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?
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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:
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On Monday, June 29, 2015, California State Assembly Bill (AB) 525 was considered by the Senate Business, Professions and Economic Development Committee.
If passed by the Senate, AB 525 will amend the existing California Franchise Relations Act (Business and Professions Code §§ 20000 - 20010) ("CFRA") by expanding protections for existing franchisees. See my previous blog post for a discussion of the amendments to the CFRA that would be created by AB 525.
While the Senate has made some minor clean-up amendments to AB 525, none of them substantially change the character of the bill or the amendments that it would create to AB 525.
The International Franchise Association ("IFA") has mounted a significant challenge to AB 525, having sent to its California-based members an email urging them to contact their elected officials and voice opposition to the bill.
From the IFA's email:
This bill in its current form places the basic tenets of the franchise contract at risk, which ultimately would harm franchisees, franchisors and consumers in California. This is a dangerous precedent, as this legislation could damage the reputation of local franchise business owners by reducing their brand standards. The unintended consequences of this legislation will also drastically increase incentives for litigation.
As an interesting example of politics making strange bedfellows, one of the key sponsors to AB 525 is the Service Employees International Union (SEIU).
The SEIU is the driving force behind the National Labor Relations Board's (NLRB) push to hold franchisors liable for their franchisees' employees as "joint employers," which push is widely considered to be a significant threat to the franchise industry as a whole.
According to Catherine Monson, CEO of FASTSIGNS, AB 525 is part of the SEIU's "coordinated attack on the franchise business model."
To assist the IFA in its campaign to defeat AB 525, you can follow this link: https://www.votervoice.net/FRANCHISE/Campaigns/39986/Respond
Through effective trade associations and lobbying efforts, during the last century automobile dealer franchises in the United States convinced state governments to give them significant protection against commercial abuse or unfair dealing by the manufacturer or supplier franchisors.
Franchisees in other industries could learn from that example.
The strength of the laws protecting dealer franchises was demonstrated by a recent New York court decision in Audi of Smithtown, Inc. v. Volkswagen Group of America, Inc. .
The case was brought by one set of Audi dealers charging that Audi's wholly-owned subsidiary, VW Credit, Inc. discriminated in favor of new dealers to the detriment of the incumbents who brought the case. At issue were incentives that VW Credit put in place for dealerships to purchase vehicles returned by customers at the end of their leases.
(For example, if Joe Brown leases an Audi Quattro for 3 years, the vehicle is owned by VW Credit during the lease, so at the end of 3 years, VW Credit has a "pre-owned vehicle" to sell. )
The incentive programs were based on the proportion of returning off-lease vehicles that a dealership purchased. However, since incumbent dealerships had more leases, they had more opportunity than new dealers to benefit from the incentives.
To level the playing field, VW Credit automatically granted new dealers a more favorable level of available discounts and bonuses (known as "Champion Level") for the first three years of the dealership. While this program seems to have a logical business justification - making it easier to open a new dealership, which increases Audi's presence in the local market -- the Court ruled instead that it constituted price discrimination against the incumbent dealers.
New York's law provides: "It shall be unlawful for any franchisor . . . [t]o . . . sell directly to a franchised motor vehicle dealer . . . motor vehicles . . . at a price that is lower than the price which the franchisor charges to all other franchised motor vehicle dealers." N.Y. Vehicle & Traffic Law § 463(2)(aa).
Audi argued that VW Credit is not a "franchisor" under the statute and therefore no violation could have occurred. The dealers had that covered, however, because in 2008 the New York legislature amended the statute to add references to "captive finance sources" so as to prohibit a motor vehicle franchisor from using "any subsidiary corporation, affiliated corporation, captive finance source, or any other controlled corporation, company partnership, association or person to accomplish what would otherwise be unlawful conduct under this article on the part of the franchisor." N.Y. Vehicle & Traffic Law § 463(2)(u).
The New York laws prohibiting price discrimination and the use of shell entities to get around the law are similar to those in others states that protect car dealers in their relationships with their franchisors.
In Maryland, for instance, the law requires manufacturers to act honestly and observe reasonable commercial standards of fair dealing in performance or enforcement of the franchise agreement. They are also not allowed to:
1. Coerce dealers to do something not required by their franchise agreements, or make them agree to material modifications (for instance, changes to their purchasing or performance requirements), unless the changes apply to all other Maryland franchisees of the same manufacturer.
2. Stop a dealer from offering other manufacturers' products at the same facility through a franchise agreement granted by another manufacturer.
