May 2015 Archives

On May 14, 2015, the California state Assembly passed AB 525, a bill that would amend the existing California Franchise Relations Act (Business and Professions Code §§ 20000 - 20010) ("CFRA") by expanding the protections for existing franchisees.

As currently written, AB 525 would amend the CFRA in the following ways:

• "Good Cause" Restricted to Substantial Compliance. Under the CFRA, a franchisor is permitted to terminate a franchise prior to the expiration of its term only for "good cause," which includes (but is not limited to) the failure of a franchisee to comply with any lawful requirement of the franchise agreement after being given notice and an opportunity to cure the failure. Under AB 525, "good cause" would be limited to the failure of the franchisee to substantially comply with the franchise agreement.
• 60 Day Cure Period. AB 525 would create a mandatory period of at least 60 days for the franchisee to cure a material default under the franchise agreement, which cure period would apply in all but a few defined circumstances.
• Right of Sale. A franchisor would be prohibited from withholding its consent to the sale of an existing franchise except where the buyer does not meet the franchisor's standards for new franchisees.
• Notification of Approval / Disapproval of Proposed Sale. A franchisor would be required to notify the requesting franchisee of its approval or disapproval of a contemplated sale of a franchise within 60 days of receiving from the franchisee certain mandated forms and information regarding the sale. If a franchisor does not provide its written approval or disapproval with the 60 day period, the sale will be deemed to have been approved.
• Reinstatement or Purchase of Franchise. In the event that a franchisor either terminates or fails to allow the franchisee to renew or sell its franchise in violation of the CFRA, the franchisor would be required to, at the election of the franchisee, either: (a) reinstate the franchise and pay the franchisee damages; or (b) pay the franchisee the fair market value of the franchise and the franchise assets.
• Monetization of Equity. A franchisee must have the opportunity to "monetize its equity" (obtain the fair market value of the franchise and its assets) prior to the franchise agreement being terminated or not renewed by the franchisor, except under certain limited circumstances.

AB 525 is now in the Senate for consideration.

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For franchisors, the benefits of trademark monitoring can be substantial and the costs relatively low, as I wrote about the benefits of trademark monitoring programs.

Here are four real-world examples of how trademark monitoring has helped (or could have helped) franchisors and other business owners maintain control of their brands online.

*While the following examples are based on real cases, facts have been modified to maintain complete confidentiality with respect to the actual matters involved.

1. The Franchisee Who Never Paid

A new franchisor was subject to financial assurance in certain registration states, and had opted to defer collection of initial franchise fees. A new franchisee signed a franchise agreement, received training and certain materials, but then never opened for business--and never paid the initial franchise fee.

It appears that they had intended to do so--as trademark monitoring revealed they had set up a website and commented on forums using the franchisor's trademarks (in violation of the franchise agreement). But then he went silent (and apparently changed his address) when it came time to pay.

Through monitoring the franchisor's trademarks online, we were able to keep tabs on the "franchisee's" conduct (and use it to the franchisor's advantage) while termination and other enforcement remedies were pursued.

2. The Sudden Competitor

In a case where an effective monitoring program would have significantly mitigated damages and the scope of the parties' dispute, a new client came to me after a significant amount of damage had already been done. The client owned a registered trademark for use on apparel and in connection with retail services, but someone else had previously registered the corresponding ".com" domain name and kept it dormant for years.

The client operated successfully under similar domain names (e.g., "trade-mark.com" and "trademark.net"), until she started receiving complaints and comments that were wholly unrelated to her website and products. As it turns out, shortly after she launched her business, the ".com" owner launched a commercial site that was causing confusion and misrepresenting the client's brand.

Fortunately, we were able to make a strong argument for bad faith that helped produce an efficient settlement, but the settlement costs and loss of business likely could have been reduced substantially if the alleged infringer had been identified and targeted much earlier in the process.

Given actual prior knowledge of the domain name, this would have been a particularly easy issue to address through trademark monitoring.

3. The USPTO Registrant

In another case where trademark monitoring would have saved significant costs and headaches, a new client came to me after delaying in filing for initial trademark registration. He had been using his trademark online for close to a year, but had simply put off registration with the USPTO.

In performing the trademark clearance research in connection with the application, I discovered that someone else had filed for registration of an identical trademark for use in connection with substantially identical professional services only a month and a half earlier. A month and a half may not sound like much, but for small business owners (and bad faith infringers), this is plenty of time to put lots of money and effort into building a new online brand.

