospective franchisee has a clear understanding of the franchise opportunity and is properly represented.

The best franchise consultants or franchise brokers understand that good relationships  with their candidates is critical to consultant's future success.

In my experience the prospective franchisees that contact me after working with a franchise consultant or franchise broker are typically most prepared to pursue the franchise opportunity.

The relationship between a franchisee and its employees is a now massive headache for the franchisor. 

The reason is simple: Joint Employer status.

If the franchisor overreaches and actively controls the employee relationship between franchisee and it's employee, then the franchisor might be liable under the legal theory of joint employer.

 "In Myers v. Garfield & Johnson Enterprises, Inc., et al., 2010 U.S. Dist. LEXIS 3468 (E.D. Pa. January 14, 2010), a federal district court in Pennsylvania held that defendant Jackson Hewitt, Inc., the franchisor of co-defendant Garfield & Johnson, was potentially liable under Title VII of the Civil Rights Act of 1964for sexual harassment allegedly committed by Garfield & Johnson managers. 

Rejecting the franchisor's motion to dismiss for failure to state a claim, the court held that plaintiff's joint-liability theory was plausible enough to proceed to discovery. 

 

What is particularly bracing about the court's analysis is its recognition that these factors could trigger potential employer liability for the franchisor even though they were, in many cases, typical of the control exercised in any franchisor/franchisee relationship. 

 

The court said that if the standards for control and authority derived from common law principles for application in the Title VII context were met, the fact that they arose between a franchisor and franchisee and reflected the type of control that almost all franchisors exercise would not insulate the franchisor from liability.

 

Because the joint employer and agency tests involve multiple considerations with no single factor dispositive, it is not clear that any single contractual or operational step (short of drastically limiting the degree of control over franchisee operations that most franchisorsfeel is essential) could foreclose the potential for liability under this court's view of the law. 

 

Taking the decision at face value, it could be argued that, under Myers, franchisors find themselves between a rock and a hard place: 

 

The more closely they monitor franchisee employment practices, the greater the risk of their being subject to Title VII liability for the franchisee's wrongful behavior.

 

If they eschew monitoring of that behavior, they may be subject to Title VII liability anyway under other elements of the applicable tests, and will not be in a position effectively to regulate conduct that could result in statutory violations. 

 

On the other hand, if they do monitor the behavior and then take draconian measures in response to franchisee violations, they may trigger liability under state dealership or franchise protection statutes."