Recently in Compliance Category

Here is a due diligence tip. If you see this type of non answer when you ask "How Much Money Can I Make?", run away.

See Todd Weiss's answer on the thread, in which he explains:

"A thoughtful and compliant franchise seller wouldn't do this... an unethical one would.... it's deceptive and a major red flag... I wouldn't walk from this... I'd run...."

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Times are difficult right now, for both franchisors and franchisees. What with an economic lockdown which may last for 4 or 5 months.

Some franchisors are trying offer some inducements to their franchisees to hang in there.

But, Carmen Caruso warns that you might want to look this gift horse in the mouth.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Traditionally, a franchisor was not generally responsible for the franchisee failure to pay the correct wages to the franchisee's employees.

Now that the franchisor can track and even help schedule the franchisee's employees, using the POS system, does that change anything?

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

As most people know, in the US, jurisdiction over franchising is at both the State and Federal level.

A well-known franchise lawyer, Rochelle Spandorff, has proposed a radical change:

1. The end of independent state jurisdiction over registration;
2. A private cause of action for the violation of the FTC Franchise Rule.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Should a Franchisor be required to disclose what the SBA has determined about the viability of its loans, in the past?

If so, what form & liability for this obligation be -- given that the SBA's data can be error prone?

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Joe and I see franchisors fouling up sales by making unlawful sales too often.

Here is a nice tip sheet designed to make lawful franchise sales, compliant with the FTC Franchise Rule and other State Laws.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

People outside franchising don't understand that the franchisor is not the "boss" of the franchisees.

The franchisor, who does have considerable power because of the Franchise Agreement, cannot just tell their franchisees how to run their business.

In particular, the franchisor cannot simply require that the franchisees implement a sexual harrassment program that the franchisor favors.

Even US Sentators somtimes fails to understand.

Disclosure requirements for franchise sellers vary around the world.

Do these self-regulated disclosure jurisdictions work better than the FTC Rule?

For more great stories like this, sign up for the Franchise-Info Newsletter.

Few in the franchising world doubt that McDonald's is a world-class organization.

Hallam Movius and Lawrence Susskind hold out the mouth-watering proposition that McDonald's is a world-class negotiation organization. And, they offer up their recipe for turning your franchise into something similar. Their recipe is contained in Built to Win. The ingredients are familar enough to anyone with knowledge of the Harvard Negotiation Program or Mutual Gains Approach.

McDonald's Is Built to Win

Why should other franchisors care that McDonald's overwhelming advantage is due, in part, to its negotiation capability with franchisees and vendors?

Well, if true, then despite the notorious secrecy of McDonald's, Movius and Susskind offer the posibility that your franchise system could duplicate McDonald's advantage by following their Built to Win curriculum.

That's a very tempting offer.

Let's look more closely.

"Happily, we sometimes find that leaders have recognized the value of relationships and converted them into bottom-line opportunities. For many years, Bob Jackson (most recently a vice president and division operating officer) was a highly successful regional general manager at McDonald's, responsible for an area of the United States that comprised more than six hundred sites.

His region was consistently among the best performing in the country. When we first interviewed Jackson [in 2003], it was clear that he and his most successful colleagues were already following a number of practices encompassed by the mutual gains approach (my emphasis). Jackson repeatedly described negotiations in which he worked with owner-operator franchisees to implement marketing plans, technology upgrades and other operational initiatives.

'Many times we have interests and goals in common. But sometimes the corporation's interests are not identical with the owner operators.', he commented. 'We do best when we work jointly with our franchisees to solve the problems and difficulties that come up, taking their worries and concerns seriously and trying to share information and invent options to address those concerns and interests while advancing our own.

'Having a good relationshiop helps to create value far out into the future, because you gain trust and the next time a hard problem comes up, you're in a much better position to deal with it productively." Movious and Susskind [pages 40-45]

Effective Cooperation

Now, you and I know that franchisees can be downright nasty and refuse to engage in constructive dialogue with the franchisor. (And franchisors don't fix nasty -they look to terminate nasty.)

Especially when it comes to: marketing, upgrades, retrofits, menu item changes, and numerous other operational issues. Franchisees feel the dynamic is: the franchisor's plans using the franchisee's money.

Franchisor and franchisee interests, positions or goals, can be either adverse, in common, or a mixture of both.

McDonald's, says Jackson, takes these differences seriously and provides sufficient information to the franchisees to establish a collaborative working relationship which advances everyone's interests. (It also helps the franchisor's credibility that they own 20% of the units. Thus, this franchisor isn't alwasy using other people's money.)

Operational choices made by McDonald's have a long projected payback. A good working relationship extends the trust created today to commitment tomorrow. This coordination is valuable. It is not a traditional asset because it is not owned by the corporation. It is an intangible value, which nonetheless can be measured.

Increase value and get a better bottom line.

Now, do you think other franchise systems can be Built to Win or is McDonald's in a unique position?

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Before furnishing an FDD to a prospect, you must confirm that the prospect has been given, or must give the prospect, notice of the FDD formats available, and the prerequisites and conditions for obtaining those formats.

The law does not require the notice to be in writing or to be acknowledged. The notice may be given personally, by telephone or in writing by paper or electronically.

However, as a matter of policy, a franchisor may require the notice to be in writing, and may require the prospect to sign or initial an acknowledgment of the notice. This type of policy protects the franchisor and you from later claims by prospects that they were not given the notice.

The notice must be given to a prospect before an FDD is furnished to the prospect. If the notice is posted on the franchisor's website or included in the franchisor's marketing materials or franchise application form, and if the prospect has visited the website, received the marketing materials or submitted an application form, the prospect has been given notice.

However, you should not assume this to be the case. You should confirm that the prospect has been given notice, or you should give the prospect notice, before you furnish an FDD to the prospect. You should be particularly careful if you are dealing with a prospect who meets you at a trade show, a renewing franchisee, a current franchisee buying an additional franchise, or a transferee of a current franchisee.

These types of prospects are least likely to have been given the notice.

The notice must be given whether the franchisor uses just paper FDDs, just electronic FDDs, or both paper and electronic FDDs. The specific wording of the notice is not prescribed by law.

If a franchisor uses both paper and electronic FDDs, the notice could state:

Notice of Available Disclosure Formats

If you qualify as a franchisee prospect, we will furnish you with our franchise disclosure document in paper form unless you request an electronic copy by sending an email request to [name, title] at [email @franchisor]. We will provide the paper form of our franchise disclosure document to you in person if you visit our offices, or we will mail or courier the document to you at our cost. We will provide the electronic form of our franchise disclosure document to you in PDF format, sent by email to the address you provide to us. You will need to have Adobe Reader software installed on your computer to open and view the PDF document and a printer to print at least one Receipt page.

If a franchisor uses just paper FDDs, the notice could state:

Notice of Available Disclosure Formats

If you qualify as a franchisee prospect, we will furnish you with our franchise disclosure document in paper form. We will provide the document to you in person if you visit our office, or we will mail or courier the document to you at our cost.

If you would like all these tips in a bound book, for a handy desk reference, sign up for the Franchise Seller's Handbook.

If you would like to know if you can franchise your business, connect with me on LinkedIn or just give me a call, 202-824-1744.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

I'm all for getting your company's name in front of as many people as possible - after all, isn't that part of the goal of engaging in social media? However, there's one thing I continue to see over and over that really bugs me.

Imagine you're out with a few friends, talking about a restaurant you recently visited. Out of nowhere, someone comes up to your group and says, "You're talking about ABC Restaurant? Let me tell you about my restaurant instead - it's great!" and continues to talk about their restaurant and why you should go there.

You'd be a little creeped out, right? It would feel like an invasion on your personal conversation, and an unwelcome intrusion.

This is how businesses need to see social media - intruding on one's conversation to pitch your own business is a no-no, and likely turns many people off.

I've seen this most times on Facebook - a good example is when I followed the conversation regarding a live chat with GoDaddy and the Honest Toddler. In the middle of the conversation, which revolved around the hilarity of the comment and speculation on what the representative was thinking, someone chimed in about how their business, a competitor to GoDaddy, was better and suggested that people who are customers of GoDaddy leave them and go to this company.

Another place I've seen this happen is on Facebook pages for news sites. The conversation could be surrounding a current news topic, and sure enough, there is always one or two that will try to pitch their business. In this case, it's mostly unrelated to the topic at hand.

Companies who do this may be trying to gain exposure; instead, they are sending the wrong message to people. This is something that I've seen all too often and for whatever reason, has become a pet peeve of mine.

If you want to get your company exposure in social media sites, join conversations that are relevant to your business, and don't "sell" your company. Post from your business page on Facebook, for example, so if people are interested in what you have to say, they can visit your page to learn more about your business.

If you want to get company exposure, use LinkedIn.

Join groups and offer relevant, insightful comments related to your industry so people can get to know the "person" behind the company.

way to do this is to monitor news articles and blogs in your industry and comment, using your real name and perhaps a link to your company website.

The two tactics mentioned above will go further in gaining exposure, credibility, and interest than intruding on other people's conversations.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Franchise Agreements may contain minimum royalty fee requirements and performance standards.

What is the difference between the two?

Can you be in default even if you pay the minimum royalty fee amount?

Listen to the video and learn the answers.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Last night I reviewed a franchise agreement and found a surprising, and illegal, provision buried deep in the contract. If ever there was a compelling case for being careful when you are choosing legal counsel, I just found the provision that makes it.

But first, some background. My law practice involves representing both franchisors and prospective franchisees. For franchisors, I primarily draft franchise disclosure documents ("FDDs") and franchise agreements; I assist my clients in obtaining franchise state registrations; and I assist them with day-to-day issues that arise in running their businesses. For prospective franchisees, I will review their proposed franchise agreements and FDDs and help them understand what they will be committing to do if they decide to buy the franchise. If the franchise company is willing to negotiate, I help prospective franchisees through that process.

I find that reviewing other companies' FDDs and franchise agreements also helps me in my practice for franchisors; it's always instructive to see what other industry leaders are doing. I have noticed that, in a small minority of systems, some franchisors go well beyond what is legally permitted to be included in the franchise agreement and include provisions that unquestionably violate the FTC Franchise Rule (the "Franchise Rule") as well as various state franchise laws.

The Provision

If you're on either side of the franchise relationship, you should know if your contract has a provision like this one. Pull out your franchise agreement now. Go ahead, I'll wait.

You have it now? Good. Here's the provision we're looking for:

Release of Prior Claims. By executing this Franchise Agreement, Franchisee, and each successor of Franchisee under this Franchise Agreement forever releases and discharges Franchisor and its Affiliates, Its designees, franchise sales brokers, if any, or other agents, and their respective officers, directors. representatives, employees and agents, from any and all claims of any kind, in law or In equity, which may exist as of the date of this Franchise Agreement relating to, in connection with, or arising under this Franchise Agreement or any other agreement between the parties, or relating In any other way to the conduct of Franchisor, its Affiliates, its designees, franchise sales brokers, if any, or other agents, and their respective officers, directors, representatives, employees and agents prior to the date of this Franchise Agreement, including any and all claims, whether presently known or unknown, suspected or unsuspected, arising under the franchise, business opportunity, securities, antitrust or other laws of the United States, any stale or locality.

In plain English: "you, the franchisee acknowledge that we, the franchisor, may have lied to you and might be lying to you right now. Our entire FDD might be one of the greatest works of fiction sinceMoby Dick. You agree, however, that you waive all your legal rights to take action against us based on those lies, even if you have invested hundreds of thousands of dollars of your hard-earned money in this phony business." Wow.

Do you have that one in your franchise agreement? You might have to do a bit of hunting for it. You would think something like that would be on the first page, bolded, in caps, with a box around it and perhaps accompanied by a self-lighting sparkler that draws your attention directly to the provision when you open the contract. But no, in the case of the contract in which I found this provision, it was buried on page 36 of a 39-page franchise agreement, with no particular emphasis placed upon it.

I will never include a provision like this in a franchise agreement I draft, nor will I ever recommend that a prospective franchise buyer sign a contract when it includes this provision. Why? It's not only unfair, but it's also illegal under the Franchise Rule and under various state franchise laws.

The Problem with Having the Provision

Now, I highly doubt that in most situations, the franchisor even knows this provision is in its franchise agreement. Most start-up franchise companies trust their franchise counsel to draft the agreement and don't necessarily carefully consider each provision in the contract. This sort of provision is typically created by counsel, who is seeking to protect his or her client. An admirable goal, to be sure.

The problem is that this provision is impossible to justify to a prospective franchisee that notices it and understands its implications. If you're a franchisor, imagine trying to explain that to a potential buyer: "we're not lying to you. But you have to agree as a condition of buying this franchise that we might be and that you won't ever do anything about it if we are.

A franchisor may be able to slip this one by a franchisee unnoticed, but a franchisee that notices and understands this provision is always going to have a problem with it. A franchisee that has experienced franchise legal counsel review the agreement for them will certainly flag the term and warn the franchisee against agreeing to it. That could cost you a sale.

To make matters worse for the franchisor, the types of franchisees that actually read the agreement before signing it and have legal counsel review it for them are exactly the type of franchisees the franchisor wants: franchisees that take their commitments seriously and are willing to put their time, effort, and money into understanding commitments before they make them.

Now, I have my doubts that this type of provision will be enforceable in any event because, as I said, including a provision like this one is an explicit violation of the Franchise Rule, which "prohibits franchise sellers from disclaiming or requiring a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments." This provision does exactly that - and, as a result, the franchisor that included it in its agreement is in violation of the Franchise Rule (and various state laws) just for having the term in the contract.

Violating the Franchise Rule and state franchise laws leaves the franchisor exposed to lawsuits by franchisees that may have a state law "unfair trade practices" cause of action against the franchisor because of it. When those legal claims exist, a franchisor could face claims for damages or rescission. Moreover, state franchise administrators could refuse to register the franchise offering with a provision like this one (if they notice it) or worse, later take administrative action against the franchisor based on its violation of franchise law.

The better practice for franchisors that want to protect themselves, but do so within the bounds of the law, is to use exculpatory provisions and "compliance questionnaires" as part of the agreement signing process. A well-drafted exculpatory provision will provide a measure of protection to franchisors for unauthorized statements made by a renegade sales person, but will not seek to disclaim statements made by the franchisor in its FDD (and therefore is permissible under the Franchise Rule and many state laws).

The Lesson for Franchisors and Franchisees

If you are a franchisor, inclusion of a provision like this in your franchise agreement should make you question your legal counsel. Ask yourself: are you willing to risk losing a potential sale to a qualified, savvy, and ideal franchisee because you have a provision in your franchise agreement that probably isn't enforceable anyway? Are franchisees that sign your contract without even reading or understanding it really the type of franchisees you want? And is "sneaking something past" your unwitting franchisees who don't review every term of your contract really the way you want to do business? As I explain above, there are better (and legally-enforceable) ways to protect yourself in your franchise agreement, anyway.

If you are a prospective franchise buyer, this situation highlights the importance of: (1) reading your franchise agreement, cover-to-cover; and (2) hiring legal counsel experienced in franchise law to review your contract before you sign it. Contrary to the opinion of some, franchise agreements aren't all boilerplate, and not all franchise contracts are created equally. Don't assume that your franchise agreement doesn't contain something objectionable just because other franchisees signed it.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Throughout the United States franchisors have been able to enforce choice of law and venue selection provisions in their franchise agreements with few exceptions. A few states have proactively limited venue selection, but in the absence of rule or statute the U S Supreme Court has exonerated venue selection in the franchisor's home state as reasonable (Burger King leading case). On the issue of choice of law the primary confrontations have been over post termination covenants not to compete.

One state, California, prohibits them by statute (but see the Schlotzky's case where the California court permitted a restriction against making the Schlotzsky sandwich that was held to have secondary meaning as a source identifier for Schlotzskys).