Somewhat fortunately, again, this appeared to be a case of bad faith, and that helped expedite a favorable settlement (withdrawal of the competing USPTO application), but the potential damage if we had not reached a settlement was substantial. Had the business owner been engaged with an effective trademark monitoring program, it is likely that (i) the bad faith user would have been spotted before they applied for registration, or (ii) at the very least, the competing application could have been addressed much sooner after its initial submission (of course, the issue may have been altogether moot if the client had just timely sought to register his trademark).

Either way, the risk of loss and paralyzing uncertainty likely would have been mitigated substantially through effective trademark monitoring.

4. The Unauthorized Reseller

Finally, in another case where trademark monitoring served its purpose, an author of business publications was able to discover that an unauthorized individual was re-selling digital copies of her publications online - using her name to promote them - without her authorization. While we could not immediately track down the infringers, being aware of the problem, we were able to make effective use of the Digital Millennium Copyright Act to get the infringing copies removed from the Internet in less than a week.

The client will need to continue to monitor to make sure that the infringer does not resurface on some other ISP, but under the circumstances trademark monitoring allowed her to protect her reputation and maintain exclusive control over the distribution of her works for only marginal additional fees.

Conclusion

As these examples demonstrate, for franchisors, the benefits of trademark monitoring can be substantial. Not only does trademark monitoring allow franchisors to promptly address instances of potential third-party infringement, it also allows them to (i) monitor franchisees' representations of their brands, and (ii) identify and address possible unauthorized disclosure and redistribution of their confidential and copyrighted materials. This day in age, franchisors (and really all companies) shouldn't be without a strategy for protecting their trademarks online.

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I remember, during my mediation training, asking for a clear definition of "bargaining in bad faith" and being disappointed not to receive one.

Having now myself done a little research I can understand why the concept is so hard to define, despite many people's claim to "know it when they see it."

Most of the legal discussions of bad faith bargaining that I have seen come from the area of labour relations. For example, the Alberta Labour Relations Board advises that, "parties must make every reasonable effort" to reach an agreement. They also list some examples of bad faith bargaining techniques, including refusing to meet the other party, refusing to respect the other party's representatives, reactivating proposals that have already been settled, adding new areas of discussion late in the dispute, and "surface bargaining."

I would guess that "surface bargaining" is what most people have in mind when they think of bad faith bargaining. It is basically a form of stalling. In surface bargaining one of the parties "goes through the motions" of bargaining, but has no intention of ever coming to an agreement. The BC Labour Relations Board defines bad faith bargaining somewhat more strictly, saying that it is the "deliberate strategy by either party to prevent reaching an agreement."

Bargaining in bad faith is not the same as "hard" bargaining, but the two can be very difficult to tell apart in practice. Imagine a dispute in which party "A" has made what they consider a reasonable offer to settle. Party "B" refuses to accept it and has not moved very far from their opening position.

Did party B never intend to settle, or are they simply convinced that party A's offer isn't yet good enough? How would a mediator (or anyone else) be able to tell, short of a private confession by party B?

Or imagine a dispute in which party A spends a lot of time going over relatively trivial yet highly detailed matters. Is party A deliberately stalling, or taking reasonable care to protect their interests? And who is to say what counts as a "trivial" issue?

Yet despite the difficulties in characterizing bad faith bargaining, it represents a real problem for mediators and for the mediation process. It is a particularly troubling possibility when one of the parties has greater resources (time, money) than the other. The more powerful party can stall, drawing out the process and using up the other party's time and money. When the mediation process is declared a failure, the stronger party is in an even more favourable position. The weaker party, having depleted their resources, may agree to an unreasonable offer because they no longer have the money to defend their rights in court.

What should you do as a mediator if you suspect that one of the parties is bargaining in bad faith? I don't think that there is any way to be sure that parties intend or do not intend to come to an agreement, and it is important not to jump to conclusions. If one of the parties won't move from what looks like an unreasonable position, try to find out why.

Their view of the dispute may be such that their own position is reasonable.

How does it differ from your view, and from the other party's view?

But there may come a point in a mediation when the mediator begins to suspect that the process is not serving either party and that prolonging it would not be a good use of their time or money.

In this event, the best thing for the mediator to do may be to explain their concerns and then exercise their right to end the mediation.

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Franchisors often resist franchisee requests for loosening controls in order to make the franchisee's loan eligible for SBA financing.

Thanks to several recent Court decisions, a franchisor's case for maintaining certain kinds of control over the franchisee just got a lot weaker.