3. Require a material change to "the dealer's facilities or method of conducting business if the change would impose substantial financial hardship on the business of the dealer."
4. Require a franchisee to adhere to performance standards unless, as applied, they are "fair, reasonable, equitable and based on accurate information."
5. Refuse to permit an individual to be the responsible person of the dealer "unless the individual is unfit due to lack of good moral character or fails to meet reasonable general business experience requirements" -- and the manufacturer has burden of proving unfitness.
6. Unreasonably withhold consent to a request to transfer a franchise, and an aggrieved franchisee has a right to an administrative remedy to contest a manufacturer's refusal to consent.
7. Terminate the dealership for any reason without payment to the dealer of compensation for various types of assets and franchise-specific improvements.
8. Require the dealer to reimburse it for attorneys' fees in any dispute involving the franchise.
Maryland Transp. Code Sections 15-206.1 through 15-212.2. In addition, aggrieved franchisees have a right to bring an action for damages and reasonable attorneys' fees incurred in vindicating their rights. Id. at Section 15.-213.
These statutes are not a cure-all for auto dealers who fail to properly execute their responsibilities. And, in any event, the 2009 bankruptcy proceedings of General Motors and Chrysler show that extreme economic circumstances can trump state statutory rights.
But overall, the various state laws protecting automobile dealers show the advantages of a century-old industry, widely dispersed, and generally liked in their local communities.
The auto dealers have been able to put their case to their state representatives and win some good protections. This is an example franchisees in other industries could learn from.
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Kids still read books, but nobody uses Quill pens, the Tennessee Court of Appeals in reversing the lower court and finding that nexus exists even without agents or a physical presence.
Remember Scholastic Book Club? Those were the books you ordered in grade school and your teacher placed the order for the class. A few weeks later, a package arrived and teacher gave you the books.
Sort of like Amazon but a lot easier since you could guilt-trip your parents into buying you some cool mystery paperbacks.
Book clubs may be passe, but empty state coffers are current news.
The State of Tennessee wanted to charge Scholastic sales & use tax.
The company argued that it had no presence in Tennessee, and that teachers who took the book orders were agents of the students. The company also argued that it did not place demands on state services.
In particular, the company relied on Quill v North Dakota (1992) and said that there was no tax nexus that would be recognized under US Supreme Court jurisprudence on the matter.
On appeal, the nexus issue was presented:
Whether the activities of in-state schools and school employees on behalf of an out-of-state seller that enable the seller to establish and maintain a market in Tennessee create sufficient nexus with Tennessee under the Commerce Clause of the United States Constitution to support an assessment of Tennessee sales and use taxes against the seller.
The court opinion is troubling for franchisors. The court held that Quill was dispositive and nevertheless managed to find tax nexus:
the issue in this case is not whether Tennessee teachers may be considered agents of SBC, but whether SBC's connections with Tennessee's schools and teachers establishes a "substantial nexus" such that the Commissioner's assessment may be sustained under the Commerce Clause
The court found:
In short, SBC has created a de facto marketing and distribution mechanism within Tennessee's schools and utilizing Tennessee teachers to sell books to school children and their parents. Contrary to SBC's assertion that it uses no public services in Tennessee, this State's school facilities and teachers are, in large part, funded by taxpayer dollars. We agree with the Commissioner that SBC's connections with its customers in Tennessee do not fall with the narrow safe harbor provisions affirmed in Quill Corp
Of particular interest to franchisors is the court's statement that Quill stands for the proposition that contact may only be via "common carrier or the United States mail."
By the reasoning of the Tennessee appellate court, franchisors with sales agents and support/compliance audits within the state are outside the "narrow safe harbor" of Quill.
Unlike the schoolteachers in Scholastic, the local representatives of franchisors are not working without compensation; in fact their compensation is often tied to a percentage of what the franchisor is earning. It is true that the appellate court noted the taxpayer support of schoolteachers, but a reading of the Opinion suggests that this was not the basis for the decision and more in the nature of dicta than a necessary element of finding nexus.
The court ruling is a roadmap for SCOTUS to gut Quill without actually overturning precedent, and the Scholastic reasoning is likely to be closely read when and if Quill is challenged at the high court.
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On May 14, 2015, the California state Assembly passed AB 525, a bill that would amend the existing California Franchise Relations Act (Business and Professions Code §§ 20000 - 20010) ("CFRA") by expanding the protections for existing franchisees.
As currently written, AB 525 would amend the CFRA in the following ways:
AB 525 is now in the Senate for consideration.