Elsewhere when a franchisor chose its own state as the choice of law and the law of its home state was more permissive about use of post termination restrictive covenants, the question was whether the more expansive permitted use infringed the public policy of the franchisee's state. In those instances courts customarily reduce the scope of the covenant to the point at which the confrontation with public policy is eliminated.

The current direction of the law on post termination restrictive covenants, except in California, is simply to enforce them. The franchise can be old to the point of moribund and the market can already be so flooded with direct competition that enforcement of the covenant really bestows no material benefit to the franchisor other than a vendetta interest. Competent drafting of restrictive clauses today usually tie the clause in with the protection of confidential information and the non disclosure clause.

Venue selection has received little attention except for the rare prohibitory statute or rule.

Most large franchisors have now expanded extensively into foreign markets. Many of them still keep the domestic venue selection clause that facially requires franchisees in foreign countries to come to the United States and litigate or arbitrate disputes in the franchisor's home town. Just such a situation arises now in the context of an American franchisor requiring its European Community franchisees to resolve disputes here in America.

The agreement also prevents class treatment of disputes and groups as joint complainants. The EU franchisees would have to come to America one at a time and hire a USA lawyer to have their disputes sorted out by a court or arbitrator.

In the situation of poorly performing franchise systems, the franchisees' position is that this makes dispute resolution effectively unavailable to EU franchisees. This is, to be certain, part the purpose of this contractual configuration. This article offers a road map through the issues that will have to be dealt with if EU franchisees decided to attempt to defeat the USA venue selection clause.

INHERENT PRO FRANCHISOR BIAS IN THE USA

Over the last 25 years franchise law produced from decisions in dispute resolution has become more and more favorable to franchisors. Part of the reason for this tectonic shift may be attributed to the fact that every time a major court resolves a significant issue in favor of a franchisee, lawyers representing franchisor groups immediately redraft applicable franchise agreement provisions to circumvent that ruling. The "draft around" exercise has paid off handsomely for franchisors, and one would indeed be foolish not to avail itself of that technique. That is one reason lawyers go to annual seminars where they receive the benefit of the shrewd draftsmanship of the industry's best and brightest nit pickers. There is actual biblical precedent for this, but that is better left for drinking parties.

For these reasons alone, EU franchisees would win a substantial tactical and perhaps strategic advantage if they first found a way to defeat the international venue selection clause and were then able to have their disputes with their franchisors resolved in their own courts and arbitration resources, in their own languages and in context of the fairness balancing influences of their own countries and cultures.

Inasmuch as there is now no significant history of franchise litigation in EU countries, there is an opportunity for EU courts to approach franchising issues free of the pro franchisor bias so pervasive in the USA. How might one go about accomplishing that What are the issues and salient fact patterns relevant to confrontation of international venue selection provisions

THE ISSUES AND THE FACT PATTERNS

In the USA the ruling case law is that a franchisor may compel dispute resolution in its home jurisdiction under the law of its home jurisdiction. That is long established law. The rationale is that the franchisor ought to be able to operate its system in accordance with one set of legal principles and requirements and avoid the vagaries of local law that on the whole provide no significantly better legal climate than the law of the franchisor's home jurisdiction.

Even in this system, franchisors are required to provide a section of their disclosure package (FDD) that deals with state specific law that may affect the enforceability of various provisions of the franchise agreement. The shibboleth is that the essence of uniformity lies in its variables. There is essential uniformity, but not absolute uniformity from state to state.

Recognizing that the International Franchise Association spends a fortune every year to lobby franchisor favorable positions in every jurisdiction, nationally and internationally, one must begin by acquiring command of the jurisdictional trends and precedents in the EU countries relating to franchising dispute management to ascertain the extent to which there remains a meaningful opportunity to defeat an international venue selection provision under any circumstances at all. This involves the EU itself and the individual member states.

If the matter remains unsettled, then where does one initiate a proceeding seeking to upset a particular venue selection provision One thing is certain. One does not go to any USA court to try to achieve this.

It would be a total waste of resources with an almost guaranteed adverse result. This may mean a race to raise the question first, as one tribunal might not wish to devote its resources to an important question that is already before another tribunal. If the first tribunal decides the issue in a manner and pursuant to a rationale with which the EU tribunal would be comfortable, the ability to seek consideration of the matter before a potentially more sympathetic body is simply lost.

For this reason, I am somewhat surprised that USA court determination of these issues has not already been sought by the USA franchising community via declaratory judgment actions in American courts. By the time this article circulates, that tactic may be initiated as a possible means to preempt EU rulings on it. L'audace! L'audace! Toujours l'audace!

The salient fact issues will be distance, language, economic preclusion of a right to fair adjudication and the equities of the particular fact pattern before the court. It will be essential that the franchisee(s) in the case be essentially compliant even though contentious. You don't take a scoundrel to a court seeking fairness and equity.

If the initiator is a group of franchisees, it would be worthwhile to screen out the bad apples and proceed on behalf only of the more platinum plaintiffs/complainants. How that screening is accomplished is a subject for a totally separate article all by itself. Underlying every technical decision is an inherent, even though unspoken, issue of whether the party seeking relief is deserving of the relief.

With respect to the issue of distance, be mindful that a venue selection clause in an American franchise agreement may impose a more than 3,000 mile distance disadvantage, and that has not been the basis of an unreasonability ruling in a USA court. Distance from the EU to the east coast of the USA may not be much more than that. For this reason one should never raise the distance issue in isolation, but in every case in combination with language and other issues.

Consideration should be sought in light of the fact that the USA franchisor does not deem it inconvenient in any economic or distance sense to franchise its business in the EU as well as comply with EU and member state laws and regulations applicable to franchising there.

The distance and language issues should always be raised in combination with the franchisor's willingness to subject itself to EU and member state laws that enable and permit the enterprise from which the franchisor derives substantial financial benefit. That will go a long way toward blunting franchisor arguments before a European tribunal but probably not here in America.

The other crucial fulcrum of decision in this project will be the economic argument (which also would not prevail in the USA.) In the USA the concept of business risk, its assumption when you buy a franchise, not being a child or other person in need of special attention and protection in any business to business transaction tend to foreclose sympathy for "the downtrodden" in the sense of poor unprofitable franchise owners.

These so called victims, when applying to purchase the franchise, portrayed themselves to be financially and experientially capable of accepting the risks. Moreover, there are competent pre-investment due diligence assistance resources if they are not themselves astute at small business investment vetting. Additionally, the fact that the franchise agreements are in every instance rather draconian does not affect the pitch of the playing field in this discussion.

If you sign an agreement that permits the opposite party to take financial advantage of the situation and you do not expect that to happen, you are simply a fool. Actually, very few of these investors ever avail themselves of really competent pre-investment due diligence assistance at a meaningful level of competence simply because the services are not cheap. But that is their choice freely made.

There are escape hatch clauses in every franchise agreement plus a pre closing escape hatch questionnaire that further disable claims of being taken advantage of even when they have been taken advantage of in many cases and know about that before they sign the agreement.

So in the USA the "Oh poor me" gambit is usually worthless. Whether EU or member state tribunals are more receptive to the "poor me" arguments than USA courts remains to be seen. Ultimately, the USA is absolutely the worst place in the world to try franchise fraud and abuse cases today. There is no downside to trying to escape to another jurisdiction for resolution of disputes.

What constitutes an actionable complaint is probably different in the USA than elsewhere also. Notions of good faith and fair dealing are litigated here every year, and every year courts seem to find ways to deny their application other than lip service. What we just yawn at here in the USA could be a major offense against any fairness concept under EU or member state law. Equitable considerations are essentially worthless in the USA in business to business disputes. The free market means just that - the wild west.

Where then is the touchstone combination of circumstances in the making of a competent economic/predation case for escaping a venue selection and a choice of law provision in a franchise contract between an American franchisor and an EU franchisee I suggest the following approach.

Take seriously into account that an American court would accord no significance to the fact that the franchisee(s) are from another country and use another language. There will be absolutely no respect for a position that is a function of nationality. EU franchisees should make that clear to the EU or member state tribunal and suggest that a USA franchisor not be accorded preferential treatment.

The contract will have been drafted in the USA and will be in English.

There will be a local language version, but in the event of a disparity of meaning in any provision there will probably be a clause that says the English language version rules.

The EU franchisees will have been at a decided disadvantage in almost every instance when the "deal" was originally made.

One should suggest to the tribunal that one of the purposes of the EU and member state commercial law structure includes taking into account every way in which the EU party may have been disadvantageously positioned and make compensation for that by at least placing disputes before an EU or member state tribunal and applying the law of the franchisee's home country.

THE ECONOMIC POSITIONS

Usually the situation at hand will involve franchisees who invested in a franchise opportunity upon the stated or obviously implied representation that the franchised business model was a proven business concept capable of being operated by an investor acceptable to the franchisor with a positive financial performance profile.

If it is the case that the franchisees in the EU country are, as a group, unable to succeed in the business as licensed, that should be strong evidence that the opportunity was not investment worthy for this country/market and that the franchisor had no business selling it in the EU. If it is also the case that the franchisees in the USA are not doing well, that should be considered a strengthening of the conclusion that the transaction was not investment worthy in the beginning, much as a court would deal with a security that was not investment worthy.

There is a duty in all jurisdictions relevant to this discussion that the seller disclose material information that would cause a potential investor to make a negative investment decision.

In the face of such evidence, the franchisor should never be allowed to impose upon the EU franchisees an obligation to submit disputes to an American dispute resolution resource. The franchisees will be economically preempted from obtaining justice as a matter of simple economics, and no company selling investments should ever be allowed to put a victimized investor to that disadvantage. The argument that this requires prejudgment of the ultimate issue does not meet logical criteria here because we would be litigating jurisdictional issues and the findings would be for that limited use only.

In the USA the same standard is used in deciding whether preliminary relief should be granted in the course of deciding the issue whether the party seeking relief has "a likelihood of ultimate success on the merits. Taking this approach in protecting EU franchisees would not be a departure from American legal standards, and because of that the American franchisor should have no grounds to complain.

There is a countervailing argument available to franchisors in this instance. Regardless where EU franchisees must litigate their disputes, they will have to come up with resources to hire competent counsel, very few of which in the USA will accept them as clients on a contingent fee arrangement. In the EU contingent fee arrangements are much less condoned than in the USA.

The same requirements exist in the USA, and the cost of really competent representation is not going to be that different than in the EU. Depositions can be held in the locales of the witnesses, eliminating travel of everyone internationally before there is actually a trial. In each event the franchisees will need to create a common fund to share litigation costs, so there is no venue difference on that issue.

The adverse economics issue must be presented in a logical connection to other important issues rather than as a stand alone basis for decision.

If in addition to such a scenario (or even without it for that matter) the EU franchisee(s) can make a case of post execution abuses that materially adversely impacted the ability of the franchisees to make a reasonable financial return, that alone should make out a case that the franchisor is perfectly willing to engage in predatory practices no matter the impact upon the franchisees. A comparison of the measurable relationship cost as stated in the FDD to the actual costs, including extraneous revenues from franchisee operations not quantifiable from the information provided in the FDD, should serve to show that a franchise portrayed in the FDD as having a relationship cost of 15 % of gross sales actually has a relationship cost of from 20% to 25%. That would be very strong evidence of predation by the franchisor. Ten to fifteen percent of gross sales usually will equate to a negative impact of from 30 % to 50% of net profit. That is more than substantial impact to justify an EU or member state tribunal refusing to enforce a venue/choice of law provision in a franchise agreement.

How one goes about preparing such a case and obtaining evidence of sufficient quality is not part of this article, as that will vary with each case. Suffice it to say that counsel with very extensive experience in preparing and trying lawsuits involving franchise fraud and abuse should be tasked with assisting EU counsel in the entire proceeding. Knowing the theories and the art of expressing the theories effectively will not suffice without a record of competent evidence to support them.

As always, you can call me, RIchard Solomon, at 281-584-0519.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

"Financial Claims" could mean one of two things. The first possible meaning of "financial claims" is what's known as earnings claims or earnings projections that can be (but are not required to be) contained in a Disclosure Document.

This type of financial performance data is typically data that represents how certain franchisees in the system are performing financially. It can represent average performance, low/medium/high performance, and so on. This data can be verified in one of (or a combination of) three ways.

The first thing to do is gain an understanding of the data and carefully read the wording in the Disclosure Document that explains the basis of the data: this wording will tell you whether the data presented is only representative of, for example, franchisees that have been in the system for 5 years or more, or with territories of a certain size, and so on.

The second way to verify the data is by doing a little bit of due diligence. A list of all existing franchisees, as well as recently closed franchisees, should be included in the Disclosure Document. Call those franchisees, both current and past, and ask them if their performance is representative of that contained in the Disclosure Document.

If you feel you need more verification, a third way to verify the data is to attend at the franchisor's headquarters and ask to see the actual data that has been summarized in the Disclosure Document.

The second possible meaning of "financial claims" in this question could mean any claims the franchisor has made about its own performance.

This is verified by reviewing the franchisor's financial statements that are included as an exhibit to the Disclosure Document. Anyone not familiar with financial statements would be well-advised to have an accountant or other qualified financial advisor review the statements.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

This is the first of a three articles intended to raise investment care sensitivities. They are offered as a gesture of concern about what I see happening to people who invest in new and in old/over the hill franchise opportunities.

The purpose of the deceits practiced by these two groups of franchisor companies is, in the first instance, to portray itself as the investment quality equivalent of an already proven franchise concept/model, and, in the second instance, to portray itself as still being as good an investment vehicle as it once may have been but no longer is.

Is it possible for franchisors to say to prospective franchisees that profitability information is not provided when they do they provide profitability information?

It is also a very logical question to ask whether a franchisor can provide false or misleading profitability information so long as a warning is also given that there is no guaranty that you will achieve profitability and that you assume the risk of profit or loss and that there are risks.

Since risk is inherent in any investment, warnings about risks do not include or excuse risks that are produced by false statements made to induce the investor to part with his money in the first place.

How does someone who is thinking of investing in a franchise go about vetting the numbers?

This is the hottest button issue in disclosure, because assurances of potential profit are the most effective way to sell a franchise. Only an imbecile buys a franchise because of the bullshit. Real people want to know whether they will make a profit and how much, and how long it will take to reach profitability, and how much it will cost to get there.

Many years ago I published a suggestion in the ABA Franchise Newsletter that, since every franchise agreement empowers the franchisor to receive copies of periodic financial information and tax returns generated by its franchisees, compiling that information ought to be made mandatory, and that information ought to have to be disclosed in a way that displays how the franchisees are really doing.

This would include grouping franchisee performance information by levels of profitability (top third, middle third, bottom third), by region of the country, and by showing seasonality if seasonality is a significant factor. I also suggested that the information could be handled in such a way as to eliminate the impact of different franchisees treating various expenses differently for accounting or tax purposes.

If that were to happen, people might be able to appreciate at a higher level of quality just what the performance expectancies might be.

Franchisors, of course, howled at the thought. Why, if that were done, people might be able to see whether your franchise system was more profitable for its franchisees than someone else's franchise system, and the lower performing franchise systems would have a harder time selling franchises. DUH! That's one of the best reasons for doing it!

Since a potential franchisee will not receive that quality of prospective financial performance information, it remains necessary to have access to a fairly high level of sophistication in dealing with what is provided.

This article is intended to help to deal with the garbage that is thrown at you now.

Reading this article does not make you my client, and there are many other things that must be accounted for than just the questions raised here. But you can take this to your lawyer or accountant/financial planner, and maybe it will help you both better understand what you are being handed.

Are there Franchise Consultants? No.

Let's get started. Start by first asking yourself who it is that you are dealing with -- who is behind the face you are looking at when you are dealing with the person who is providing you with initial information about a franchise opportunity? If that person identifies himself/herself as a 'FRANCHISE CONSULTANT', you know you are dealing with a liar.