Recent cases involving employment discrimination have held that too much control, which creates ineligible "affiliation" under the SBA rules and regulations, can also make franchisors liable for claims by the franchisee's employees. (Keep reading to see the nose ring case)

Franchising has historically succeeded as a business model due, in large measure, to the support the franchisee gets from the franchisor in exchange for fees and a commitment by the franchisee to preserve and protect the franchisor's system and its attributes, including especially franchisor's trade marks, trade names.

The franchisee typically agrees to be trained in the franchise system and to comply with the franchise agreement rules and procedures.

Generally, franchisors want to ensure franchisees adhere to the look and feel of its system. Small business loan applicants frequently choose franchising or similar arrangements such as licensing or distributorships as a business model and seek SBA financing for their operations.

Affiliation issues found in franchise, license and certain dealer or distributorship agreements can render the small business ineligible for SBA financing. Affiliation is found where the franchisor exercises so much control over the franchisee and the franchised business that the small business no longer has the independent right to profit from its efforts or bear the risk of loss commensurate withy ownership.

Recent court cases provide franchisee-borrowers applying for SBA loans with better ammunition for getting franchisors to back off from some controls and enable franchisees to negotiate modifications to the franchise agreement to avoid affiliation and make the agreement eligible.

Actions such as step-in rights, where the franchisor can take over the franchisee's job if the franchisee is performing inadequately (Hayes v. Enmon Enterprises, LLC d/b/a Jani-King, 2011 U.S. dist. LEXIS 66736 (S .D.. Miss.) or where the franchisor runs all payroll through its central system (Myers v. Garfield, 679 F. Supp. 2d 598 (E.D. Pa. 2010) have made franchisors liable as joint employers with the franchisee.

Factors courts are looking at to determine whether a franchisor can be held to be a joint employer include all of the following: authority to hire and fire employees, promulgate work rules and assignments and set conditions of employment, including benefits, compensation and hours; day-to-day supervision of employees including discipline; and control of employee records, including payroll, insurance, taxes and the like.

Courts say that no one single factor is dispositive in determining whether a franchisor is a joint employer.

Now, for the nose ring case -----

An employee of a fast-food franchise was fired by the franchisee for wearing a nose ring that she said was religiously required but that violated the franchisor's no-facial-jewelry policy. She filed a claim with the Equal Employment Opportunity Commission.

The EEOC, on her behalf, sued the franchisee ---- and the franchisor. In denying the franchisor's motion to be let out of the case, the court said there was enough evidence to find that the franchisor's were a joint employer with the franchisee, especially since only the franchisor had the authority to waive the no-facial-jewelry policy that was enforced by the franchisee against the employee.

The controls that give rise to a franchisor's liability as a "joint-employer" of the franchisee's employees provide a franchisee and its SBA Lender with additional leverage to negotiate fixes to a franchise agreement that is not on the SBA franchise registry to render it eligible for SBA financing.

For more information regarding franchise eligibility matters, please contact Lynn at [email protected] or call (215) 542-7070.

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On September 16, 2014, the Franchise and Business Opportunity Project Group of the North American Securities Administrators Association (NASAA) issued a Multi-Unit Commentary to provide guidance in addressing certain disclosure requirements in 3 different types of multi-unit franchising structures.

All of the state franchise regulators are members of NASAA so we can expect that the state franchise regulators will follow the guidelines addressed in the commentary in 2015. The effective date of this Commentary is 180 days after the date of adoption, or 120 days after the franchisor's next fiscal year end for Franchise Disclosure Documents already in existence.

Among other franchise offerings, the new Multi-Unit Commentary includes guidelines for the Franchise Disclosure Document used by a subfranchisor in offering unit franchises. The Franchise Disclosure Documents currently used by subfranchisors in offering its unit franchises may already be in compliance since the commentary largely provides clarification or confirmation on how FTC Guidelines should be interpreted when disclosing information on multi-unit arrangements, rather than imposing new requirements.

The following summarizes the guidelines under the Commentary that will apply to a subfranchisor's unit FDD:

A subfranchisor is not required to disclose in the FDD the financial arrangements between it and the national franchisor. The subfranchisor may disclose in Item 6 that fees paid by the unit franchisees are shared by the subfranchisor and the national franchisor.

Subfranchisors are required to amend their unit FDD when there is either a material change to the information regarding the subfranchisor or there is a material change to the information disclosed regarding the national franchisor.