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On September 16, 2014, the Franchise and Business Opportunity Project Group of the North American Securities Administrators Association (NASAA) issued a Multi-Unit Commentary to provide guidance in addressing certain disclosure requirements in 3 different types of multi-unit franchising structures.
All of the state franchise regulators are members of NASAA so we can expect that the state franchise regulators will follow the guidelines addressed in the commentary in 2015. The effective date of this Commentary is 180 days after the date of adoption, or 120 days after the franchisor's next fiscal year end for Franchise Disclosure Documents already in existence.
Among other franchise offerings, the new Multi-Unit Commentary includes guidelines for the Franchise Disclosure Document used by a subfranchisor in offering unit franchises. The Franchise Disclosure Documents currently used by subfranchisors in offering its unit franchises may already be in compliance since the commentary largely provides clarification or confirmation on how FTC Guidelines should be interpreted when disclosing information on multi-unit arrangements, rather than imposing new requirements.
The following summarizes the guidelines under the Commentary that will apply to a subfranchisor's unit FDD:
A subfranchisor is not required to disclose in the FDD the financial arrangements between it and the national franchisor. The subfranchisor may disclose in Item 6 that fees paid by the unit franchisees are shared by the subfranchisor and the national franchisor.
Subfranchisors are required to amend their unit FDD when there is either a material change to the information regarding the subfranchisor or there is a material change to the information disclosed regarding the national franchisor.
Item 3 of the subfranchisor's unit FDD must include litigation information for the national franchisor and its officers and managers identified in Item 2 in addition to litigation information for the subfranchisor and its officers and managers identified in Item 2.
Item 4 of the subfranchisor's unit FDD must include bankruptcy information for the national franchisor and its officers and managers identified in Item 2 in addition to bankruptcy information for the subfranchisor and its officers and managers identified in Item 2.
Item 8 of the subfranchisor's unit FDD must disclose any rebates received by the national franchisor and its affiliates or other revenue derived by the national franchisor or its affiliates from purchases by unit franchisees, in addition to similar disclosures for the subfranchisor.
In Item 13, the subfranchisor must disclose the circumstances under which the subfranchisor's subfranchise rights may be terminated by the national franchisor, and the effect any such termination or expiration or non-renewal of the subfranchisor's agreement with the national franchisor will have on the unit franchisees' rights to continue to use the marks.
In Item 20, the subfranchisor only has to disclose information on current and former unit franchisees. Disclosure on the subfranchisors in the system is not to be included.
In Item 20 of the subfranchisor's unit FDD, there are to be two sets of Tables 1 - 5. The first set of tables should include information only on the unit franchises in the subfranchisor's territory. The second set of tables should include information on all unit franchises in the franchise system.
The subfranchisor's FDD must include two lists of current unit franchisees. The first list is to include all of the unit franchisees in the subfranchisor's territory. The second list must include unit franchisees of the franchisor and its other subfranchisors.
You can choose to list all unit franchisees in the entire system or the unit franchises in your state and, if necessary to have a minimum of 100 franchisees between the two lists, other unit franchisees in contiguous areas.
The financial statements of both the subfranchisor and national franchisor must be included in Item 21 of the subfranchisor's unit FDD.
If the national franchisor and the subfranchisor have two different fiscal year ends, the subfranchisor must update within 120 days of its fiscal year end, and then must amend its FDD when the national franchisor issues a new FDD after the end of its fiscal year to incorporate any material changes in the national franchisor's updated FDD.
Time to review with franchise counsel if changes will need to be made to your Franchise Disclosure Document (FDD) to bring it into compliance.
FRANData, the company that operates the Franchise Registry for the U.S. Small Business Administration (SBA), announced last week that it adopted the standard franchise definitions used by the North American Securities Administrators Association (NASAA) in the Multi-Unit Commentary that was issued in Fall 2014.
This is important because it recognizes and implements some standardization in the franchise industry, which has historically been inconsistent when referring to certain types of franchise relationships.
Specifically, the NASAA Multi-Unit Commentary uses the following definitions, which will now be recognized by FRANData:
FRANData's adopting these standard definitions will help the company work with franchisors, state administrators, and the SBA in benchmarking performance across brands and industries. "When franchisors ask us to benchmark their performance against their peers, it's important that we all agree on the types of franchising programs being used and their relative historical results," said Edith Wiseman, President of FRANdata.
"Franchisors use single-unit franchising, multi-unit franchising, area representatives, sub-franchising, master franchisees, licensing and other growth channels. It is crucial that we are able to do apples-to-apples comparisons when gauging the relative success of their efforts."