There is no such thing as a franchise consultant who sells franchises. While many people do that, they are not consultants in any functional meaning.

The reason for that is that they only get paid for selling franchises -- usually by a commission. That's a salesperson, not a consultant. And even if they were consultants, they aren't working for you to help you.

If you aren't the only one paying them for assistance, they are salespeople. When they tell you that they are there to help you get the right deal for your circumstances, that is total bullshit. They are there to sell you a franchise -- any franchise that will pay them a commission. You have to be extremely cynical about everything you are told.

Doubt everything until it is proven -- and you need to know what proof looks like.

What they call proof usually isn't. In once case in my office, the franchisor sales person claimed to be a vice president when he wasn't even an employee of the company. He was an outside salesman. You have to doubt EVERYTHING.

Item 19 Traps

a) - No Item 19 earnings claim is a Lie

Liar Number One tells you in Item 19 of the UFOC that the company does not give out earnings claims and that no one is authorized to provide earnings information in connection with the sale of its franchises.

This is an obvious lie for several reasons. The first reason is that the only reason to make an investment is to make a profitable return on that investment. If there is no representation of profitability potential/earnings potential, then there cannot be any reason on earth to make an investment in their franchise.

The second reason is that every one of these franchise companies does make earnings claim information to every potential franchise purchaser. The earnings claims information isn't in Item 19 of their UFOC, but it is provided by other means.

Among these other means you will see one or several of the following:

The franchise sales person provides the information either orally, on a blackboard, on a random piece of scrap paper/cocktail napkin/table cloth (and if you hang on to that piece of paper you may have a great exhibit when things later don't go as you thought they should).

b) Franchisee Verifications cannot be relied upon

The franchise sales person invites other franchisees to come appear at a meeting of franchisee prospects to tell of their experience as a franchisee. These folks always tell about their own wonderful financial performance. The presentation is intended to tell you that this is what you can expect if you buy the franchise.

The selected franchisee spokespeople are either all very successful or just shills lying through their teeth. In some instances these shills also receive a 'commission' on every franchise fee taken from each person attending that meeting who buys a franchise.

There are probably some successful franchisees in the system, but the point is that you are being provided with information that the franchisor denies providing to you, and that the information -- since it is denied it was ever given anyway -- is never reliable.

If you do buy the franchise, you will see in the franchise agreement an Acknowledgement clause that says that you agree that you were never given any earnings claims information.

If you sign that agreement knowing that you were in fact given earnings claim information, you may be out of luck even getting it admitted into evidence in court or in arbitration of any fraud claim you may later seek to assert.

Some courts are allowing the Acknowledgement clause to exonerate misrepresentation, making the defrauded franchisee seek reversal of those rulings in courts of appeal. That adds time and expense to obtaining relief.

You are provided, as is required, a list of the names, addresses and telephone numbers of all the franchisees of that franchisor so that you can contact them as part of your investigation/due diligence before you buy the franchise, to see what kind of experience they are having with the franchise.

But the franchise sales person steers you to certain franchisees. These will always say they are making tons of money and are just thrilled with the franchisor who provides great training and support. If you do buy the franchise, the sales person usually gives them a percentage of the sales commission, or they receive some other form of consideration for their assistance.

The franchisor's position is that, notwithstanding the steering, they have no part in providing you with earnings claims information. If you buy that you are too stupid for words. While it may in some strict sense be true that someone else, not the franchisor, provided you with the information, the fact is that the information was provided to you through the efforts of someone affiliated with the franchisor.

c) Financial Assistance for SBA Loans, but no Item 19

The franchisor who claims not to provide earnings claims information to persuade you to buy the franchise, does offer to assist you in seeking an SBA loan. The loan requires that you prepare a 'business plan' (another work of sheer fiction). The business plan requires a pro forma operating statement and balance sheet statement to show the lender what you expect by way of financial performance of the business for which you are borrowing the money.

The franchisor either provides you with information to use in preparing the business plan, including the financial pro forma, or steers you to a 'consultant' to assist you and the consultant provides financial pro forma information that the consultant obtained from the franchisor.

Then of course, you take your business plan to the franchisor for review, before submitting it to the SBA lender, and the franchisor tells you that you 'did a good job' or that 'your numbers are reasonable', vouching for the numbers/earnings claims information.

The lying franchisor's position is that they provided nothing and that you got that only from some third party, not from the franchisor. The franchisor's back up position is that they didn't provide you with the information in order to get you to buy the franchise. They just provided information to help you get a loan.

DUH! And -- I actually heard a franchisor person testify to this once -- the ultimate fall back position if the information is false is that the false information wasn't provided to you, but was provided to the lender.

There are other ploys by which franchisors who state in Item 19 of their UFOC that they don't give out earnings claims financial information actually do in some fashion provide it.

The fact is that it is almost never true that they don't provide earnings claim information, and if they provide it while insisting that they are not providing it, they are lying to you and you need to run like hell, not buy the franchise.

As always, you can call me, RIchard Solomon, at 281-584-0519.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Vicarious Liability in General

Nearly every franchisor has suffered threats of litigation based upon the actions of its franchisees. These threats are not necessarily limited to claims stemming from the franchisees' delivery of services (from mold remediation to serving tasty food which does not result in gastro-intestinal distress), but may extend to those arising from the franchisees' employment decisions.

Generally, the franchisor defends on the basis that it does not direct the day-to-day actions of its franchisees, and the franchise relationship by definition is an independent contractor relationship, rather than an agent-servant relationship.

A recent case out of Washington recognizes this principle, but with a current technological and statutory gloss.

Robo Calling by Franchisee using Franchisor Mandated POS

In this case, a sizable Domino's Pizza franchisee (Four Our Families, Inc.) hired a telemarketing firm (Call-Em-All LLC) to help increase sales, and that firm engaged in "robo-calling" to offer pizza delivery specials.

A class action lawsuit was filed claiming violations of the federal Telephone Consumer Protection Act (47 U.S.C. Section 227 et seq.) and a Washington statute (Revised Code of Washington Section 80.36.400, "WADAD," governing "automatic dialing and announcing devices"). The putative class action plaintiffs claimed that they had received unsolicited auto-calls offering pizza deals from Domino's, and those calls were made without their prior consent.

The plaintiffs claimed that the franchisor was liable for the franchisee's actions under the general contract provision granting the franchisor the right to control advertising and marketing decisions. The franchisor denied that it was involved in the robo-call efforts.

In support of their claim against the franchisor, the plaintiffs pointed out that the telemarketing firm had advertised its services at a Domino's national convention, and also had used the PULSE telephone system (which Domino's Pizza requires the franchisees to use, and which is capable of producing lists for "ADAD" calling).

Ruling By Court - No Franchisor Liability for Mandating POS

The federal district court granted the franchisor's summary judgment motion and denied class certification. The court recognized that the franchisor did not conduct a robo-calling campaign itself, participate in the franchisee's campaign, or direct that franchisees conduct such a campaign.

The court stated that the "mere fact that Domino's requires franchisees to participate in marketing campaigns does not somehow mean that any franchisee's illegal use of an [automatic dialing and announcing device] is imputed to the franchisor."

This is just one more example of an effort by the plaintiffs' bar to hold franchisors accountable for the actions of franchisees.

Franchisors should take heed, and zealously defend the independent contractor relationship and the realities of the relationship.

In addition, franchisors would be well advised to inquire into the availability of insurance for these and similar claims.

The court's order may be reviewed by clicking here.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

The franchise industry is on the verge of losing a battle regarding employer liability, as old arguments fail to address new opponents.

Whatever your position on the Obama view of franchising, the reality is that Executive Branch officers are powerful and have wide discretion. As such, franchisors ignore their views at great peril.

A recent article by attorney Harold Kestenbaum made the case that state legislators are able to determine how "employer" is defined under federal law. Presumably Mr. Kestenbaum was being facetious in demonstrating the failure of the International Franchise Association and others to address the concerns of the NLRB and US Dept of Labor, but the large number of industry players who took the article as a serious comment are indicative of just how clueless the franchise industry remains today.

David Kaufmann may lack Mr. Kestenbaum's sense of satire, but Kaufmann's article in the Spring 2015 Franchise Law Journal is a serious attempt to lay out the basis for the threat and a socio-legal defense of the existing jurisprudence. The article is worthy of more serious consideration than can be dealt with in a brief BMM post, and is the starting point not only for an attack on the Obama administration viewpoint but also for a frank discussion of why David Weil is having success.

Kaufmann is blunt in identifying the root cause of the problem, and it is to this point that my comment is addressed.

American political discourse has gone thru many cycles in our history, and we are now in an environment similar to the great Progressive Era of a century ago. As Kaufmann realizes, the impetus is also similar to the last cycle: just as the Gilded Age led to a reaction against inequality of wealth and political influence, the wake of the 2007 financial collapse has led to a reevaluation of economic changes in recent decades.

Most relevant to our concerns, the gap in wages for those at the bottom of the ladder stands out in sharp contrast to the wealth of those at the top. A century ago, this led to some action at the federal level (such as the Sherman Act), but most of the activity was at the state level, and union organizing was in its infancy.

Much as the encyclical Rerum Novarum (1891) led to calls for a "living wage" in the 1920s, religious leaders today are calling attention to the moral aspects of how QSR workers are being treated in 2015.

Politicians are by nature attuned to popular sentiment, whatever the century. Theodore Roosevelt sought to follow Herbert Croly's prescription to achieve "Jeffersonian ends through Hamiltonian means." There are significant differences between Croly and Weil, and Obama is no TR. Yet even starting from a conservative viewpoint (as did Croly and TR), the remedy of David Weil is not without foundation in American politics or jurisprudence.

While the Great Depression marks a break from the Progressive Era, the legislation which resulted (including the creation of the NLRB) was very much informed by the progressive values of the first three decades of the century.

New Deal legislation coupled with the effects of World War II led to the locus of power shifting to Washington and in the wake of Chevron and the practical realities of statutory implementation, our time is one in which the state governments are bit players (with some exceptions such as Eric Schneiderman).

Kaufmann says that if the Obama viewpoint takes hold, then franchisors would be on the hook for increased costs due to the need to comply with Wage & Hour mandates. Costs would increase and franchising could not survive, says Kaufmann.

No doubt Weil would agree and explain that is precisely the point. Costs would increase as employees would have to be paid in accord with statute, and the ability to go after a "deep pocket" would mean that businesses would have to either comply with the law or be sued.

In fact, this is precisely the logic behind NY Attorney General Schneiderman's pursuit of pizza franchisors Domino's and Papa John's.

Kaufman realizes the problem, but he does not propose a solution and spends most of the article formulating a legal argument regarding why "joint employer" theory should not apply to the franchise industry.

Kaufmann makes a respectable case on this latter point, but that is not going to solve the underlying problem, since this is an issue which is every bit as much a public policy issue as a legal one-- and I would argue, more so.

Kaufmann is well aware of the underlying problem and his failure to address it is nothing to hold against him. But as he suggests in the beginning of his article, there is a populist and even a moral aspect to the Weil thesis which needs to be addressed.

We can debate whether the minimum wage was originally intended to be sufficient to live on (it was not), and whether the minimum wage was intended to be the support of full-time workers who are the head of household (again, it was not). We can also debate whether the top of the food chain is getting more than a fair share.

But at the end of the day, the franchise industry is left with a simple reality: the electorate perceives a gross inequality which needs to be rectified. And with every franchise owner who fails to abide by Wage & Hour statutes, and with every franchisor who turns a blind eye to wage theft and taxpayer subsidy of wages, the position of David Weil and the NLRB is going to get a more sympathetic ear.

It is time for the franchise industry to clean up its act, or at least to get through the next Presidential election cycle without suffering a disaster.

Morality aside, there are sound reasons why franchisors should take David Weil and the NLRB seriously-- answering not simply their legal arguments, but their economic arguments and the moral basis thereof.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

There are two issues regarding Franchisor control that have bubbled under the surface for a number of years and are now beginning to become significant to Franchisees and Independent Franchisee Associations alike.

Since a Federal judge ruled that Coverall North America must pay triple damages to hundreds of workers misclassified as franchisees instead of employees, everyone in franchising is now aware of the dangers of a franchisor who has too much contractual control.

The control issues are:

1. Operational Control

2. Supplier Control

Not coincidentally, these issues have become more prevalent and evident with the advent of strong Independent Franchisee Associations.

As the Franchisors continue the erosion of certain aspects of a Franchisees Business as well as the ability of an Association to exist, they may experience some dire consequences if not careful.

Note the simple graphic below:

<----------------------------------{ **** }------------------------------------------------------------------------------------------------------------------------------------->

^ ^ ^

Independent Operator Independent Contractor Employee

The scale above represents at the furthest left hand point, the ability of the Franchisee to do what ever he/she wants with very little direction from the franchisor. At the furthest point on the right hand of the scale represents the Franchisee as strictly employee and no other distinction.

The 'window' (represented by the brackets on the line) shows where the Franchisor has been on the scale.

Operational Control

The Franchisor has the exclusive rights and fiduciary duty to protect its Trademark and Brand. This certainly includes standards of operations, protecting trademarked signage, logos and products.

Franchisees sign an agreement with the Franchisor with the expectation that the Franchisor is an 'expert' ith the chosen field. "The Franchisor's Plan" will change according to the market place.

Franchisees should also enter their agreements knowing that reinvesting in the business reasonably will be a part of keeping up with the competition.

The graphic above is now showing a much different picture. The "window" is gradually and some cases dramaticlly toward the right side of the bar and is being driven by actions on the part of the Franchisor. In the case of some franchised systems, becoming a franchisee is no more that purchasing a job.

As these sifts to the right of the 'line' continue to occur, it is incumbant upon Franchisees and their Associations to become extremely aware of the State and Federal guidelines that determine whether the Franchisee is truly an Independent Operator, and Independent Contractor or an Employee.

It is very tempting in the current employment environment which features legislation such as the Fair Pay Act, Insurance Reform, Employee Free Choice Act (not yet passed and somewhat on the back burner) and others for not only Franchisors, but Small Business in general to attempt to avoid compliance by classifying their workers as Independents.

They are not only relieved of the legal issues, but don't pay FICA, Workers Comp, Unemployment Insurance and the like. There is only on small problem; It's Illegal!

These issues that have been brought to the forfront regarding the Coverall case as well as the Federal Express Drivers complaint.

Supplier Control

The issue of supplier control rests squarely on one question; "Does excercising strict controls over certain products and services protect the Brand and the Brand Image?"

The Franchisor's supply chain management in most systems have standards, supplier facility inspections, quality control metrics (checked frequently from the manufacturer) and the ability to protect itself from fragmentation, inconsistency and dereliction due to inferior or harmful products.

The Franchisor's supply chain management team must be allowed to exercise control over products which would destroy a brand if due diligence were not done.

It is in the best interest of all Franchisees to forbid the use of products that would harm customers or in some cases cause death.

However, what seems to be occurring is a not so subtle choice on the part of Franchisors to 'grab' control of products and services that have nothing whatever to do with Brand protection and the avoidance of harming the consumer.

Newsletter, work shoes, floor mats, individual websites, certain forms of business insurance and other have all been grabbed by the franchisor.

For individual Franchisees and particularly for the Independent Associations, the willingness of the Franchisor to take control of these items has encroached on the remaining ability of the operator to influence their own unit economics and have taken away from the Associations a very important source for funding.

You will see more information in the very near future as well as collaborative solutiuons in the future.

More and more issues surrounding Franchisor control will continue to be brought to light and we intend to keep you informed and even look at actions that can be taken in the future.

(This is a reprint and update of an article the late Steve Ellerhorst wrote 3 years ago, and it still rings true today.)

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

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.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

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.