Item 3 of the subfranchisor's unit FDD must include litigation information for the national franchisor and its officers and managers identified in Item 2 in addition to litigation information for the subfranchisor and its officers and managers identified in Item 2.

Item 4 of the subfranchisor's unit FDD must include bankruptcy information for the national franchisor and its officers and managers identified in Item 2 in addition to bankruptcy information for the subfranchisor and its officers and managers identified in Item 2.

Item 8 of the subfranchisor's unit FDD must disclose any rebates received by the national franchisor and its affiliates or other revenue derived by the national franchisor or its affiliates from purchases by unit franchisees, in addition to similar disclosures for the subfranchisor.

In Item 13, the subfranchisor must disclose the circumstances under which the subfranchisor's subfranchise rights may be terminated by the national franchisor, and the effect any such termination or expiration or non-renewal of the subfranchisor's agreement with the national franchisor will have on the unit franchisees' rights to continue to use the marks.

In Item 20, the subfranchisor only has to disclose information on current and former unit franchisees. Disclosure on the subfranchisors in the system is not to be included.

In Item 20 of the subfranchisor's unit FDD, there are to be two sets of Tables 1 - 5. The first set of tables should include information only on the unit franchises in the subfranchisor's territory. The second set of tables should include information on all unit franchises in the franchise system.

The subfranchisor's FDD must include two lists of current unit franchisees. The first list is to include all of the unit franchisees in the subfranchisor's territory. The second list must include unit franchisees of the franchisor and its other subfranchisors.

You can choose to list all unit franchisees in the entire system or the unit franchises in your state and, if necessary to have a minimum of 100 franchisees between the two lists, other unit franchisees in contiguous areas.

The financial statements of both the subfranchisor and national franchisor must be included in Item 21 of the subfranchisor's unit FDD.

If the national franchisor and the subfranchisor have two different fiscal year ends, the subfranchisor must update within 120 days of its fiscal year end, and then must amend its FDD when the national franchisor issues a new FDD after the end of its fiscal year to incorporate any material changes in the national franchisor's updated FDD.

Time to review with franchise counsel if changes will need to be made to your Franchise Disclosure Document (FDD) to bring it into compliance.

Mediation is often touted as the panacea for dispute resolution. It's not, and it suffers a bit from idol worship. I'm a mediation evangelist myself, but it's just a tool and it has many limits.

The goal for dispute resolution should be to find methods with the substance and flexibility to help resolve any dispute in the fastest, cheapest, fairest method possible. I have an idea on this that I call Early Active Intervention, and I'd appreciate comments, critical or otherwise. But before describing it, I point out some limitations on mediating franchise disputes.

In 2009, at the American Bar Association Forum on Franchising, I presented a seminar that covered mandatory mediation clauses in franchise agreements.

The participants (roughly 2/3 franchisor counsel, 1/3 franchisee) were split on the issue. About half looked on the clauses favorably because mediation is very successful in resolving disputes, and they found that mandatory mediation worked in practice to resolve their disputes promptly and fairly.

The other half didn't like mandatory clauses. Franchisor attorneys said that mediation makes sense only at a certain stage of a case, not necessarily the beginning, and that mediation has a chance to succeed only when both parties want to mediate. Good lawyers will know when a case is ripe for mediation. And if one side doesn't have a good lawyer, mediation probably won't succeed. So there's no reason to force mediation in the beginning of a dispute.

Franchisee attorneys expressed dissatisfaction that too often franchisors used the requirement to force the franchisee to take the time and spend the money to go to a mediation in the franchisor's home city with no intention of resolving the case short of franchisee surrender.

My sense is that all these are very good points. Mediation is very successful in resolving disputes, which is why I'm a mediation evangelist. Most mediation providers provide success rates at 65% - 85%. But it's not clear what those rates really mean. Did the cases resolve early or late, in one session or in many over time. Was there an expensive initial session that one side abused in bad faith? And, perhaps a question that can't be answered, would the cases have resolved without mediation? After all, probably fewer than 10% of business cases go to trial regardless of whether they're mediated. So if you count any case that settles before trial as a mediation success if the parties tried mediation at some point, then the success numbers will naturally be very strong.

Breaking it down further to the franchising area, I'm unaware of any statistics on the success of mandatory mediation requirements in franchise agreements. But the anecdotal evidence of dissatisfaction is strong. And most lawyers agree that mediation makes no sense when one party does not want to participate in good faith.

