September 2014 Archives

A large portion of the difficulty and expense of dispute resolution is that there are pre-emergence symptoms that are not recognized and dealt with.

Financial advisors evaluate and assist in the management of financial variables. There are other kinds of variables that impact the humanities side of company performance as well as its financials. If these are taught about in school, few people get passing grades and most don't take the course.

Business degree curricula being certificate oriented and template compliant regimes such as they are, the analysis and competent management of non-arithmetic variables are beyond their scope and capability.

What is taught is that nice people do right and you are a nice person so you must be doing right all/most of the time. Since neither proposition is regularly true in most instances, troubles happen.

No amount of instruction can rule out disputes. Disputatious situations will arise no matter what. What is unfortunate is that they are not identified with sufficient anticipation and not competently managed so that their impact is negated or minimized. Dispute anticipation can't be taught. This comes only with years of actual dispute management/resolution experience that enables one to see what it was that caused the disputes to arise in the first place and in retrospect identify when a dispute began to take root.

I have spent so much time over so many years going through case files and interviewing the people involved in so many lawsuits that a sensitivity to moment of arising and methods of avoidance simply became part of my psyche. In later years I can recall conversations with client managers in which the real goal was not in the resolution of the situation but in the avoidance of blame for its having happened. This, simply put, is unnecessary.

How does one go about not having to worry about blame for difficulties?

Dispute forecasting is both art and science. It does not readily lend itself to hourly rated retention, as the passage of time during which difficulties are identified/anticipated, how best to manage them is identified through collegial consensus, and the chosen method(s) implemented make hourly rated expenses prohibitive. Mission creep and the incentive to maximize billing poison the quality of the endeavor.

In addition, the resource to provide the expertise is not usually conducive to appointment to officer or director status. The resource needs to remain outside and to be involved in doing the same things for other companies in order to maximize its usefulness. A resource with only one client quickly becomes more fearful of alienating that client than focused on confronting root causes of difficulties. The ability to move on without suffering economic dislocation is indispensable to this kind of work.

How then does one establish and carry out being someone's effective dispute avoidance/management resource?

I believe the most effective relationship in the performance of these functions is a continuous presence/availability. Now that we have such things as email and electronic file transfer, we do not need to be constantly under foot. We can be available for face to face meetings at client need or convenience, but most of this can be performed remotely.

Retention terms should be periodic but not hourly. The resource and the client can come to mutually acceptable terms per month or quarter so that mission creep and billing incentives are removed from the scene. Since this kind of work requires the establishment of trusting relationships with relevant management and open channels of communication with no increase in project cost, this longer periodic arrangement fits/works better than any other.

The alternative is what companies suffer through now. A conflict on any given situation begins to arise. It is swept under the rug for as long as possible. Eventually it grows, like Rossini's description of slander, from a whisper to cannon fire. During this period of development, memos are written, emails are sent, and angry conversations occur that are later received in evidence or memorialized in deposition testimony transcripts and dueling affidavits. When the lawyers finally get involved the situation is on fire, the expenses are horrific (including management dislocation), and in many cases the resulting damages can destroy or financially undermine a company.

This unfortunate set of circumstances is no longer necessary. People need to feel free to deal up front with negative issues without career threatening consequences. When significant disputes can be avoided through competent variable management techniques, these negative impacts can be eliminated or so mitigated that threat levels are not critical. Of course conscious, intentional misconduct is an exception that nothing can eliminate. However, vindictiveness and scofflaw behavior are rare notwithstanding all the attention they get in the newspapers and on TV.

Most folks want to play reasonably close to the rules. The more you think about this the better it sounds and the more you will want to consider this approach.

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. 

There are in every segment of our economy, at every moment of the day companies/people who sense that some significant project for which they bear responsibility is starting to move in a bad direction.

Whether it is a franchise system filling with disenchantment due to market changes for which requisite adjustments have not been found and made; or a fashion house trying to cope with designer disputes and threatened license terminations; dealers that need to be terminated in order to more effectively aligning the company's direction with its marketing strategy or foreign trade issues - how to build a more international network and mitigate exposure to foreign jurisdictions should things not go as planned - the list is endless - that movement from well being to impending serious difficulty arises.

The people to whom you regularly turn for guidance in more normal circumstances are less helpful when life starts to get tougher. They may have long tenure and vast company and specific industry knowledge as well as knowledge of the people involved. However, theirs is not responsibility for stepping away from the immediate picture and providing calibrated options that can with econometric reliability be sorted and prioritized.

Finally, let us assume that the situation/company/relationships now coming into higher risk are worth saving. Some are so desperate that the die has been cast.