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.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

As Chief Development Officer for a capital intensive franchise, I knew that we had an advantage in the marketplace - we could tell franchise candidates how much money they could make - because of our Item 19, or what is now called a "Financial Performance Represenation".

But we had a problem. While our ads in the Wall Street Journal could explain our business model and make representations consistent with our FPR, we had to be compliant with the FTC Rules on Misleading Advertising. We had a great average unit volume story, AUV, and we just had to tell it in the right way.

I knew all of this, wrote the ad & added the FTC required disclaimer -sent the ad to our legal counsel. We were "experts" on compliant franchise sales.

It was great! We had a terrific response, and we were in compliance with the law.

My joy was short lived -replaced with nerve racking fear. Our great advertising success was about to become a liability that would kill the franchisor!

A competitor of ours phoned me up. Here is their story. "Joe, saw the ad you were running. Just a word to the wise. We ran the exact same type of ad, pulled information from our FPR, and inserted the standard FTC disclaimer language. The next thing we heard was not from a happy or excited franchise candidate, but from the dour FTC. We had forgotten something. And it was going to kill us.

We didn't put on the ads the number of units and percentage that they represented which reached or exceeded the AUV. And the FTC wanted $11,000 for each ad we ran because of that one infraction. Just a word to the wise."

Now, we never got that call from the FTC. Thank heavens. But, I sure moved quickly to change the ad so that we told franchise candidates not only the AUV, how much they could make, but how many units were hitting that mark, and what percentage of the system they represented.

The joy returned. Our aggressive ads were working.

I still see franchisors advertising and selecting figures from their FPR, but either leaving out the disclaimer language or forgetting to put in the number of units and percentage they represent. I guess that they can afford the FTC fine - but I know we couldn't.

I was thankful that a competitor who was marketing with their Financial Performance Representation - FPR in their advertising as we were, was thoughtful enough to let us know. This way we could avoid the pain of having to pay the FTC fines of well over $100,000, at $11,000 per infraction, and have our reputation needlessly damaged.

So if you see a franchisor marketing with non-compliant sales claims in their advertisements do them a favor and give them a heads up so they can make a quick and easy fix. Feel free to send them this article.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

The top stories in the franchise world continue to be about efforts by the cities of Seattle, Chicago, and others in raising the minimum wage with laws that discriminate against small business owners who own franchises. For the full story, see some of my previous blog posts on the issue. These laws are a serious concern for franchisees and franchisors alike.

In brief, these laws (which are written substantially the same way in the different cities that have adopted them) require small businesses to raise the minimum wage of their workers from the current level to $15 an hour. Under these new ordinances, businesses with more than 500 employees have 3 to 4 years to increase the minimum wage to the new $15/hour level, while "small businesses," defined as businesses with fewer than 500 employees, have up to 7 years to reach the new level.

The problem? For the purpose of calculating the "500 employees" number, all franchises in the same system are counted together. The net result of this is that these locally-owned small businesses with a few employees, which also happen to be franchises, are being discriminated against as compared to their non-franchised counterparts.

After reading some of my blog posts on the subject, another franchise attorney (one who exclusively represents franchisees) commented to me that these laws, which treat franchises differently than similarly situated non-franchise small businesses, could arguably be viewed as "industry specific" laws for the purposes of Item 1 of a franchisor's Franchise Disclosure Document (FDD). I can see the argument on both sides of that point.

The Federal Trade Commission's (FTC) Franchise Rule requires a franchisor to state in Item 1 of its FDD "any laws or regulations specific to the industry in which the franchise business operates." The FTC has elaborated on this requirement by saying that laws applying to all businesses generally do not need to be disclosed; instead, "only laws that pertain solely and directly to the industry in which the franchised business is a part must be disclosed in Item 1."

The minimum wage laws adopted by some cities like Seattle target franchises by treating them differently from other similarly-situated small businesses; laws that are specific to a certain "industry" are the types of laws that need to be disclosed in Item 1.

So, the question then becomes: is franchising as a whole an "industry?" Are these the types of laws the FTC was contemplating when creating the Item 1 disclosure requirement? Should Item 1 of a franchisor's FDD should disclose these laws?

I can see the arguments on both sides. On the one hand, franchising itself isn't really an "industry." Merriam-Webster defines "industry" as "a department or branch of a craft, art, business, or manufacture; especially: one that employs a large personnel and capital especially in manufacturing." In that sense, franchise systems are not part of the same "industry" because they are diverse, representing businesses in a multitude of different streams of commerce (like retail, food service, personal services, and business services just to name a few).

However, Merriam-Webster does recognize an alternative definition. "Industry" can also be defined as "a distinct group of productive or profit-making enterprises <ex: the banking industry>." In that sense, franchising could be considered an industry because franchise companies are in a distinct group that has its own set of goals, concerns, and issues. It is in this sense that the International Franchise Association and business periodicals regularly refer to franchising as an "industry."

In its guidance, the FTC hasn't specified which of these definitions it meant when it created the Item 1 disclosure requirement. The better argument, in my view, is that the FTC didn't intend to single out franchising as a whole as its own "industry" when it created the Item 1 disclosure requirement. That is because the FTC itself, in its rulemaking process, used the word "industry" a number of times, but used it in different contexts. Specifically, the FTC repeatedly referred to franchising itself as an "industry," and then in other contexts that are clearly different, it talked about the franchisor's duty to disclose certain information unique to "industry" in which the franchisee's business will operate. It is clear from the context of the FTC's guidance that the two uses of the word are different from one another.

Based on the contextual distinction between the two uses and definitions of the word "industry" by the FTC in its rulemaking, I think the more convincing legal argument is that a franchisor does not have to disclose minimum wage laws that discriminate against the franchise "industry" as a whole.

But, from a practical and informational perspective (and considering the purpose of the Franchise Rule), I think a good argument can be made that these laws should be disclosed anyway (even if disclosure is not legally required). That a franchisee may be required to pay its employees a higher minimum wage than his or her similarly situated non-franchise competitors is something that she or he would certainly want to know.

As a result, I am recommending to my franchisor clients that, when they update their FDDs for 2015, they include a disclosure in Item 1 that says:

Some jurisdictions have passed laws that require businesses to pay their employees a higher minimum wage than what is required under federal law, which laws may disproportionately affect franchised businesses.

It's a simple enough disclosure to include. Moreover, it would certainly help a franchisor in later defending against a legal claim by a franchisee that the franchisor knew about, but didn't disclose, the existence of these laws prior to the franchisee committing to buy the business.

What do you think? Do you think these discriminatory minimum wage laws must be, or should be, disclosed in Item 1?

For the 5 Most Fascinating Stories, a weekly report, click here & sign up.

The Vanishing Competent Franchisor

Franchise investors find, often too late, that the unique systems and concepts in which they have invested are neither unique nor have even competent execution by the franchisor.

The reasons for this are several. Some of them are the natural vicissitudes of living in any competitive marketplace over time, but others are fault ridden. Which is which? What are the identifiers? How early can they be spotted and what can be done to avoid or thwart them?

So far the courts have not seemed hospitable to the notion of going beyond the explicit wording of carefully drafted agreements entered into by seemingly sentient adults. From a macroeconomic perspective this is exactly what courts should be doing, as enforceable agreements are indispensable capital that underlie the value of enterprises.

But are the franchisees caught in an ever tightening noose of business contraction so constrained by contract language that the only diagnosis is: suffer a financially excruciating death? Should bankruptcy be the only resort/cure to being in contract with people who rely on legal enforceability?

How far can franchisees go without violating fundamental contract rights and thereby effectively changing franchisor inability into franchisee liability? Where is the line between act or die on the one hand and legal suicide on the other?

The Legal Framework

In today's franchise agreement one finds that the mission statement is not a term of the agreement. None of the hortatory rhetoric of the sales pitch/marketing materials is ever to be found anywhere in the actual contract language.

There is a bright line between all the positive reasons for investment and the machinery by which the investment, once made, is to be managed, performed and observed.

Investors seem not to notice that what convinced them to invest in the first place is nowhere to be found in the agreement itself. Franchise investors are in the main due diligence illiterate.

The agreement always provides that the goodwill of the business and the brands are all the sole and exclusive property of the franchisor and that the franchisor may change its configuration at any time, for any reason and without having to field test and performance prove any change before compliance with it is demanded of the franchisees.

The franchisees covenant to execute the business model as directed by the franchisor in the manual and otherwise, including participation in all programs mandated by the franchisor on the terms stated, all as may vary from time to time, and to guaranty the payment of royalties out to the end of the contract term regardless of termination or other reason for failure.

All fault for nonperformance is placed upon the franchisees while all decision making prerogatives belong exclusively to the franchisor.

Many attempts to modify the absolutist right versus wrong, franchisee versus franchisor abrasive interface have been tried and they have all come to naught.

Most of them have been in the guise of an imaginary unwritten covenant of good faith and fair dealing and more recently in the form of a so called franchisee bill of rights that exists neither in statute, ordinance or other document having any legal force whatsoever.

Finding Operational Salvation

Where does that leave the franchisees who see themselves caught in abandonment of the brand by the franchisor and in the inability of the franchisor to respond effectively to changes in market conditions?

Litigation/confrontation seems not to provide a remedy. Self help so often leads to litigation/confrontation.

And yet no one can live at sword points.

The only present tense answer to this problem lies in effective but insistent relationship management that is initiated by the franchisees acting mostly in concert with organization and a high level of competence that seems at such moments to be available only from the franchisees themselves.

How does that work?

Up to now it doesn't work at all/yet. Commitment at any effective level seems not to be an ability of groups of franchisees. As their collective minds now work, they feel entitled to competence/protection as a matter of "right" (whatever that is) and because of that they are simply waiting for someone to provide it.

Since no "right" on earth is self executing, no matter what they taught you in political science class, attitudes of entitlement produce nothing useful. Why can't franchisees seem to recognize that obvious fact?

They didn't get what they bargained for - in their minds - and want "justice". Inasmuch as what they signed on to did not provide for what they thought they were getting, they, as adults, in law are getting what they bargained for. The correct analysis is that they failed to recognize that the agreements they signed never said that they get what the sales pitch/marketing materials said they were getting.

They are not a "family".

They are in business by themselves.

They are not their own boss.

Nor, have they invested in any commercial vehicle that has prospects for a successful future -without a lot of work being done.

The courts enforce what they signed, not what they later wish they had signed.

Where does that leave them? It leaves them with only self help and self help is fraught with liability risk. The choice in a franchise system that is draining away their resources is between slow financial death and taking the risk associated with a turnaround through self help. How in hell does one accomplish that?

The Road To Glory

The road to glory is paved with personalities. There are definable personalities who are running your franchisor company. Their characteristics are known, unfortunately not any more deeply that epithetically. The things that need to be fixed spring from what is happening in the market place and the fact that their abilities to guide the company through the happenings without hurting franchisee financial performance are inadequate.

A method of approach has to be configured. It is not realistic to expect collaboration from people if your opening gambit is to itemize in loudly proclaimed expressions all their perceived shortcomings.

There is, after all, a bit of sonofabitch in each of us. We aren't perfect either. At least tacit recognition needs to be given to the fact that a close evaluation of our own constituency would uncover some warts too.

I am good and you are awful will not yield a desired response or open that door through which you must walk. This is reality.

I have sat in too many franchisee association meetings listening to epithets hurled at franchisor managers by people who were chronically late with many obligations, to put it mildly - and the principal reason for not doing what was agreed to was always self serving opportunism.

In some instances the franchisor was aware of the defaults but tolerating them for later use as bargaining chips - something that every franchise agreement specifically allows the franchisor to do but not the franchisee.

When the pain in the ass franchisee wants consent to open additional stores there will always be this stuff in his file to justify a refusal of consent. The same goes for anything else a franchisee might want to do that requires franchisor consent. The uses of those seemingly small peccadillos are many and delicious, which I have elaborated elsewhere.

While the personality profile of the people we must deal with is configured, and we have devised a few plans for how best to make the approaches we want to make, a goals agenda should be made and ranked in order of priorities. There are several, time being one and cost efficient feasibility being another. Rank the goals. Some goals will be interrelated so that they may be presented and achieved as a package, while others may need spacing.

Goals and projects need responsible people to take charge of their execution. Within your group there will probably be more than one person with a special interest in particular goals as well as the skill sets necessary to accomplish them. Identify them and privately vet their suitability and willingness to put forth the effort in a timely manner.

Each goal must have its own business plan. The plan must be cross examined viciously before it is presented, because that is exactly what management is going to do. If you cannot defend your thesis you have just wasted a lot of time and your credibility. Debug the plan to the greatest extent possible. There is an inside track for the plan. Find the management person who controls the track and win his/her support.

Until you have actually proved your ability to create and execute brand enhancing new concepts it is a hard sell. Once you have made your bones life will become easier unless you get cocky or careless.

You save up reputational wampum just like you save money. Don't spend your credibility before you make your bones on the next projects. Winners know how to share credit and shut the hell up about how great they think they are.

The road to franchisee primary participation in brand enhancement is not easy at first.

There will always be detours. It has to be managed and counseled by people who understand the process. Find such people and bring them on board to help guide you.

Theirs will be the job to ask the tough questions that members of your group will not want to ask for reasons of political correctness.

They pull their weight.

For the 5 Most Fascinating Stories, a weekly report, click here & sign up.

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.

As an attorney who represents franchisors, a significant part of my practice is drafting franchise agreements and franchise disclosure documents.

Once these documents are completed, I also help franchisors comply with state laws by filing and maintaining their registrations in the various states that have franchise registration laws. As a result, much of my time (particularly during the first half of the year) is spent dealing with franchise regulators in various states.

During my years of practice, I have seen a number of common mistakes made by both start-up and established franchisors in their Franchise Disclosure Documents ("FDDs").

Many of these mistakes, which can cause delays in a franchisor's ability to obtain registration, are easily avoided. Make them, and state regulators will refuse to register your franchise offering - sending you a comment letter requiring you to correct your errors before issuing a registration permit. Avoid them, and your time to obtaining registration may be cut down by weeks, or even months.

To read my other "common mistakes in the FDD" blog posts, click here.

The Disclosure Requirement

A common FDD mistake is failure to list all "Initial Fees" in Item 5.

Item 5, entitled "Initial Fees," is where a franchisor must disclose all initial fees paid by the franchisee, and the conditions under which the fees are refundable.

Initial Fees" are defined as "all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee's business opens, whether payable in lump sum or installments." A franchisor must also disclose whether the initial fees can be paid in installments, and what those payment terms are.

Many franchisors do not follow instructions and fail to list all initial fees in Item 5. There are two types of common mistakes.

1. Common Mistake #1: Failure to List All Initial Fees Paid to the Franchisor

The first type of mistake is that the franchisor or its counsel assumes that "Initial Fees" means only the initial franchise fee paid by the franchisee (the fee franchisors charge franchisees for the right to enter into a franchise agreement). This is wrong because it ignores the other types of fees that are paid (or that the franchisee is committed to pay) to the franchisor prior to the franchisee's business opening.

In some franchise systems, there can be a multitude of initial fees charged that need to be disclosed in Item 5. Some examples:

• In connection with processing the franchisee's application (running credit, doing a background check, etc.), the franchisor requires a deposit or "application fee."

• The franchisor charges a fee for the franchisee to attend initial training.

• The franchisor requires (or has the right to require) the franchisee to pay a fixed amount directly to the franchisor so that the franchisor can conduct grand opening advertising for the franchisee.

• The franchisor charges a technology start-up or other type of fee relating to the franchisee's use of the franchisor's point of sale or other software system.

This is only a partial list of the types of fees that can fall under the category of "initial fees." I have seen many FDDs where franchisors will clearly charge these fees, but fail to list or disclose them in Item 5.