It's clear that resolving franchise disputes early and before they become lawsuits or arbitrations is a worthwhile goal for franchisors and franchisees. Both save time and money by resolving the dispute early, and they can return to focusing on their business rather than their disputes. Also, a new incentive for pre-filing resolution is that, since Item III of the FDD now requires disclosure of settlement terms, franchisors have far greater flexibility in settling suits before a complaint or arbitration demand is filed.

To address some of these issues, and to focus on speed, cost ,and fairness, I've come up with a process I call Early Active Intervention (EAI). It involves a voluntary effort on both sides to resolve the dispute as early, quickly and inexpensively as possible. The parties use a facilitator, but the facilitator is much more active than in standard mediation . Primarily, if a dispute is not ripe for resolution, the facilitator can structure a limited information exchange to allow the parties to obtain the information they need to form a reasonable judgment as to how to reasonably resolve the dispute. Then the mediation resumes.

Because EAI is voluntary, parties not wanting to participate won't. Because the tools are broader than standard mediation, early intervention is always appropriate. Because the facilitator is expected to take a more active role, the facilitator has more flexibility to address issues related to parties or counsel who appear to be proceeding in bad faith. And because the rules are spelled out, expectations for the process are shared.

Here's my proposed clause for a franchising agreement:

EARLY ACTIVE INTERVENTION CLAUSE

Early active intervention. If either of us has a claim against the other, either of us may invoke early active intervention ("EAI") against the other before filing [suit or arbitration]. EAI is subject to the following rules:

1. Notice. EAI is triggered by the initiating party's sending notice (the "Notice") to the responding party that states that the initiating party is initiating EAI, and that provides a concise statement of the initiating party's claim.

2. Tolling. Initiation of EAI tolls the statute of limitations on the initiating party's claims. The responding party may terminate tolling on 14 day's notice.

3. Response. Within seven days of receiving the Notice, the responding party shall send the initiating party a concise statement of its defenses or counterclaims (the "Response") to the initiating party's claim.

4. Preliminary negotiation. Upon receipt of the Response, you and we may (but are not required to) begin negotiations within three days pursuant to effective negotiation principles, which shall be as follows:

i. Parties with authority. You and we will have at the negotiation the person who has the authority to resolve the dispute.

ii. Principles and goal. The goal of negotiation will be to seek a business resolution of the dispute through cooperative communication in which we focus on each other's interests and seek to generate options to satisfy those interests, using objective standards to evaluate interests and options.

iii. Need for further information or documents. If the dispute is not resolved by negotiation, you and we shall seek to determine whether either needs further information or documents to develop reasonable judgment to evaluate reasonable resolution of the dispute. If either side needs further information or documents, we shall seek to agree on how to share information and documents no later than 30 days after the date of our agreement.

iv. Further negotiation. If you and we agree to continue negotiation following information and document exchange, negotiations shall begin with fourteen days after completion of the information and document exchange.

5. Selection of EAI facilitator.

i. Timing. If you and we do not agree to negotiate, then within seven days of the initiating party's receipt of the Notice, you and we shall mutually select an EAI facilitator. If we do choose to negotiate, either side has the right to invoke selection of an facilitator at any time.

ii. Failure to agree on facilitator. If you and we are unable to mutually select an facilitator in seven days, the EAI process shall terminate.

iii. Fees. You and we will each be responsible for half of the facilitator's fees.

6. Case facilitation conference. Within seven days of the facilitator's selection, the facilitator shall hold a case facilitation conference by telephone. The conference shall address the following topics.

i. Information and document exchange. If you and we have not agreed on exchange of information or documents, the Facilitator may decide on the appropriate scope of information and document exchange. The presumption shall be to allow only that discovery necessary to make the process fair in the sense of giving you and us enough information to reasonably evaluate the merits of our respective positions. The facilitator shall set a short time limit, no longer than 30 days after the case facilitation conference, to finish exchange of information and documents.

ii. Facilitation schedule and site. The facilitator shall set a date for a personal case facilitation conference with you and us. The conference shall be scheduled no later than 30 days after the end of information and document sharing. The facilitator shall decide the place of the conference.

iii. Facilitation conference. The facilitator may require you and us to submit materials to the facilitator that we send confidentially to only the facilitator or that we share with each other. You and we will have at the facilitation the person who has the authority to resolve the dispute. The facilitator's role will be to actively mediate the dispute to seek resolution by using suitable facilitative, evaluative, and transformative mediation principles.

iv. Litigation management. If you and we are unable to resolve the dispute at the facilitation conference, the facilitator shall assist you and us in developing a litigation management agreement to cover discovery, time limits, and other matters to seek to limit the cost and time of [suit or arbitration].

v. Flexibility. The facilitator shall have the discretion to alter these rules as the facilitator sees fit.