Most of these relationships are founded upon written agreements containing clauses taught in law school or by long custom that are terrible impediments to braking as brinks are more closely approached. Feeling trapped by inopportune language, most law firms I have encountered advise the pulling of triggers, giving notice of claim or default, stated in those stilted lawyerese that so endears our profession to the rest of the world.

But contracts have other clauses, largely unwritten in the traditional sense. They have become incorporated into the business model of the agreement by the force of experience and change. Lawyers who can read often can't find these clauses due to lack of substantive insight. They may be legal scholars, but this isn't a law school final exam.

If pulling triggers for fear of being accused of not exercising one's rights and thereby losing them could without sacrifice of position be replaced, would you consider it? And what factors would you have to take into account to decide to take a more unorthodox approach to dispute avoidance that could save the deal/relationship/realignment project that you really wish to implement?

Begin with the metrics. The metrics are not a set of likely numbers if one approach is chosen. The metrics are differentials between performance number sets when alternatives are not only netted against each other, but considered in series. Yes. You can do both. If you know you can still fight if the preferred approach doesn't work, with no loss of position, could you ever even think of not doing this as I suggest you should?

Obviously this is not addressed to scorched earth egoists who like fiddle music in the midst of conflagration. Most companies are rational. It is to those rational companies that our approach makes the most sense. Few people are always or absolutely right. In most instances there is room for adjustment. The passage of time alone suggests market changes that make old agreements less suitable to modern issue resolution. Lawyers who believe only in contract language can never accomplish what I am speaking of.

If you would like to explore this avenue to rational prosperous relationship preservation, give us a call at 281-584-0519.

Two and half years ago, I wrote about the class action in Tim Horton's -part based on interviews with the class action representatives.

Now, that Burger King intends to buy Tim's, I thought it was useful to revisit the post.

Because the Burger King has an independent franchisee association, while Tim Horton's does not. Yet.

The result of the franchisee's class action lawsuit being dismissed is that Tim Horton's, the franchisor, lost a major business battle. In a rare summary judgment motion., the reasons for the judgment, part 1 and part 2 can be read here, a motions judge dismissed the franchisee's class action.

But, now Tim's will now struggle mightly to get same operator expansion as a result of this legal victory.

Like any mature franchisor, Tim's relies upon same operator expansion for its growth. It is fortunate to have a substantial number of operators who have grown with the system from near the beginning.

Sophisticated operators know that franchise operations need modification and changes. And Tim's is no exception. This type of operator needs to know how to plan and budget for such changes, paying for them in part by the expected increased return.

But, now that planning process is riddled with uncertainty.

In 2002, after considerable debate with its franchisees, Tim's introduced a centralized baking system. Tim's baked centrally and shipped frozen products to its stores. (Only in Canada could one say with a straight face that these baked goods were "Always Fresh".)

The par baking facility was funded by the TDL Group and constructed by its joint venture partner, IAWS. These joint venture partners contributed approximately $95 million (US) in 2002.

During 2002 to 2009, the 3,000 franchise owners collectively contributed approximately $100 million (Can.) for store modifications, without which the joint venture partner's par baking facility would be useless.

At issue in the class action lawsuit, was whether either the franchise contract or the equity of fair commercial dealing required that the return on the joint venture partnership be commensurate with the return on the franchise owners collective investment.

This would appear to be a difficult question of fact and law requiring a trial.

But, the motions judge handed Tims and TDL, a complete legal victory yet possibly a business disaster.

As reported by Robert Thompson, who wrote Ron Joyce's biography, the founder of Tim Horton's,

"Stores had once made upwards of 20-percent margins, a windfall for the mom-and-pop shops that were often operated by pioneers who entered the business in the early 1970s. Margins fell under Wendy's management, and Joyce was concerned they would continue to decline after the IPO, which is exactly what Jollymore alleges was the case.

These days, those close to Joyce say stores are lucky to make 13 percent, a steady decline from a decade earlier."

Sophisticated operators like the representative plaintiffs, the Jollymores, know now that the franchise contract doesn't require any equitable sharing on the returns made as the result of the franchisee's collective investment of new capital.

The Court sanctioned unfairness will make it difficult for Tim's to continue to grow with same operator expansion.

Analysts of the public company may wish to reflect on another franchisor who spurned same operator expansion - Jackson Hewitt. Bankruptcy looms nearer when the experienced franchisor operator as a group doesn't expand. The Jackson Hewitt franchisors did not share equitably with the franchisees the fruit of the Refund Anticipation Loan program, "RAL". The franchisees refused to expand the system, and so when the franchisor needed their support it wasn't there. The franchisor needed the franchisee's support for expansion when the RAL program was gutted by the IRS.

We can hope that the Jollymores, Ron Joyce, and the other franchise owners will now see the wisdom in what Colonel Sanders saw many years ago when he imbude his franchise owners with real protection - for the betterment of the franchise system.