2. Common Mistake #2: Failure to List All Initial Fees Paid to the Franchisor's Affiliates

The second type of common mistake is the franchisor lists only initial fees paid by the franchisee directly to the franchisor, but ignores the fees paid to the franchisor's affiliates. The instructions for Item 5 clearly call for these fees to be disclosed, too. Remember, an "affiliate" is defined as "an entity controlled by, controlling, or under common control with, another entity."

Some examples of fees paid to a franchisor's affiliates:

• The franchisee must purchase an initial stock of inventory from the franchisor's affiliate.

• The franchisor's affiliate builds out the store for the franchisee (often referred to as a "turn key" franchise), and the franchisee pays the affiliate for the build-out.

• The franchisee is required to pay the franchisor's affiliate to buy or obtain the right to use the franchisor's proprietary software system.

• The franchisee buys an initial supply of marketing materials from the franchisor's affiliate.

Again, these are just some examples of the types of fees that are paid to affiliates. If these fees are paid before the franchisee opens for business, they are "initial fees" and must be disclosed in Item 5.

Conclusion

Avoid making these common mistakes in Item 5 of your own FDD, and you will have an easier time of getting registered in the registration states.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

My previous post described common disclosure errors that might be used to exit a franchise system. This article describes the process by which disclosure errors can produce this result. The process is by no means automatic, and it requires the involvement of an experienced franchise attorney. In some cases, even obvious and serious disclosure violations do not translate into a pass to leave a franchise system.

But where (a) significant disclosure law violations exist, and (b) applicable state law cooperates, disclosure law violations can be used to exit a system without any continuing obligation not to compete, and sometimes franchisors can also be made to refund fees or reimburse business losses.

There is no private right of action for violation of the FTC Rule under federal law, so the consequences of violation generally depend on applicable state law. If the franchisor and franchisee are located in different states, consequences of disclosure violations can be very different under the laws of their respective states.

The Franchise Agreement almost always specifies that the law of the franchisor's state applies. Frequently that controls which state's law applies.

But sometimes the franchisor is located in a state with a law that permits private actions for disclosure violations, so that the choice of law provision actually gives the franchisee rights it would not have had otherwise. In other cases the franchisee may be located in a state where either (a) state law requires a franchisor to provide a contract amendment invalidating such provisions, or (b) state law provides that contract terms applying a different state's law are not enforceable.

In some cases, the specified state may not have any law addressing FDD disclosure violations, and no lawsuit could therefore be brought for such violations, apart from the possibility of a lawsuit alleging fraud (for example, for issuing misleading financial performance representations).

In other cases, the state may have a law directed at disclosure violations, but the law may include an exemption for certain kinds of franchise sales, for example, where the franchisor is very large (think McDonalds), or the sale of the business involves a very large investment (such as a large hotel investment).

Ohio has a Business Opportunity Law which one commentator has referred to as "the Hidden Franchise Law". The law is complex, and generalizations are hazardous.

But in substance, the law requires a franchise seller to provide the purchaser with an FDD, and gives the purchaser a right to file suit if the FDD or disclosure process violate FTC regulations in significant respects. In such cases, the purchaser can bring a lawsuit and ask the court to "rescind" (or undo) the transaction, and also to award treble damages and attorney fees. In practice, many franchisors quickly offer to settle such claims once they are shown how the FTC regulations were violated.

Attorney Stanley Dub has handled many such cases, and would be pleased to discuss your situation without obligation.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

In order to offer or sell franchises in certain states with franchise disclosure laws, the franchisor must have effective registrations or notices in those states.

A state law may cover the offer or sale of a franchise if the prospect resides in the state, if the franchised business will be fully or partially operated in the state, or if any communications about the franchise offer or sale are made in, into or from the state.

State laws vary in terms of when they apply, so if any state with franchise disclosure laws is involved in any manner, you should check with the franchisor's lawyer or compliance manager about whether that state's law applies.

If the law applies and the franchisor does not have an effective registration or notice, you may be prohibited from offering or selling the franchise until after the franchisor obtains a registration or files a notice.

If the franchisor is registered with a state, the state and the effective date of the registration should be noted at the bottom of, or immediately after, the state cover page in the FDD. No effective date for a state with a state law likely means that the franchisor will need to obtain a registration from that state before you make an offer or sale covered by the law.

An old effective date likely means that the franchisor's FDD or registration will need to be updated before you make an offer or sale covered by the law.

If you have any question about a state, check with the franchisor's lawyer or compliance manager.

No effective date, or an effective date that is not within the previous 12-month period, for a notice state such as Florida, Indiana, Kentucky, Michigan, Nebraska, Texas or Utah, may not be a problem, since effective dates for those states are not required to be in the FDD, and since some of those states permit notices to remain effective indefinitely unless specific changes occur, such as address changes.

(This was the second post in a series of 11 posts on making compliant franchise sales. If you need to know more about these exact provisions, please ask for a copy of the Franchise Seller's Handbook. We will get one right out to you.)

If you want to make a legal franchise sale, you must follow certain basic franchise sales steps.

Those steps are shown in the picture below.

We will move through each step, noting the potential compliance pitfall.

1. You must have a current Franchise Disclosure Document (FDD). It must be in the format specified under the FTC franchise rule and state laws.

a. The FDD may be paper or electronic.

In either case, it must be a "single document." In other words, for example, the franchise agreement and the franchisor's financials must be integrated into the FDD, and may not be free-standing.

If the FDD is electronic, it may contain scroll bars, search features, internal links and limited external links, but it must not contain multi-media features such as audio, video, animation, pop-up screens or other external links.

b. The FDD must be current.

This generally means that it must have been updated within 120 days after the franchisor's most recent fiscal year end, and, in addition, must have been updated promptly after the occurrence of any "material change" (anything such as a lawsuit, bankruptcy, fee increase, cost increase, financial reversal, or other change that might be significant to a prospect).

For example, if the franchisor has a fiscal year ending December 31, the FDD must be updated no later than April 30 (120 days after December 31). If it is not, you must not offer or sell the franchise.

You should check with the franchisor's lawyer or compliance manager before using any FDD that might be outdated because there are exceptions that may apply. For example, you can use an FDD that has not been updated after a "material change" has occurred when only the more lenient updating requirements in the FTC franchise rule apply.

Even if you are permitted to use the previous FDD, you may be required to re-disclose the prospect with the updated FDD before you sell a franchise.

Always check with the franchisor's lawyer or compliance manager before proceeding in this type of situation, giving an outdated FDD and then re-disclosing with the correctly updated FDD.

(This was the first post in a series of 11 posts on making compliant franchise sales.)

If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

If you would like all these tips in a bound book, for a handy desk reference, sign up for the Franchise Seller's Handbook.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

1. Who is a Franchise Seller?

If you are an officer, employee, representative or broker involved in the offer or sale of franchises, you are a "franchise seller."

Your involvement in the offer or sale of franchises may be obvious, such as if you are a salesperson actively pursuing franchisee prospects for a franchisor, are signing agreements with new franchisees, or are accepting payments from new franchisees.

Or, your involvement may be less obvious, such as if you are participating as a finder or consultant in discussions with prospects about their business interests, pre-screening prospects through questionnaires, recommending franchise options, or assisting prospects in completing franchise application forms.

In either case, you are involved in the offer and sale of franchises, making you a franchise seller - who has to comply with a number of regulations.

2. What are Your Obligations as a Franchise Seller?

As a franchise seller, you must comply with the FTC franchise rule and numerous state laws that regulate the offer and sale of franchises.

The FTC franchise rule requires a franchisor to prepare a Franchise Disclosure Document, known as an FDD; to keep the FDD updated as "material changes" occur, new audited financials are issued and new fiscal years phase in; to follow and have its franchise sellers follow basic franchise sales steps in dealings with prospects; and to modify the basic franchise sales steps in certain special situations.

In addition, the FTC franchise rule permits and prohibits specific activities during the franchise sales process. The FTC franchise rule does not require a franchisor's FDD to be filed with the FTC, but it does permit the FTC to investigate and punish franchisors and franchise sellers believed to have violated the rule.

3. What are the Penalties for Non Compliance?

If you do not meet your obligations under the FTC franchise rule and state franchise disclosure laws ("state laws"), you and the franchisor you represent could suffer significant penalties.

The most frequent penalty is a claim or lawsuit by a franchisee which is costly to defend, and which results in a settlement or judgment requiring the franchisor to rescind or void the franchise agreement, refund the franchisee's payments, or reimburse the franchisee's damages, attorney's fees and costs.

This penalty can be financially debilitating or devastating.

Another common penalty is the loss of your job or relationship with a franchisor.

The states often seek penalties, including orders which must be disclosed to prospects for 10 years or longer, monetary payments to franchisees or the states, or restrictions on your future business activities.

In some instances, a penalty may be an FTC investigation that results in an order which you must disclose to future prospects, a freeze of your assets, civil penalties of up to $10,000 per violation, payments to franchisees, or an injunction.

In rare instances, a penalty may be a state criminal prosecution against you.

Hopefully, your desire to make legal franchise sales and this array of possible penalties will motivate you to make a serious effort to meet your legal obligations during the franchise sales process.

4. How to Effectively Comply.

Education which leads to permanent changes in business methods is the best way to effectively comply with the franchise sales laws.

To facilitate this process, we, at Akerman, have identified 11 distinct steps of franchise sales compliance which need to be understood.

Here are the 11 steps.

Step 1: Have a Current FDD

Step 2: State Registration or Notice

Step 3: Notice of FDD Formats Available

Step 4: Notice of "Franchise Sellers" Involved

Step 5: Disclosure Whenever Requested By Prospect

Step 6: Minimum Disclosure Timing

Step 7: Receipts

Step 8: Providing Final Agreements to Prospect

Step 9: Re-Disclosure If "Material Change" Occurs

Step 10: Execution of Agreements

Step 11: Post-Sale Obligations

If you would like all these tips in a bound book, for a handy desk reference, click here for the Franchise Seller's Handbook.

Many years ago I was pulled away from my usual assignments to do a major product production tolling agreement between two of America's larger food companies.

It was a stroke of luck for me because it provided something new for my interest in multivariate risks management. Since then I have prepared many multivariate high risk agreements, and it is always an enjoyable as well as remunerative adventure.

When you think of every brand as a franchise in itself, it fits perfectly into my customary practice of managing franchise relationship disconnect issues.

Recently, I have been able to mix some of my more basic interests, consuming olive oil, with my interest in being able to negotiate and prepare the enabling agreements that bring together great marketing companies in America. More specifically, working with the best producers of great Extra Virgin Olive Oil and managing risks inherent in horticulture to delivery.

This is a wonderful exercise in multivariate risk management.

Olive Oil - Fraud and Standards

The notoriety of product purity fraud in the extra virgin olive oil business has stimulated my interest intensely. I love good olive oil to a degree that borders upon religion, I think that I probably consume good olive oil at the level of a Greek.

I am now eating the world's most incredible and unquestionably pure olive oil, and every meal is almost a religious ritual.

Olive oil is something with soul. You consume it with such incredible gratitude. I long ago gave up on European wines, with occasional ventures back there only when the auguries compel it.

California and the American Pacific Northwest is to me the world's most fantastic wine producing area, but has yet to arrive when it comes to top quality and taste olive oil.

Inasmuch as good wine also enjoys the presumptuousness of highly specific imprimatur, especially in France and, to a somewhat similar degree elsewhere in Europe, one might well expect that the snooty who insist upon their nomenclature prerogatives would, when put to it, lie cheat and steal to keep the black ink flowing on their financial statements.

Tom Mueller's book and blog, Extra Virginity, depicts the degree of hardship that olive oil producers are facing in the current economic difficulties and the "blending" that has become rampant to enable what is labeled Extra Virgin Olive Oil, "EVOO", to be sold profitability.

What is blended into it is often not even olive oil.

What most Americans buy as EVOO isn't, to make a long story short.

Whole Foods Market and Standards

However, there is some hope.

I was browsing in a new Whole Foods Market in Houston last Sunday, sitting at their new wine bar placed next to the olive oil shelves.

A rather nice looking woman was looking rather lost as she tried to determine which bottle of olive oil to select.

I walked the few steps over to her and pointed to the Lapas olive oil. She asked why I suggested that and I explained to her that it was from a reliable producer and told her that it was a house brand for Whole Foods Company, one of the very few trustworthy house brands in the world olive oil trade and completely organic.

She smiled and took the Lapas bottle as her selection.

Risk Management of Sole Source Producers

Whole Foods Company had to have carefully researched this project. Contracting for a single source agricultural product in a distant and troubled economy is high risk to say the least.

I know what terms the agreement has to include, but I wondered how each of the contract risks in the Whole Foods - Blauel Group agreement was dealt with.

Fritz Blauel is an Austrian who went to Greece in the 1970s and became interested in olive oil production and cultivation in the Peloponnesus and Kalamata in particular.

The Greeks of that area were still using rather ancient methods, and he sought to influence the producers of the area in totally organic methods.

To make a long story short, he succeeded, and Whole Foods Company's house brand of really top grade olive oil (not their 360 brand), Lapas, comes entirely from Blauel's operation. He produces about 650 tons of organic top grade olive oil each year within his group of farmers, and it may be found also under the brands Mani Organic and Kalamata Gold.

The Challenge and Rewards of Risk Management

What does one think of when contemplating the establishment of such a relationship, beyond the market research and the position of the brand as a "fit" within one's business?

For the lawyer crafting the seminal protocol it is a wonderful challenge. It requires input from several specialists who will probably be found within the client company or be on retainer for the client company.

In the matter of food and agricultural products, those would include not just the market research folks but also the agronomists, food chemists, manufacturing technique specialists, those in transportation and delivery as well as the financial staff.

The issues, especially in the instance of purchasing foreign agricultural output from a single producer or single group of producers include the management of numerous risks.

When you have accounted for absolutely everything you and the group can think of you have to start playing "what if..." games. The what if games should continue throughout the process of building the relationship and the agreement, right up to the moment of signatures.

Even then you can be assured that there are contingencies you missed. When that jumps up and stares you in the face you have to rely for relief upon the credibility and trust you were able to build up during the relationship right up to the moment when the event arises, and your approach to dealing with it must be obviously fair for it to be successful.

By way of illustration, a client lost total supply from a sole source vendor for a whole product line because someone served a subpoena on the vendor without handling the diplomacy properly.

The vendor was in Iceland and it required a several day long "social event" with its Vikingesque CEO just to get talks started on the real problem. It took a few weeks to recover from the "social event". You simply cannot think of everything.

Particularly in the instance of olive oil being produced at an exceptionally high level of quality within one of the most troubled economies on the planet where no one feels secure, just the notion that minute controls can be expressed in a single writing seems farfetched.

The cultural and economic divides standing alone would be insurmountable without bringing into acute focus many talents and skills in common easy to read and effective ways.

The resulting economic engine microcosmically and with mutual compassion and grace generates profitable product integrity without sacrificing the art or the nuances of timeless beauty encapsulated within a sacred tree fruit. We are speaking of olive oil, sacred, healthful and delicious.

Commercial lawyers rarely get to work on a symphony of nuances that embrace a fundamental expression of an entire culture. Smoothing the contrapuntal rhythms into a composed useful protocol calls upon artistry of expression as it seems to seek a trivializing of the ephemeral, a capturing of spirituality.

This is an example of the grace notes of law practice. It comes to very few.

What must be produced is a reliable encapsulation of many inherently indefinite forces that are answerable in the normal course to the uncertainties of agricultural crops and worked on by farmers and associated trades as well as social and political upheaval.
At many points along the lines potential leakage can occur if care and sensitivity are not brought to bear. Investing in great things is not to be approached without the willingness to support a work of very fine art as well as a mundane agricultural food product.

Doing that with an eye upon effective economics is rather breathtaking. If you are already in this business as you read this you understand the nuances and risks.