7. Method of written communication. All written communication shall be by e-mail. For purposes of calculating dates, receipt of written communications will be deemed contemporaneous with sending.

8. Voluntary termination. Either you or we may terminate the EAI process at any time by sending three-days notice to the other.

About the Author: Peter Silverman is a franchise lawyer, mediator and arbitrator. You can reach him at [email protected]. Any thoughts he offers are his personal opinion and are not legal advice.

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FRANData, the company that operates the Franchise Registry for the U.S. Small Business Administration (SBA), announced last week that it adopted the standard franchise definitions used by the North American Securities Administrators Association (NASAA) in the Multi-Unit Commentary that was issued in Fall 2014.

This is important because it recognizes and implements some standardization in the franchise industry, which has historically been inconsistent when referring to certain types of franchise relationships.

Specifically, the NASAA Multi-Unit Commentary uses the following definitions, which will now be recognized by FRANData:

• Unit Franchisee: An owner of a single franchise unit.
• Area Developer: A person that is granted, for consideration paid to the franchisor, the right to open and operate multiple unit franchises, generally within a delineated geographic area. The area developer generally is a party to an "area development agreement" with the franchisor specifying the number of units to be developed and a development schedule, and the area developer or its affiliates generally are parties to separate unit franchise agreements with the franchisor. The area developer does not have the right to grant or sell unit franchises to third parties. This relationship is sometimes also referred to as a "multi-unit" or "area franchisee" relationship.
• Subfranchisor: A person with rights related to granting unit franchises to third parties, generally within a delineated geographic area("subfranchise rights"). The subfranchisor generally is a party to a subfranchisor agreement, aka master franchise agreement, with the franchisor specifying the territory in which the subfranchisor may operate and a minimum opening schedule, and the subfranchisor is a party to unit franchise agreements, aka subfranchisee agreements, with third parties for unit franchises. The subfranchisor is typically obligated to provide support services to those third parties.
• Subfranchisee: A third party that signs a subfranchisor's unit franchise agreement. The franchisor and the subfranchisor usually each receive a portion of the initial franchise fee and the continuing fees paid by each subfranchisee.
• Area Representative: A person that is granted, for consideration paid to the franchisor, the right to solicit or recruit third parties to enter into unit franchise agreements with the franchisor, and/or to provide support services to third parties entering into unit franchise agreements with the franchisor. The person granted these rights is a party to an "area representative agreement" but is not a party to the unit franchise agreements signed by the third parties. The area representative, like a subfranchisor, usually receives portions of the initial franchise fees and the continuing fees paid by unit franchisees, depending on the services the area representative provides. The area representative's payment of consideration to the franchisor for the right to recruit and/or provide support to unit franchisees is the element that makes the area representative different from a franchise broker or selling agent.

FRANData's adopting these standard definitions will help the company work with franchisors, state administrators, and the SBA in benchmarking performance across brands and industries. "When franchisors ask us to benchmark their performance against their peers, it's important that we all agree on the types of franchising programs being used and their relative historical results," said Edith Wiseman, President of FRANdata.

"Franchisors use single-unit franchising, multi-unit franchising, area representatives, sub-franchising, master franchisees, licensing and other growth channels. It is crucial that we are able to do apples-to-apples comparisons when gauging the relative success of their efforts."

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Section 7 of the U.S. National Labor Relations Act ("NLRA") states,

Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection . . .

U.S. Code, Title 29, Section 157.

This provision and the balance of the NLRA, which was enacted during the Great Depression of the 1930's, are primarily focused on the right to join a union and collectively bargain. As the percentage of U.S. private sector employees represented by unions has dropped substantially over recent decades, the NLRA has become a much less prominent part of the discussion of employment-related legal matters.

However, through its recent activities the current National Labor Relations Board ("NLRB") has indicated its determination to make the NLRA relevant to all U.S. employees (and employers), by focusing on the last part of the quoted portion of Section 7, "Employees shall have the right . . . to engage in other concerted activities for the purpose of . . . mutual aid or protection."

Among the areas where this emphasis is being shown is the ability of employers to limit employees' use of social media networks such as Facebook. The "social media policies" area is particularly interesting because many (if not most) of employees' online posts relating to their employers cannot be construed as "concerted activities for the purpose of mutual aid or protection."