"When Colonel Sanders sold Kentucky Fried Chicken, he feared his franchisees would lose control of their own businesses and the future that they were working toward and in which they had invested.

So he encouraged them to unite to protect the franchisees that he considered part of his own "family" and to give the franchisees a voice in the future development of a concept which would prove to be far greater than was envisioned at the time.

This brought about several small meetings with early franchisees and in 1965 the Southeastern Kentucky Fried Chicken Franchisee Association was formed and formally organized in Atlanta, Georgia.

Ten years later, the AKFCF (our national association) was incorporated in the same city.", from the Association of Kentucky Fried Chicken Franchisees website.

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You're a franchisor. You don't want to be a Joint Employer of your franchisees' employees. Your franchise agreement goes into detail on how your franchisees and their employees are not on your payroll. And you do not have any employer responsibility.

Well that was easy. Your law firm has made it clear in your contract. You are in no danger.

Not so fast.

Some people in federal and state government think otherwise.  And they don't seem to be reading your franchise agreement the way you want them to.

So what can a franchisor do?

Stop doing things that make you an employer. Even the nice things your franchisees like.

Here are a couple of true stories about kind franchisors helping out their franchise owners.

One -Train Your Franchise Business Consultants 

There once was a long time franchise owner whose only daughter was getting married. This franchisee was Greek, very religious and his daughter was having a destination wedding in Greece. The whole family was going and all the relatives from around the globe were attending. 

The franchise owner had a problem. He was going to Greece for two weeks and his family members who worked in their franchises were going too. 

He told his Franchise Business Consultant that he was concerned about being short-handed while he was away and asked him to watch over his busineses in his absence. 

The franchise business consultant knew the family well and had watched his franchisee's daughter grow up in the business.

Franchise Business Consultant agreed to oversee the businesses. 

The Franchise Business Consultant checked in with the managers daily on the phone or in person. He even used his weekend time-off to ensure things were being managed correctly. Reviewed their schedules to ensure crew labor was under control. Made certain the daily deposits made it to the bank. Reviewed the incoming mail. Took care of supplier payments. And gave direction to the managers and employees as needed. 

He solved his franchise owner's temporary management problem.

The wedding went off without a hitch the franchises were managed by the Franchise Business Consultant.

Two - Stop "Helping" with HR

Franchisor had very conscientous Vice President of Human Resources along with a great Director of Operations. Franchise owners were asking for help. 

They wanted employee handbooks for their businesses and employees. Franchisees knew that the franchisor had very good HR systems for its company owned units and thought why not use what the franchisor was using.

The franchisor's employee handbook had been developed by pros, regularly updated and had been in use for some time. No reason to reinvent the wheel.

So the Vice President of Human Resources slapped a little disclaimer on the franchisor's document saying that the franchisees should get the template reviewed by the franchisees' respective employment attorneys before using it. And that the franchisees' would hold the franchisor harmless if something went wrong.

Franchise owners were very happy they didn't have to go through the time and expense of developing their own employee handbook and their problem was solved by the conscientious Vice President of Human Resources and great Director of Operations.

Franchising is full of people who care deeply about franchise owners and would do most anything they could to help out in a pinch. 

What could possibly go wrong for the franchisor in either of these situations?

Seems harmless enough and the franchisor was just helping out franchise owners, right?Stop 

If you are a businessperson, sooner or later you will have to deal with a lawyer. In the franchise world, it helps - tremendously - to deal with attorneys who understand franchising and franchise law. It doesn't matter whether you are a franchisor or a franchisee; no matter which side of the transaction you happen to be on, you will want an experienced franchise attorney to be on the other side.

Surprisingly, the level of franchise law knowledge among attorneys who actually get involved in franchise transactions varies considerably. The majority of the time, lawyers who are knowledgeable in franchise law are on both sides of the transaction. But that is not always the case. Sometimes, the attorney on the other side is inexperienced, and "dabbling," in franchise law.

This is the second of a two-part piece on why attorneys who are inexperienced in franchise law can hinder a transaction, or worse, do harm to their clients. To read part one, discussing the problems that inexperienced franchisee counsel can cause for their clients, please click here.

This article explores the problem of inexperienced counsel from the point of view of the franchisor, which is using an attorney that has little or no familiarity with franchise law (or, even worse, the company is using a consultant who is not a lawyer).

Why Franchisors sometimes use Inexperienced Legal Counsel?

If a company is considering franchising its business (a "start-up" franchisor), one of the first things the company does is look for legal counsel. Finding an experienced franchise attorney is not a simple task; there are only a few hundred attorneys in the country that specialize in franchise law. A start-up franchisor may look to its local business attorney to help the company draft its franchise agreement and franchise disclosure document ("FDD"), and otherwise help the company comply with its legal obligations.