I really enjoy this kind of work because I find myself working with extremely competent committed people who take an almost worshipful approach to the products.

Whenever I get such an assignment it is a call to celebration and wall to wall happy in addition to remunerative. Professional life doesn't get much better than that.

As always, you can call me, RIchard Solomon,  at 281-584-0519.

In this series of blog posts, we have examined the use of injunctive relief in state and federal courts in response to employees who have misappropriated confidential information and trade secrets, who have solicited clients and employees, or who have violated non-compete agreements.

In our last three posts, we identified best practices for ensuring that a company's house is in order, including the use of narrowly tailored restrictive covenant agreements (Part I); adopting a company culture and behaviors that protect its information (Part II); and why and when to seek injunctions and temporary restraining orders (Part III). In this, our fourth and final blog post in the Watch Your Assets series, we discuss the use of key injunction strategies.

A.  Who to Sue?

One of the first and most important decisions to make when seeking an injunction is who will be named as a defendant--the former employee alone or the employee and his or her new employer.  Suing the employee alone can be an effective "divide and conquer" strategy. That is, by suing the employee alone, the new employer is forced to decide whether it wants to inject itself into the proceedings or take a hands-off "wait-and-see" approach.

Generally, if the new employer has been complicit in some wrongdoing (e.g., has assisted with the misappropriation of confidential information) or has a significant monetary interest in seeing an employee avoid a non-compete (e.g., a sales employee with a significant book of business), it will team up with the employee and provide legal and other assistance. Many employers in these circumstances will also step back and suspend an offer of actual employment and tell the employee he or she must resolve the matter themselves before employment may begin.

Conversely, suing the new employer at the outset can force that employer and the former employee onto the same team, which will mean that the former employee may have company-provided legal representation and other resources available that would not have been available otherwise. It is important to think through each of these scenarios and outcomes before filing a lawsuit.

As part of the process, employers should perform due diligence about the potential adverse company, including its appetite for lawsuits, involvement in restrictive covenant cases, its outside counsel (which may inform, at least by general reputation, its level of aggressiveness), etc.

B.  Timing is Everything

As a general rule, seeking injunctive relief, especially a temporary restraining order (TRO), requires an employer to act as soon as it sees any realistic threat to its interests.

Thus, there is usually a significant amount of work required in a short period of time to gather the facts and relevant documents; examine any legal weaknesses with the contracts or claims; develop the necessary affidavits and exhibits; draft the complaint and injunction pleadings; and schedule and conduct an injunction hearing.

Of course, there are times when it makes sense to avoid a TRO and simply file a complaint with a request for a preliminary injunction, such as when there are potential enforcement issues with an agreement or other problems that can affect your ability to demonstrate a likelihood of success on the merits. In those instances, it may make sense to file a complaint with a request for a preliminary hearing but not set the hearing to put the other side back on its heels and allow you to examine the situation in more detail or try to negotiate a resolution.

Of course, taking a wait-and-see approach can be fatal to an award of temporary injunctive relief, because the other side will argue that the wait is proof of the lack of a threat of imminent harm or an otherwise adequate remedy at law.

Further, while sending a cease and desist letter prior to filing suit and waiting for a response saves expense and may possibly lead to an early compromise, there is significant risk that the former employees and competitors will take advantage of the notice period to prepare and file a declaration action in another jurisdiction before the company has an opportunity to file suit. This gives them the strategic benefit of choosing the venue and of controlling the language of the action.

The best approach is dictated by considerations of available monetary resources, likelihood of success, judgment of the litigation preparedness, and willingness of the other side, etc.

C.  Notice--Who, When, and How?

In order to secure an injunction, the requesting party will have to demonstrate to the court that it has made reasonable attempts to notify the other side that it is going before the court to seek equitable relief. This is generally not a problem with a preliminary injunction hearing, as these are usually set with the full participation of the court and the other party (who is typically already represented by counsel that has been identified in early stages of the case).

However, a TRO hearing is generally decided on very short notice without the appearance or participation of the other side, which is why the court will usually require the requesting party to provide a bond that will protect the other side from damage from an improperly issued injunction.

The tactical advantages associated with an ex parte hearing are many, not the least of which is the absence of any opposition to the motion. However, before the court will grant a TRO (and, in some jurisdictions, before it will even allow a hearing on a TRO), it will want to be satisfied that the requesting party made reasonable attempts to provide notice to the other side.

Courts are also adept at seeing attempts to game the system, such as a call to the other side from the courthouse steps when the company has been aware of the new employment for days or weeks. In general, a requesting party will want to show that it has provided at least 24 hours notice of the hearing or have a credible explanation about why it could not do so (e.g., the former employee has a copy of a trade secret formula that it is shopping to competitors or is out of town meeting with the company's biggest client in an attempt to pirate the business). Proof of attempts to provide notice of a hearing should be put in an affidavit that is submitted to the court with the injunction pleadings showing the calls, mail, service of pleadings, or other provisions of notice.

D.  Costs--Injunctive Relief Is Expensive

Securing injunctive relief can be very expensive because it requires the requesting party and its attorneys to work full speed on very short notice to review documents and interview witnesses, perform the necessary legal research, draft a complaint and a motion for an injunction with supporting affidavits and exhibits, and prepare for a hearing.

A preliminary injunction hearing usually operates like a mini (or sometimes full) trial on the merits where the parties will present live testimony, have an opportunity to cross-examine witnesses, provide opening and closing arguments, and argue the merits of the motion.

As with a regular trial, the parties will have to invest a significant amount of time, effort, and financial resources, including taking crucial employees away from their daily tasks to focus on the injunction hearing, to make a convincing argument.

As with any other expenditure of company resources, companies should engage in a significant cost-benefit analysis before committing to the injunction process. This can be difficult because these situations are usually highly emotional, which can temporarily cloud judgment.

E.  Venue--Familiarity with Local Courts, Rules, and Judges Is Key

Deciding where to sue and seek injunctive relief can be one of the most important decisions a company can make when seeking injunctive relief. Ultimately, the decision to award injunctive relief is made by a judge.

So, knowing and understanding the local judiciary can be the difference between getting an injunction or not. If federal jurisdiction is available, based either on the diversity of the parties or the existence of a federal claim with original jurisdiction, there may be a tactical advantage to suing in federal court where the judges may be more capable of managing complex facts and legal theories.

However, federal courts can be more reluctant to provide ex parteTROs and can be slower to schedule preliminary injunction hearings. Whereas in state court, you may be able to go before a judge simply by waiting in the halls of the courthouse until one will see you.

There may also be tactical advantages in forcing the other side to deal with removal or remand issues, and federal courts are widely perceived as controlling the parties and the discovery process better and being less patient with uncooperative counsel and frivolous arguments.

Ultimately, a good understanding of the local courts, judges, rules, and practice is critical when deciding when and where to seek injunctive relief.

F.  The Documents Should Never Be an Afterthought

Courts have very little time--even less than the parties in putting the documents together--to review, evaluate, and decide a TRO injunction motion and its underlying complaint.

Thus, the most critical element of success for obtaining injunctive relief is for the company to present clear, persuasive, and focused documents to the court, including the complaint and memorandum in support. The documents should marshal all of the key facts and law in persuasive, easy, and consumable bites for the court so that it (and its law clerk) has very little to do to understand and agree with the company's position.

Filing the best possible papers at the beginning of the suit also furthers the company's ability to win the credibility contest that is always front and center as the court makes initial determinations.

John C. Glancy is a shareholder in the Greenville office of Ogletree Deakins, and he co-chairs the firm's Unfair Competition and Trade Secrets Practice Group. Tobias E. Schlueter is a shareholder in the Chicago office of Ogletree Deakins, and he is on the Steering Committee for the firm's Unfair Competition and Trade Secrets Practice Group.

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.

For the 5 Most Fascinating Stories in Franchising a weekly report, click here & sign up.

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.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Restaurant operators who think they are vigilant about the security of their customers' credit cards may want to do some double-checking in the wake of P.F. Chang's China Bistro Inc.'s reported data breach."

If there is one issue which causes sleepless nights for business executives, it has to be data privacy and security. While the laws are still being updated and drafted for new technologies and new threats, businesses need to address these issues now.

Financial, healthcare, and retail brands all have legal requirements to protect consumer data.

These have been in place for many years but federal and state agencies are increasing regulation and enforcement actions. Data breach and customer notification laws are in place in every state. A federal uniform standard has not been enacted.

Plaintiff's Bar is Prepared

The plaintiffs' bar is quickly latching onto class actions and other private enforcement actions to seek redress for consumers who have suffered privacy invasions. With new technologies and new ways to capture and use personal information, the risks are increasing and lawmakers will be forced to respond by passing more legal strictures and regulations around such data.

In the big picture, companies face three basic types of risks: (1) external; (2) internal; and (3) human error.

1. External Risks

External risks for data breaches occur when someone outside the organization "breaks into" the organization's information network to try to secure items of value - such as financial information, credit card numbers, personal codes and other information of value.

External actors obtain the information to sell to others in the "information black market" or use the information themselves to carry out fraud schemes. For example, one of the important tools for healthcare fraud is Medicare and Medicaid identification numbers which are commonly sold in the information black market.

2. Internal Risks

Internal risks for data security focus on when an organization's employees or authorized users access the information network to secure personal information for their own benefit. The employees or authorized third parties will steal the personal information for their own benefit to sell to other criminals or carry out their own schemes.

3. Human Error

The third, and perhaps most overlooked risk, is human error. Many times a security breach is the result of human error or security lapses. An information security network may be improperly designed or implemented leaving some employees at risk for error and causing harm to the organization. Even if network security controls are in place, employees or authorized affiliates or third parties can make mistakes.

It is obvious to point out that not all data breaches are alike. Whatever the cause, poor planning and security steps can have a devastating impact on an organization. The cleanup process, the notifications and remedial steps can hinder an organization for years. Civil lawsuits and possible state and federal enforcement actions are increasing and can result in fines and penalties.

Even aside from these obvious consequences, organizations can suffer serious reputational harm. Public disclosure of data breaches is more common today. Consumers, however, are taking greater account of these infractions because of increased sensitivity to the protection of personal information.

Information security does not mean adoption of a boilerplate policy with no change in network security protocols or systems. As usual, information security starts with an assessment of existing security and identification of deficiencies and risks.

Once that is done, organizations need to determine what information needs to be secured and what types of rules and protections are needed to protect that information.

A holistic approach enables an organization to allocate information security resources to areas of greatest need based on a ranking of deficiencies and risks.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

If a "material change" occurs at any time after you furnish a prospect with the franchisor's FDD, the franchisor must update the FDD, and you must re-disclose the prospect with the updated FDD and re-observe all waiting periods.

A "material change" may be voluntary or involuntary.

Voluntary "material changes" include, for example, changes to any fee, the size of territories, territorial rights, any substantive term in any agreement in the FDD, the products or services offered by franchisees, the initial investment required or the franchisor's name, and may include changes to the franchisor's leadership team.

A lawsuit filed by the franchisor against a franchisee generally is not a material change that requires immediate updating and re-disclosure, even though the franchisor must disclose the lawsuit when it does its annual FDD update.

Involuntary "material changes" generally are negative, and include, for example:

• a significant legal proceeding brought against the franchisor or anyone on its leadership team;

• a significant deterioration in the franchisor's financial condition;

• a bankruptcy of the franchisor or anyone on its leadership team;

• a significant loss of franchisees in a state or nationally;

• the loss of an important trademark registration, or;

• a similar adverse development.

If you are concerned about whether a "material change" has occurred, check with the franchisor's lawyer or compliance manager before continuing to offer the franchise or having a prospect sign final agreements or make any payment to the franchisor or any affiliate.

You may be told that the FTC franchise rule does not require re-disclosure.

To some extent this statement is true. However, most state laws, as well as general state common law fraud principles, require re-disclosure.

(This was the ninth post in a series of 11 posts on making compliant franchise sales. )

(This was the sixth post in a series of 11 posts on making compliant franchise sales.)

You must disclose a prospect with the franchisor's FDD a minimum amount of time before the prospect signs any binding agreement with, or pays any amount to, the franchisor or any affiliate.

If you are using a paper FDD or an FDD on a CD, disclosure occurs on the day you hand-deliver or otherwise actually deliver the FDD to the prospect, or 3 days after you mail the FDD to the prospect by first class mail. If you are disclosing electronically, disclosure occurs on the day you email the FDD to the prospect, or give the prospect directions for accessing the FDD on the Internet. The date on the signed and dated receipt received from the prospect for the FDD should correspond to the date disclosure occurs.

In most states, the minimum disclosure time is 14 calendar days before the prospect signs or pays. When counting calendar days, you may not count the day the FDD is delivered or the day the prospect signs or pays.

Some state laws require different minimum disclosure times (see Appendix A). If the Iowa, Maine, Maryland, Nebraska, New York, Oklahoma or Rhode Island law applies, you may be required to disclose the prospect at your first "personal meeting" with the prospect.

A "personal meeting" is a face-to-face meeting in a semi-private setting such as a restaurant or a lounge area at a tradeshow, or in a private setting such as a hotel conference room or your office. If the Connecticut, Maryland, Michigan, New York, Oklahoma, Rhode Island, Texas, Utah or Washington law applies, or if you are exempt as a large franchisor in California, you may be required to disclose the prospect at least 10 business days before the prospect signs or pays.

When counting business days, you may not count the day the FDD is delivered, the day the prospect signs or pays, Saturdays, Sundays, or most federal or state holidays.

Some of the state laws requiring different minimum disclosure times may be changed, so you should check with the franchisor's lawyer or compliance manager about when any changes might take effect.

Until all of the state laws are changed, however, your franchisor may require you to disclose all prospects at their first personal meetings and at least 10 business days before they sign or pay, just to be safe in case any of the laws apply.

(This is the 6th part of 11 series on franchise selling compliance.

If you would like all these tips in a bound book, for a handy desk reference, sign up for the Franchise Seller's Handbook.)

If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

The franchisor must furnish its FDD to a prospect whenever the prospect reasonably requests it. If you merely represent the franchisor and do not handle disclosure directly, you must communicate the request to the franchisor. The franchisor then must fulfill the request.

A request from a person who has not yet qualified and been accepted as a prospect does not trigger this step. Only a request from a bona fide prospect triggers it.

The purpose of the step is to permit the prospect to obtain and review the FDD before incurring significant costs to investigate the franchise or travel to the franchisor's office. Therefore, the franchisor may not refuse to furnish the FDD until, for example, the prospect attends discovery day.'

The FTC franchise rule does not require a request to be in writing, and does not say how quickly an FDD must be furnished after it is requested. Presumably, most prospects will make requests by telephone or in emails. You and the franchisor must establish and maintain a system for recording and responding promptly to these requests.

The FTC franchise rule assumes a prompt response, but permits some flexibility based on extenuating circumstances such as a poorly timed request (for example, a request made late on Friday afternoon) or a request made when the FDD is being updated.

If a request is made when the FDD is being updated because of a "material change" (see "Step 9: Re-Disclosure If 'Material Change' Occurs" below), you or the franchisor may respond that the FDD is being updated and will be furnished after it is updated or registered.

The FTC franchise rule permits you to furnish the FDD directly to the prospect or to a representative of the prospect, such as a partner, owner, officer, employee, agent, lawyer or accountant.

Some states may not permit you to accomplish disclosure by merely furnishing the FDD to a representative.

Check with the franchisor's lawyer or compliance manager.

You are not required to furnish an FDD in the particular format requested by a prospect. However, if the prospect refuses to accept delivery of an FDD because of its format, you may not make a franchise offer or sale to that prospect.

Neither you nor the franchisor may charge any fee in connection with a prospect's right to receive an FDD whenever he or she reasonably requests it.