Nevertheless, the NLRB has authority to stop an employer from maintaining a "work rule" that if that rule "would reasonably tend to" discourage employees from communicating with other employees "for the purpose of mutual aid or protection."

If the "social media policy" does not clearly restrict protected activities, such as by forbidding employees to "friend" each other on Facebook or to write posts about wages, hours or working conditions, then the policy only violates the NLRA if: "(1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights."

In several cases, the NLRB has found that an employer's social media policy has in fact been applied to restrict the exercise of Section 7 rights, and required the employer to reinstate employees terminated due to their Facebook postings and subsequent responses by Facebook friends.

For example, after an employee of a collections agency was transferred to a different position that would substantially limit her earning capacity, she posted on her Facebook page that her employer had "messed up" (using expletives) and that she was "done with being a good employee."

The employee was Facebook friends with approximately 10 current and former coworkers, including her direct supervisor. An extensive exchange ensued among the coworkers regarding the employer's management methods and preference for cheap labor, culminating with one of the former employees calling for a class action among the disaffected workers.

The employee who had prompted the exchange was fired the next work day explicitly because of her Facebook posts and the responses they triggered. The NLRB found the discharge to be a violation of the NLRA because (a) the employer had an unlawfully broad "non-disparagement policy," the violation of which was the basis for the termination, and (b) the employee had been fired for "engaging in conduct that implicates the concerns underlying Section 7 of the Act."

In other recent cases brought before it, the NLRB has concluded that, while the complaining former employee was not unlawfully discharged due to his or her online postings, the employer's policy itself violated the NLRA and needed to be modified.

In response to this, the NLRB recently issued a report summarizing its decisions specifically on acceptable social media policies, and perhaps most importantly, has in essence provided a sample policy that it has deemed to be lawful.

The policy, as amended by Wal-Mart after the initiation of an NLRB complaint regarding its prior policy, focuses fairly narrowly on refraining from posts that "include discriminatory remarks, harassment and threats of violence" or are "meant to intentionally harm someone's reputation." While the policy forbids dissemination of the company's confidential information, it provides a sufficient specific definition of "trade secrets" to put employees on notice that the policy (probably) does not include internal reports or procedures specifically touching on conditions of employment. Perhaps most importantly, the policy expressly acknowledges that employees may post work-related complaints and criticism, even while discounting the possibility that such posts are likely to result in changes that the employee seeks.

If your company has a social media policy, we can review it for purposes of conforming it to the NLRB's latest guidance on acceptable policies and help you avoid future problems that could result from overly broad restrictions on employee's online conduct. Of course, as specific situations arise we are available to counsel you as to legally appropriate measures to take in response to employee's online conduct.

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Recently, I was asked: "If you could negotiate any terms up front, what would be the key ones?" Here is my general approach:

First, review the FDD and determine if they are using franchise brokers to sell. If so, you can knock off about 11-20k from the franchise price by asking for the broker's rebate.

Now, you have a budget and money. Use it to hire a professional franchise attorney who will negotiate the terms in the agreement that make sense for your situation. (And yes, franchisors will offer addendums or side agreements - the California has a database is full of such side deals. If you accept at face value that franchisors "won't do x", then franchising is going to be a one sided deal for you.)

Any terms that go directly to the franchisor's business model, such as royalty rate and advertising spend are not on the table, except if you are going to be an area developer.

1. Get rid of the personal liability condition - it is a millstone which will force you to continue funding a mistake. The franchisor is not guaranteeing anything, why should you? Never sign an agreement with an unlimited personal guarantee.

2. Enumerate exactly the oral/written representations you are relying upon when signing the contract and carve out an exemption from the too general integration clause.

3. You probably want a discussion about the choice of laws/forum selection clause.

4. On item 7/8 in the FDD, you want written representations which clarify some of your concerns. Specific to your individual situation.

5. Get rid of the cross default clause, and the obey all laws clause. These clauses transfer too much bargaining power, via threats, to the franchisor. They are also completely unnecessary.

6. Get rid of the right of first refusal, which will drive down the value of selling.

7. Carefully review the liquidated damages clause, if there is one.

8. Avoid any franchises which radically restrict your use of social media for local marketing; these franchisors are already signalling that they are going to waste your national ad fund.