The business attorney may be tempted to do the work, instead of referring it to another lawyer. After all, form FDDs and franchise agreements are relatively easy to find, and many of them look similar to one another. But the problem is that franchise contracts and FDDs aren't "one size fits all" legal documents, and the franchise relationship isn't a typical business relationship. It is critical for attorneys who work in franchising to understand the documents they draft, the legal requirements for disclosure (both federal and state), and how the pieces of the documents need to fit together.

For example, an experienced franchise lawyer will understand the types of fees that are typically charged, and how those fees can be tailored to the client. The lawyer will know how fees can be used effectively to encourage compliance by the franchisee, and in what situations liquidated damages could be used effectively to decrease legal costs in the event of a dispute between the parties, and when those same fees should not be used. The experienced attorney will know where and how those fees must be disclosed in the FDD.

Counsel experienced in franchising will also understand the interplay between territorial protection (or territorial exclusivity) and the areas in which the franchisee will and won't be permitted to sell. Whether a franchisor offers exclusive or protected territories, and how those territories are defined, will depend on the type of franchise system, the franchisor's expansion plans, the nature of the business the franchisee will conduct, and the franchisor's internal franchise sales goals.

An attorney with little or no understanding of franchise law can inadvertently harm the client's business by failing to understand whether a protected territory even makes sense for the client and, if so, how the territory can or should be determined. Moreover, an inexperienced attorney may not understand the types of carve-outs from the scope of territorial protection that may be necessary or useful to protect the franchisor and its possible future expansion plans.

I could easily keep going - there are a multitude of areas that need to be addressed in the franchise agreement and FDD where the attorney must have a substantial background in franchising to adequately represent his or her client.

The Problems Caused by Inexperienced Franchisor Counsel

When an attorney who lacks franchise law experience drafts the start-up franchisor's FDD and franchise contracts, it can cause a number of substantial problems for the company.

First and most significantly, a poorly-drafted FDD can lead to significant liability for the franchisor. The form and content of the FDD is controlled by both federal and state law, and a franchisor can be held liable for an FDD that does not comply with those laws. A number of state laws give their regulators significant power to address franchisors' failure to comply with registration and disclosure requirements. These powers can include steep fines (that may be multiplied by each infraction or unlawful sale); the power to order a franchisor to rescind the franchise agreement of any franchisee who has been unlawfully sold a franchise; or, worst of all, the right to assess criminal penalties (including imprisonment) against the individuals who control or have decision-making power for the franchisor.

And that's just on the regulatory side. A franchisor can also face significant liability to its franchisees if it has sold them franchises without complying with federal or state law. Although the Federal Trade Commission's Franchise Rule does not give individual franchisees a private right of action against a franchisor for its failure to comply with the Rule, many state laws do create a separate cause of action that can be used by an aggrieved franchisee.

Even in the states where the franchisee does not have the right to sue based on a disclosure law violation, state common law will often provide a remedy to the franchisee through fraud claims. If the franchisee relied on a material representation made in the FDD that was false or misleading, and was reasonable in doing so, the franchisee can likely sustain a legal claim against the franchisor for that misrepresentation. Inexperienced counsel can lack the experience to provide his or her franchisor with the guidance needed to avoid inadvertently making a misrepresentation or false statement.

For example, an attorney who dabbles in franchise law may not have a full understanding of what is required of a franchisor who makes financial performance representations in Item 19 of its FDD. Without a full understanding of the guidelines for making an earnings claim, it is possible for a franchisor to make a misleading representation without intending to do so (by, for example, presenting an unreliable, misleading, or unreasonable subset or using numbers without a reasonable basis or written substantiation). This type of mistake could easily lead to significant liability for the franchisor - and, indirectly, for the dabbling attorney.

Even more troubling is the problem of franchise consultants - who are not attorneys - preparing FDDs and franchise agreements without the consultation or assistance of an experienced franchise lawyer. These individuals and companies risk substantial liability through an unauthorized practice of law claim in any jurisdiction where their documents are used.

Conclusion

These risks are not merely theoretical. There are a multitude of reported cases where a franchisor has been held liable for mistakes made in its FDD, with the imposition of significant damages. Often, liability could have been avoided with a more carefully-written FDD. Several other cases have also resulted in a lawyer or non-lawyer franchise consultant being held liable for malpractice or the unauthorized practice of law where material errors were made in the FDD that led to liability for the franchisor.

For these reasons, franchisors should avoid hiring attorneys who dabble in franchise law, and instead seek out experienced franchise counsel. Both franchisors and franchisees benefit when knowledgeable counsel is involved on both sides of the transaction.

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