(This was the fifth post in a series of 11 posts on making compliant franchise sales.)

If you would like all 11 of these tips in a bound book, for a handy desk reference, why not click here & sign up for the Franchise Seller's Handbook.

Sometimes a franchisor wants to pay a franchisee for helping sell a franchise.

But there are many potential problems, here. I want to point out just one and its solution.

Before furnishing an FDD to a prospect, you must confirm that both receipts at the end of the FDD identify all "franchise sellers" who have been or will be involved in offering the franchise to the prospect.

The receipts must state the franchise sellers' names, business addresses and business telephone numbers. Or, the receipts may refer to an exhibit containing the franchise sellers' names and contact information.

The meaning of the term "franchise sellers" is narrow for this purpose. The FTC wants the receipts to identify the persons who have been or will be dealing directly with the prospect, including key officers or employees and any broker. The FTC does not want the receipts to identify all persons who arguably might be franchise sellers in a broad sense, or to cross-reference lists of brokers or other persons who might sometimes represent the franchisor.

A few key persons who are involved in all or most franchise offers and sales for the franchisor may be pre-identified on all receipts. Other persons, such as brokers who deal occasionally with the franchisor's prospects, must be identified in typing or handwriting on the receipts, on a prospect-by-prospect basis.

Any person who, under a contract, will receive a sales commission or quota credit if a franchise is sold to the prospect must be identified.

This may be difficult to keep track of. What should be done if a franchise seller not identified on the receipts becomes involved with the prospect after disclosure has occurred?

When this happens, you or the franchisor must revise the dated and signed receipt previously obtained from the prospect so that the receipt identifies the new franchise seller, and must furnish a copy of the revised receipt to the prospect.

Revising the receipt may involve merely making a copy of the receipt with the new franchise seller's business card shown on the receipt or with information about the new franchise seller handwritten on the receipt. You and the franchisor are not required to have the prospect re-date or re-sign the receipt.

The cost of violating the FTC rule is $11,000 per occurrence per day.

The are a number of other risks when paying for franchisees to validate the franchisor's concept. Be sure to review your entire selling process with a franchise attorney with compliance expertise.

(This was the fourth post in a series of 11 posts on making compliant franchise sales.)

If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

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 first of a two-part piece on why these dabbling attorneys can hinder a transaction, or worse, do harm to their clients.

This part one looks at it from the point of view of the franchisor, which is negotiating with a prospective franchise purchaser. Let's assume this prospective franchisee is the party represented by a lawyer without franchise law experience. This situation is much more common than the reverse - where it is the franchisor, and not the franchisee, that has inexperienced counsel.

Why Franchise Agreements are Different from other Business Contracts

Some, but not all, franchise agreements are negotiable. The most significant problem involving inexperienced counsel occurs when the franchisor is otherwise willing to negotiate with the prospective franchisee.

If a prospective franchisee seeks legal counsel, s/he will typically seek out that person's usual business attorney, if there is one. If the prospective franchisee doesn't have or know an attorney, that person will ask friends and family for referrals. Frequently, the referral is to a business attorney who has little or no experience in franchise law.

The business attorney may be tempted to do the work, instead of referring it to another lawyer. After all, the terms in franchise agreements look a lot like the ones you might find in other types of business contracts. But the problem is that the franchise relationship isn't a typical business relationship. It is critical for the attorneys on either side of a negotiation to understand what makes franchising different.

Specifically, franchise agreements are (on the whole) much more one-sided than other business contracts. This is for a good reason: the provisions are there (in one way or another) to protect the health and integrity of the system as a whole, including its intellectual property and goodwill. Protecting the system is paramount, because if the system fails, all of its franchisees lose.

An attorney representing either side of the franchise transaction needs to understand this basic truth at the core of franchising. When s/he has experience in franchise law, counsel will understand which provisions are typical or atypical. They will also understand which terms may be negotiable and whether, taken as a whole, the franchise contract is more or less one-sided than is typical for those agreements. Having this experience will make the negotiation more productive and efficient. A more efficient negotiation will typically result in lower attorney fees.

The Frustrations of Dealing with Inexperienced Franchisee Counsel

You might think that the franchisor would benefit if the lawyer on the other side is inexperienced. I can assure you that is not the case.

Here's the problem: when a franchisor is negotiating with a prospective franchisee's counsel, that attorney's lack of franchise law experience frustrates and needlessly complicates the process. Because the lawyer for the prospect doesn't understand franchising, s/he may try to negotiate items that simply can't be negotiated from a system protection perspective.

Again, the provisions in a franchise agreement are there to protect the system as a whole. An attorney who understands franchise law gets this, and will instead turn his/her attention to the contract terms that a franchisor may be willing to negotiate. The dabbling attorney, on the other hand, will often try to change these critical terms.

Here is how things usually shake out in those negotiations. The prospective franchisee's counsel issues a 30-page memo outlining each and every provision of the franchise agreement that s/he wants to have changed. Or even worse, the attorney submits a redlined version of the entire contract containing his or her requested changes or revisions to the contract, which are usually voluminous.

The franchisor is likely to give one of two responses in that situation, and neither of them is good for the prospective franchisee.

1. Refusal to negotiate

The franchisor's first possible response to the attorney's negotiating position is to simply refuse to negotiate, at all. A franchisor will react this way when it is overwhelmed and frustrated by the number of requests, which the company believes seek to change key provisions of the contract.

The franchisee is then presented with a choice: (1) walk away from the deal entirely, and lose out on what may have been a good business opportunity; or (2) accept the entire franchise agreement as written, without any changes, thereby missing the chance to negotiate for some critical changes. In either case, the inexperienced attorney did his/her client a disservice by impeding the deal. This is frustrating to both sides.

2. Agreeing to limited changes

The franchisor's second possible response to the attorney's negotiating position is to agree to some, but not all, of the proposed changes. Obviously, this is better for the prospective franchisee than under the first scenario. But even in this situation, inexperienced counsel can be an impediment to the prospective franchisee.

This is when experience really matters: an attorney who understands franchising will also know which provisions are worth negotiating, and which are not. The experienced attorney will know when the franchisor can be pushed, and when it cannot. As a result, the selection of specific provisions that are the subject of any negotiation becomes critically important.

In other words, the "shotgun" approach to negotiation -- asking for everything under the sun -- lacks focus. And it's this lack of focus that can result in a less effective negotiation process, when the different / changed provisions are not the ones that can make the biggest difference for the client. By taking the unfocused approach, the dabbling franchise attorney misses the opportunity to conduct an effective negotiation for his or her client.

Conclusion

When franchise contracts are negotiable, an attorney who dabbles in the area, lacking experience in franchising, can frustrate or impede the process. For this reason, franchisors tend to prefer that their prospective franchisees hire experienced franchise counsel, and those prospective franchise buyers should seek out lawyers who understand franchising. Plus, hiring an experienced franchise lawyer will typically save money, because the knowledgeable attorney will be more efficient than the dabbler.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

"What a Hotel. The Towels were so Big and Fluffy;

I could Hardly close My Suitcase"

- Henny Youngman

Hotels used to have to deter guests from stealing towels.

Now, hotels need to compel their guests to reuse or recycle their towels during their stay.

Daily washing of towels uses too much water, too many detergents and is very heavy work. If hotel guests would treat the laundry as if it was their own, hotels could conserve water, use less pollutants and minimize back injuries & so lower worker's compensation claims.

The hotel usually has only one chance to persuade their guests to recycle or reuse - a simple card in the room requesting that the guest recycle the towels or laundry.

But, the effectiveness of these cards varies greatly.

Science, or the repeated testing of these messages, has discovered which messages are more persuasive than others.

Most standard messages stress only the importance of protecting the environment. These message are accompanied with tantalizing pictures of the pristine wilderness. These messages do work.

However, science allows us to do better. We can track who is reading what message and what the result is. We can design an effective compliance recycling program - which gets more guests to recycle their towels at least one during their stay.

Noah Goldstein describes how he, Robert Cialdini and V. Griskevicius implemented an effective green Hotel Towel program.

By making one small change in the messaging, Goldstein et. al, were able to get an increase in compliance of over 25%!

Think about the cost savings to the hotel in getting a 25% increase in a laundry recycling program. Now, that is much more tantalizing than pristine wilderness.

How did Goldstein do it?

Think of an Army Barracks and all those neat cots. What do you see? [Ignore the barking NCO]

Everyone can see what needs to be done, so most people do it. The cots get made up. Perfect. Simple. Compliant.

(Copyright: Vintage Post Cards.)

But in a hotel, thank heavens, the rooms are private. You cannot see what needs to be done, so most people don't do it.

How do you break the walls down?

Goldstein hit upon a brilliant solution:

Tell the "guests that the majority at the hotel recycled their towels at least once during the course of their stay."

(From page 12 of Yes! 50 Scientifically Proven Ways to Be Persuasive I recommend reading the entire book.)

Paint a picture of the social part of nature.

Goldstein reported this one simple change in messaging produced a 26% increase in the number of guests who recycled their towels at least once during their stay!

Imagine the overall savings because of such voluntary compliance!

By paying attention to the science of messaging.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

David Cahn has an interesting, although I believe flawed, view of some recent franchisor liability cases.

"Even in the best of franchise relationships, franchisors must be wary of litigation and potential liability arising out of their franchisees' business operations.

Where a franchisor imposes and exercises substantial controls over its franchisees' operational and administrative methods and procedures, the franchisor may well find itself a defendant in lawsuits brought by customers and employees of its franchised outlets, claiming that the franchisor's exercise of control makes it liable for its franchisees' negligence or misconduct."

The dilemma here, many see, is between exercising significant enough control through the standards as enunciated in the operating manual to prevent the harm from occurring, and exercising minimal control through providing only recommendations and no guidance to prevent vicarious liability attaching.

David appears to concur, and after reviewing two Jackson Hewitt cases on vicarious liability, states:

"The conclusion to be drawn from the Jackson Hewitt litigation is that franchisorsare essentially presented with two options when drafting their franchise agreements and operations manuals.

The first option is to impose significant operational controls over their franchisees' operations, similar to those described above, and assume the attendant risk of facing liability for third-party claims arising from actions taken in accordance with the operational mandates.

The other option is to limit the franchise operations manual to providing examples, general guidance and non-mandatory recommendations for operating procedures and specifications."

My view is that this dilemma should be avoided: the franchisor should be able to limit their liability and decrease the risk from happening.

Ideally, there should exist franchise owner's group who agrees to a) provide the franchisees with sophisticated risk avoidance mechanisms, b) monitor and report their use, and c) provide continual education on compliance.

Naturally, the franchise owner's group is going to want to something in return for such a project. And such an agreement should be beneficial to the franchise system as a whole.

An example was discussed here in this story about PCI compliance (see the comments)

A franchise owner's group that can effectively take on this responsibility is a potential real win/win for the franchise system and all its constituents.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

When your franchise system is facing this type of danger, connect with me on LinkedIn and we will see what can be worked out.

Like other areas of business, franchising has its own jargon or vocabulary.

The terms "master franchise" or "sub-franchise" and "area developer" have technical definitions, but are often used improperly. This article will help to define a master franchise or sub-franchise and area developer and distinguish them from other forms of expanding a franchise.

Franchise systems sell a master franchise (also known as a "sub-franchise") in order to more rapidly expand their brand and system. Often master franchising is used internationally. In that context, a master franchise or sub-franchise may be sold to a person or entity to sell franchises on the franchisor's behalf in another country.

The master franchisee has the responsibility of selling franchises throughout that country. Typically the master franchisee will sell, train and support the franchisees of that country and act as their franchisor. This may make sense for the franchise system that is interested in expanding globally.

In the United States, certain systems have attempted to sell master franchises for certain states or regions. For example, a system may sell a master franchise for New York state. That master franchisee would be responsible for selling, training and supporting the franchisees of New York. The concerns of this type of system is that often the master franchisee is unable to provide the appropriate support to its franchisees.

A master franchise is distinguished from an area development in which a person or entity who buys a territory or region is required to develop that region him, her or itself.

The area developer would be trained and supported by the franchisor and required to open a certain amount of locations within a certain territory and in a certain timeframe.

Panera Bread® is an example of a franchise that has expanded through area development. They sell a minimum territory of 15 units. The Panera Bread franchisee must develop that territory typically within six years.

Often a master franchise or sub-franchise is not the best manner of expanding in the United States for 3 reasons:

1. Master franchisees are often under a lot of pressure to sell a lot of units within their territory and do not have the infrastructure to support those franchisees.
2. The franchisor loses control over its franchisees, leaving the support to the master franchisee who is selling the franchises, and not overseeing compliance with system standards.
3. In addition, master franchisees are required to have their own disclosure document to present to the prospective franchisees in their territory. Preparation and registration (where required) of the disclosure documents can be quite time-consuming and costly.

A master franchise or sub-franchise may be one way a franchisor can expand rapidly. However, there are concerns that any franchise system or prospective master franchisee should consider. Becoming an area developer for a territory is another means of rapid expansion and has its own concerns.

For the 5 Most Fascinating Stories, a weekly report, click here & sign up.

If you would like to know more about expanding your franchise system using area developers, get in touch with me by connecting with me on LinkedIn, using my LinkedIn business card below.

A "financial performance representation," also called an "FPR," is any representation, whether oral, visual or written, to a prospect that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits .

If the franchisor states in Item 19 of its FDD states that it and its representatives do not make FPRs to prospects, you must avoid making any oral, visual or written FPR to a prospect outside of the FDD.

If the franchisor includes FPRs in Item 19 of its FDD, you may discuss any FPR in Item 19 with a prospect, but you must avoid making any oral, visual or written FPR to a prospect that is not in Item 19. For example, if Item 19 gives the average annual sales of outlets open in the previous year, you are prohibited from representing orally that average sales in the current year have exceeded average sales in the previous year, since that oral representation is not supported in Item 19.

If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Communications with Probable Franchisees

Before you furnish the franchisor's FDD to a prospect, you may communicate in writing and orally to a prospect on a regular basis, as long you and the franchisor are properly registered or on file with any involved regulatory state (see Appendix A), and as long as your statements are consistent with the standards for advertising discussed above (truthfulness, consistency with the FDD, etc.).

After you have furnished the franchisor's FDD or final agreements to a prospect, you may continue to communicate in writing and orally to a prospect on a regular basis during any 14-calendar-day, 7-calendar-day or 10-business-day period that may be running.

You are not required to observe a "cooling-off" period during which you must cease all communications with the prospect.

Confidentiality with Probable Franchisees- FTC Franchise Rule

Under the FTC franchise rule, you or the franchisor may require a prospect to sign a confidentiality agreement before you furnish the franchisor's FDD to the prospect, or before you grant the prospect access to the franchisor's proprietary information or operations manual.

This type of agreement does not trigger any disclosure obligations under the FTC franchise rule, as long as it does not contain any other type of agreement that triggers disclosure.

The franchisor is not required to include the confidentiality agreement as an exhibit in its FDD.

Confidentiality with Probable Franchisees- State Laws

For a prospect covered by a state law, the franchisor may be required to include any required confidentiality agreement as an exhibit in its FDD; and you and the franchisor may be required to furnish the FDD to the prospect and observe a 14-calendar-day or 10-business-day waiting period, before requiring the prospect to sign the confidentiality agreement.

State prohibitions and requirements vary in this area, so check with the franchisor's lawyer or compliance manager.

If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

If you would like all these tips, the The Franchise Sellers Handbook 2010 , just sign up below. 

You and the franchisor may use "advertising" to promote the sale of franchises, subject to the limitations discussed below.

"Advertising" includes website pages, Internet ads, magazine ads, newspaper ads, brochures, handouts, CDs and DVDs oriented to prospects.

Less obviously perhaps, "advertising" includes blank pro formas given to prospects, form letters or emails used to communicate with prospects, and copies of published articles and other materials given to prospects.