Those are the general areas, and there may be more important specific clauses of concern to you depending on your own business model. It is impossible to give good guidance on the territory issue, for example, with seeing the exact clause and knowing of your own local marketing ideas.

Do not waste your time trying to talk with other franchisees. if there is an independent franchisee trade association, talk with them directly about how the franchise agreement has changed, for better or worse over time.

You have the maximum bargaining power at the beginning of the relationship - just before you say "yes".

If you don't have professional training in negotiation, hire an attorney who does have specialized skill in this area.

Expect to pay between 7-10k to get an agreement which protects your rights. The value will be well worth it.

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Imagine this television commercial: a bunch of teenage kids in a house, eating junk food, playing video games with rap music blasting.

The narrator says: "Hey kids: tired of listening to your parents? Why not do whatever YOU want to do? Join the Army!"

Ludicrous, right? (Imagine the kids' surprise when their hair gets buzzed off, they're issued identical uniforms and that whole "reveille thing" is explained for the first time.) No one in their right mind would advertise so foolishly, would they?

That would be like recruiting a franchisee, one who must faithfully comply with a system of rigid rules and guidelines, with ads that say:

"Entrepreneurs Wanted!"

"Imagine the freedom! Imagine the opportunity!"

"Promote yourself to President!"

I call it the BYOB! (Be your own boss!) marketing myth. Warning signs include phrases like: "Own your own business!" "Be your own boss!" "Achieve financial freedom!" "Fire your boss!" "Take control of your life!" or similar variations.

Marketing the BYOB! myth is one of the most dangerous mistakes franchisors make. And it's the cause of much of the conflict in franchisor/franchisee relations.

Many franchisors attract prospects with the promise of freeing them from oppression and giving them the chance to gain control. There's only one problem: Franchise systems are built on adherence, not independence. Franchisors want implementers, not rebels. They often recruit individuals who are yearning to break free from their harness, but as soon as the contract is signed the franchisor expects them to docilely slip into their harness.

Requiring conformity, adherence to an established system and a shared identity is not necessarily a bad thing. That's what gives franchising its power. So why do franchisors work so hard to attract the wrong people and set the wrong expectations?

The mything link

Why, you may ask, do we sell the opportunity to join a conformist system via a dream of individualism? Why have we, as an industry, perpetuated the link between BYOB! and franchise ownership?

First, because it's an easy sell. It makes ad copy pop. The dream of being freed from day-to-day tyranny is a powerful one. Telling one's boss to take this job and shove it is the real American Dream. It's Easy Rider. It's Thelma & Louise. It's One Flew Over the Cuckoo's Nest. Unfortunately, it often delivers the same outcome.

Second, too few franchisors have actually given much thought to their franchise marketing message. They tend to just say what everyone else says: B.Y.O.B.! Many commission marketing research and branding platforms at the consumer level; more need to create a thoughtful strategy and platform for their franchise brand.

The third reason for the prevalence of the myth is the influence of commissioned franchise salespeople and brokers who are compensated for short term sales, not long-term franchisee performance or satisfaction. By the time the franchisees start storming the castle, the commissions are spent and the salespeople are long gone.

Another reason for this myth is that many founders are themselves entrepreneurs who are guided by what would motivate them. But the fact is that few founders could survive very long as franchisees of their own systems. Those who are looking primarily for implementers should not seek entrepreneurs. One franchisor per system is enough (and, according to some, one too many).

A "Never-ending Battle of Wills."

Army recruiters say Be all that you can be. They don't say "Be your own boss," or "Do what you want." They appeal to the individual's self-interest: Communicating what the prospect will gain by trading in their freedom for the benefit of being part of something greater than oneself, of being disciplined and following directions. In Army recruiting, there is a regard for the brand, the team, even the rules themselves and the benefits they provide.

Franchisors must realize that the importance of avoiding the BYOB! myth goes beyond effective recruitment and setting realistic expectations. Its importance goes directly to establishing and preserving the trust that is critical to their success. As Peter Birkeland states at the end of his book "Franchising Dreams," establishing high levels of trust with franchisees is the most critical problem for franchisors. "For those who cannot achieve that," states Birkeland, "The problem of control is a never-ending battle of wills."

Prospective franchisees must do their homework and understand the true nature of the relationship they are entering. There are no do-overs in franchising. Once they sign that big fat agreement they are giving up their autonomy, and are expected to be team players even when they disagree. If they don't want to end up posting on UnhappyFranchisee.com, they'd better make sure the system they are joining provides benefits that outweigh the costs, and is run by people they trust.

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