For purposes of this handbook, "advertising" does not include consumer-oriented materials, such as sample ads, menus or point-of-sale displays, shown or given to prospects.

Advertising must be truthful and not misleading. For example, advertising may not reference studies that purport to show that franchisees are more successful than independent business people, if those studies, such as the discredited U.S. Department of Commerce or Gallup studies, have been found to be unreliable.

Advertising may not expressly or impliedly assure or guarantee success, profitability, earnings, or a safe investment that is free from risk of loss or default.

Therefore, variations on the words "success," "profit," "proven," "lucrative" and "recession-proof," or any other term that states or implies earnings, must be used carefully and sparingly in advertising.

Advertising must be consistent with information in the franchisor's FDD. As to fees and initial investment costs, advertising must be supported by information in the FDD.

For example, any initial fee or initial investment information in advertising must match, and may not go beyond, what is in the FDD.

Advertising may not include financial performance representations, also called FPRs, unless the same FPRs are included in Item 19 of the franchisor's FDD.

Advertising may provide some supplemental information that is not required or permitted to be included in the FDD. For example, a franchisor executive is required to include 5 years of employment history in Item 2 of an FDD and may not include more unless the executive has held the same position with the franchisor for longer than 5 years.

Advertising may include much more information about an executive's experience and background.

A franchisor is prohibited from including a blank pro forma in its FDD, but it may provide a blank pro forma to a prospect to show typical categories of sales and costs.

The franchisor may not help the prospect to fill in the blank pro forma. If used in this manner, the blank pro forma is advertising that provides permitted supplemental information to the prospect.

Advertising on the franchisor's website must include a disclaimer such as the following:

NOTE: This website is not a franchise offering. A franchise offering can be made by us only in a state if we are first registered, filed, excluded, exempted or otherwise qualified to offer franchises in that state, and only if we provide you with an appropriate franchise disclosure document. Follow-up or individualized responses to you that involve either effecting or attempting to effect the sale of a franchise will be made only if we are first in compliance with state registration or notice filing requirements, or are covered by an applicable state exclusion or exemption.

The following states regulate the offer and sale of franchises:

California, Florida, Hawaii, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Nebraska, New York, North Dakota, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin. If you reside, plan to operate or will communicate about the franchise in one of these states, you may have certain rights under applicable franchise laws or regulations.

This disclaimer should be on or linked to the first website page oriented to franchisee prospects, but is not required to be on or linked to each website page oriented to franchisee prospects.

You may run ads in national publications such as Franchising World, Entrepreneur, Franchise Times or Franchise Update, and may post pages oriented to franchisee prospects on the franchisor's website, without pre-submitting the ads or pages to any states.

You must pre-submit, before use, other types of advertising, such as local newspaper ads, brochures, handouts, CDs, DVDs, blank pro formas, form letters and emails, and copies of articles distributed to franchisee prospects, to the following states: California, Maryland, Minnesota, New York, North Dakota, Rhode Island and Washington.

New York requires you to add the following disclaimer to advertising:

NOTE: This advertisement is not an offering. An offering can only be made by a prospectus filed first with the Department of Law of the State of New York. Such filing does not constitute approval by the Department of Law.

California and Washington sometimes require you to pre-submit written consents permitting the use of third-party endorsements, such as franchisee testimonials.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Recently, I was working with a business owner interested in franchising his business.

I put together some power points slides to explain franchising, the fee structure, and the business makeup of a franchisor.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

You must follow the basic franchise sales steps if the franchisor is selling an operating outlet to a prospect.

If the operating outlet was previously franchisee-owned, you must provide a prospective purchaser with the following additional information, for the franchisor's last 5 fiscal years:

• the name, city, state, and current business telephone number (if known) or last known home telephone number of each previous owner

• the time period when each previous owner controlled the outlet

• the reason for each previous ownership change (for example, termination, non-renewal, voluntary transfer, ceased operations, reacquired by the franchisor, etc.)

• the time period(s) when the franchisor controlled the outlet.

The additional information may be attached to the franchisor's FDD as an addendum when the FDD is furnished to the prospect, or may be provided later to the prospect in a supplement to the previously furnished FDD. The addendum or supplement must be given to the prospect at least 14 calendar days before the prospect signs any binding agreement with, or pays any amount to, the franchisor or any affiliate.

At your option, you may provide a prospective purchaser of the operating outlet with information about the actual operating results of that outlet. The information is not required to be attached to the franchisor's FDD or to be put into any particular format. For example, it may include unaudited financial statements for the outlet.

You may not provide the prospective purchaser with information about the operating results of other operating outlets. Similarly, you may not provide information about the operating results of the outlet to prospective purchasers of other operating outlets or of franchises for new outlets.

If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Over the last 10 years or so, franchisors have begun including performance standards, minimum gross sales requirements, and minimum royalty rates in their franchise agreements.

Whatever vintage they are (sales requirements, minimum sale or royalty), the whole rationale is this: The franchisor wants to make sure that the franchise territory is not tied up, underperforming, or underutilized.

The performance standards, minimum gross sales requirements, and minimum royalty rates are commonly stated in straight dollar amounts. Those dollar amounts may seem a bit measly, when the franchise agreement comes up for renewal 10 years later.

The franchisor can up the dollar amounts at the time of renewal. Right? One franchisee argued no way, no go.

The case is Home Instead, Inc. v. David Florance et. al. The franchise agreement in question stated, in pertinent part, "The franchisee must maintain minimum gross sales of $30,000 per month after the end of the fifth year of operation of the Franchised Business through the end of the term of this Agreement or any renewal term of a renewal Franchise Agreement (the Performance Standard)."

In this case the franchisor wanted to raise the $30,000 to $70,000, a more than double increase of the Performance Standard. The franchisee read the franchise agreement to say that the $30,000 would run forever over all renewal periods. The court called this a "strained reading" of the franchise agreement. The court went on to say that "This reading places a permanent ceiling on the Performance Standard." The court honed in on the word "minimum."

The court found that the $30,000 stated in the initial franchise agreement "creates a floor, not a ceiling." "Nothing in [the franchise agreement] §2.F prohibits the franchisor from raising the minimum amount."

Lesson from the Court: Each word has meaning, make sure to heed the meaning.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

When compiling a disclosure document, franchisors are faced with an uncomfortable dilemma: disclose too little and risk a costly lawsuit resulting from inadequate disclosure.

The rigorous disclosure requirements enacted by franchise laws in several Canadian provinces have increased the risks of incorrectly drawing the line on disclosure, and even those provinces without specific franchise laws are coming to demand more disclosure and transparency from franchisors.

It would be tempting to advise franchisors to find a balance in their approach to disclosure. In an ideal world, franchisors could reveal just enough information to inform potential franchisees while safeguarding the internal knowledge they have worked so hard to build up.

But such advice would mischaracterize the uncompromising nature of the laws on franchise disclosure. The law has not left a happy medium for franchise disclosure whether or not a provincial franchise statute is in effect.

Material Facts

In Ontario, the Arthur Wishart Act (Franchise Disclosure) leaves no room for a Goldilocks solution to disclosure. The Act plainly states that in addition to a litany of specifically prescribed corporate and financial information, franchisors must also reveal "all material facts" to prospective franchisees, which must be current as of the date disclosure is provided. This range of information will then allow franchisees to make fully informed decisions on whether to pursue a franchise.

The Act's definition of material facts is frustratingly vague and broad in scope.

As defined, "material facts" include: [A]ny information about the business, operations, capital or control of the franchisor or franchisor's associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.

The Ontario courts are still grappling with exactly what sort of information constitutes a material fact, but the consensus is that material facts include a vast scope of information that could potentially impact a franchisee's decision to invest. As a result, franchise lawyers are treading with great caution and taking an extremely broad approach when assisting franchisors in preparing their disclosure documents to ensure compliance with the law.

While the "all material facts" requirement is specific to Ontario, failure to provide pertinent information to franchisees could lead to accusations of misrepresentation in all provinces, whether or not they have specific franchise legislation in place. A franchisor who fails to disclose material facts is largely treated by the courts with the same disdain as a franchisor that deliberately distorts material facts.

Both are considered actionable misrepresentations at common law. So franchisors across the country should take careful note of the obligation to disclose, and how it might conflict with their desire to protect their information.

A further challenge to providing disclosure that meets the requirements of the Act is that a disclosure document must be presented as a single cohesive document. It is now standard procedure for franchisees to be provided with all relevant ancillary documents at the time the disclosure document is provided (all bound together as one document), such as the head-lease between the landlord and the franchisor.

The head-lease is likely to be ripe with material facts that may impact the terms under which the franchisee operates its business on the premises. A recent court case in Ontario upheld that failing to disclose the renewal and expiration terms of a head lease was tantamount to providing the franchisee with no disclosure whatsoever.

Providing the head-lease itself may seem like a safe means of ensuring that these material facts are provided to the franchisee, but it does not ensure that the relevant material facts are provided in the disclosure document itself. In complying with the obligation to disclose all "material facts", a franchisor should conduct a careful review of the head-lease, and the material facts of relevance to the franchisee should be listed clearly as a separate section of the disclosure document.

To the dismay of franchisors who give out disclosure documents, it is now quite common to see entire operations manuals, or extracts from them, disclosed to individuals who have expressed an interest in the franchise system, but have not made any substantive commitment to becoming franchisees. Given the availability of disclosure documents, and the potentially sensitive trade information they contain, franchisors may decide to keep certain information off the public record.

However, the relative ease of bringing an action for inadequate disclosure, at least in Ontario and the other provinces with franchise legislation, should serve as a significant deterrent and a constant reminder of the risks of keeping material facts hidden.

The internet has enhanced the free flow of disclosure documents. To receive a disclosure document, the potential franchisee must generally sign a receipt confirming that the disclosure document was provided and that it will be kept private. In reality, once a disclosure document is provided, it is entirely out of the franchisor's control. In the United States, a network of franchisee-friendly websites and message boards freely distribute franchise disclosure documents and court documents which are uploaded by users.

The spread of such sites to Canada, and the rapid exchange of Canadian disclosure documents, is likely to be imminent. These websites may make franchisors uncomfortable by easing access to potentially sensitive trade information, but the corresponding potential to expose inadequate disclosure on a large scale poses an even greater risk. It is yet to be seen, but the day may come when franchisees and their counsel surf these sites in the hopes of locating an exit strategy.

Even without access to disclosure documents over the internet, anyone with a bit of time and some passing knowledge of the legal system could get a hold of an array of current disclosure documents. Once a disclosure document becomes an issue in a legal proceeding, a copy with be filed with the court and publically available for anyone to read or copy. If a lawsuit proceeds to trial, the disclosure document will have the further exposure of being dissected and analyzed by each party's lawyer and the judge.

At this point, the sensitivity attached to any material facts will be less a priority than ensuring that the disclosure document is compliant with the law.

Confidentiality Orders

Concerns about the sensitivity of disclosure documents are not entirely new, even though the pressure to disclose has been increasing in recent years. When disputes arise between franchisees and franchisors, it is not uncommon for one side to request a confidentiality order from the court, which would seal the information brought forward by the parties and keep it off the public record.

A typical confidentiality order limits access to all documents produced in the proceedings, including the disclosure documents and financial information. Access is limited to the parties' lawyers, the court staff, and potentially one or two experts retained as part of the case. While they are effective in instances where they are granted, confidentiality orders cover only a small fraction of franchise disputes that end up before the courts.

Confidentiality orders are generally reserved for the largest and most complex of franchise disputes, where the court will be scrutinizing every iota of the franchisor's documentation.

The standard for obtaining a confidentiality order is set deliberately high by the courts, and a typical dispute over the adequacy of a franchisor's disclosure document is unlikely to meet the standard necessary to obtain a confidentiality order.

Furthermore, confidentiality orders depend upon the whims of the legal system, and the arguments of counsel. Obtaining a confidentiality order requires a costly motion before the court, and they are never guaranteed.

Franchisors simply cannot count on confidentiality orders to limit access to sensitive information in the event a dispute does end up before the courts.

It is understandable that franchisors do not want to hold an open house with their sensitive and proprietary information. Small compromises seem to have become standard practice, such as disclosing only the table of contents of an operations manual rather than the entire contents of the manual. Despite their understandable reluctance to broaden the scope of disclosure, franchisors must also consider the dire consequences of failing to disclose anything that might be considered a material fact.

A leading Ontario franchise case states that the franchisor has a "rigorous duty to disclose all material facts as well as protect the franchisee from entering into such agreements without having all relevant information".[1] This may be counterintuitive to franchisors, who view franchisees as independent agents making their own investment decisions, but the duty of franchisors to protect franchisees is an integral part of their disclosure obligations.

Any suggestion that material facts were willfully obscured by franchisors will be treated harshly by the courts, and franchisees will continue to have access to a set of drastic remedies.

The free-flow of disclosure documents, and the increasing awareness of franchise lawsuits, will only see increasing pressure on franchisors to disclose. There is no option for franchisors to disclose "just enough" of their material facts, as franchisees, their counsel, and the applicable laws have all established an uncompromising standard for franchise disclosure.

At the end of the day, franchisors must have open and frank discussions with their counsel in determining how best to comply with all of their disclosure obligations.

Franchisors who prepare their disclosure documents without considering these issues and obtaining sound legal advice run the risk of defending lawsuits over their failure to properly meet their disclosure obligations.

[1] 6862829 Canada Limited et al. v. Dollar It Limited et al., [2008] O.J. No. 4687 (Ont. Sup. Ct.) at para. 65.

For the 5 Most Fascinating Stories in Franchising a weekly report, click here & sign up.

Jesus saith unto him, I say not unto thee,
Until seven times: but, Until seventy times
seven.
Matthew 18:22 (King James Version)

In the Bible, it says they asked Jesus,
how many times you should forgive,
and he said 70 times 7.

Well, I want you all to know
that I'm keeping a chart.
Hilary Clinton

Forgiveness is puzzling.

The strategic puzzle is presented in Charles Schulz's cartoon series which depicts Charlie Brown being continually compelled to forget Lucy's past & to try to kick that football.

Must Charlie Brown always forgive and forget?

Or can he keep a chart, instead, and end getting tricked?

(I am told that the Rabbinic tradition that Matthew 18:22 was responding to limited forgiveness to 3 strikes. Our own secular convention appears to allow only 1 strike, and then shame on me.)

Forgiveness is not the only institution which requires us to ignore the past: voters who must overlook past politicians campaign "promises", the doctrine of confession, the fathers who have to unconditionally love the prodigal daugther or son, and the hopefuls who remarry after divorce.

And -as we enter the New Year- the institution of making resolutions to bind our future selves.

After every January 1st, I will no longer eat too much, drink too much, exercise too little, and so on.

We know by past experience that these commitments, if made in or around January 1st, will not last much past Februrary.

Should we just walk away from all these institutions, priding our self on our skill as rational calculators?

Unfortnuately, the world is not that simple or forgiving.

You and I, "Y" face a choice between safe and risk, "S" and "R". The world, full of Lucy Van Pelts, "W", can respond by being naughty or nice, "N" or "G".

There are three outcomes in this game tree, O1, O2, and O3.

Y prefers O1 the most and O2 the least. Y prefers to take risk, if the World is nice.

W prefers O2 the most and O3 the least. W prefers to have Y take a risk, just so the World can be naughty.

We both prefer O1 to O3, which is part of the puzzle.

The standard insight from game theory is: Unless the Lucy Van Pelts of the world can credibly commit to playing nice, we will end up in a world O3 which we both dislike compared to O1.

And you and I cannot bring about this world by our own actions - acting alone without a credible commitment will ensure our worst outcome.

But, being in the franchise business, we know that sometimes the credible commitments aren't worth the paper that they are written on!

Merry Christmas and Happy Holidays from Joe and Mike!