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2014 was a challenging year for franchising. While franchising growth was strong (with growth through franchising outpacing growth in the economy overall), new labor-driven attacks targeted the franchise model with a vigor and force unseen in the long history of the industry.
These attacks, driven by unions like the Service Industry Employees Union, seek to drive new membership and increase dues through unionizing employees of specific franchise brands.
In 2014, these initiatives largely took two forms:
The International Franchise Association has been vigorously combatting these initiatives through intense lobbying efforts and through grassroots educational outreach.
During the IFA's 2015 annual convention, the organization announced a new industry-wide effort to fight the minimum wage and joint-employer problems through its newly-formed group, the Coalition to Save Local Businesses.
Franchisees and franchisors alike should become educated about these efforts by the franchise industry to fight attacks on the franchise model. To learn more and to support the effort by the industry, go to www.savelocalbusinesses.com.
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The National Labor Relations Board's General Counsel, Richard Griffin, recently spoke to a group of law students at West Virginia University's College of Law. During the discussion, which was recorded and is available here,
Mr. Griffin offered the students some insight into his decision determining that McDonald's USA, LLC is a "joint employer" of its franchisees' employees.
Mr. Griffin's view is that the standard that has long been applied by the NLRB to evaluate employment in the franchise relationship context is wrong because it does not focus heavily enough on the control that franchisors actually exert over franchisee employees in their day-to-day operations.
Mr. Griffin believes that the level of control exerted by McDonald's over the employees of its franchisees is significant enough to change the character of the relationship, making McDonald's not only a franchisor, but also a "joint employer" of its franchisees' employees.
In particular, during the talk Mr. Griffin focused on the computer and software systems that McDonald's requires each of its franchisees to use. In this computer system, he says, McDonald's is able to monitor all activities at each franchise location on a minute-by-minute basis and uses this data to direct its franchisees when to schedule their employees for work, and when to send their employees home.
This control, which Mr. Griffin says is direct control over employee hours, is enough to make McDonald's a "joint employer" of those employees.
Of course, the franchisor's view is that the direction given by McDonald's to its franchisees is only guidance, which is given to help the franchisee operate its business more efficiently.
The long term effect that General Counsel's decision, which sent shockwaves around the franchise industry, will have on franchising is still unknown, but his comments during the WVU talk do offer a glimmer of hope to franchisors that they can avoid "joint employer" liability by not having McDonald's level of involvement in day-to-day franchisee operations and employee scheduling.
As we move into 2015, most franchisors will be re-evaluating their franchise documents (including their Franchise Disclosure Documents and Franchise Agreements) as part of the annual update, registration, and renewal process.
This is a good time to talk with counsel about ways that those documents can be amended to offer additional elements of protection against being found to be a "joint employer" of franchisees' employees.
If you want to discuss how you may be able to improve your franchise documents to respond to these and other new threats heading into 2015, please feel free to contact me or connect with me on LinkedIn.
On November 25, 2014, the City of San Francisco unanimously passed a new law called the "Retail Workers Bill of Rights." If it is signed by Mayor Edwin Lee, it would go into effect next summer.
Among other things, the law would require retailers to give schedules to workers at least two weeks in advance, and penalize companies for noncompliance. Further, if a company is sold, workers with at least six months of tenure would be guaranteed work with the new owner for at least 90 days.
The problem with the law is, like the minimum wage laws in Seattle and Chicago, it disproportionately targets franchise companies. The law would apply to any retailer with at least 20 locations worldwide that also have at least 20 workers. This would put independent franchise owners at a disadvantage vis-a-vis other small businesses, because even a franchisee with a single location could be considered to fall under the law's criteria if the franchisee's entire franchise system counts more than 20 locations, worldwide. This is fundamentally unfair to franchises.
To illustrate the point: consider mom-and-pop business owners, the Smiths, who own a single Quizno's sub shop in San Francisco. The Smiths compete with the Joneses, who own an independent (non-franchise) sub shop one block away from the Smiths. The Smiths, whose annual sales are about the same as the Joneses (but also have to pay royalty, marketing, and other fees to their franchisor), would be required to comply with the new law because they are part of a large franchise system, while the Joneses are free to continue operating their business as usual. This inequity makes it difficult for franchise operators to compete.
The International Franchise Association has responded to this inherent inequity by writing a letter (available here) to Mayor Lee urging him to veto the new law. We will follow this story as it develops.
Earlier this year, the California Department of Business Oversight (DBO) launched a new electronic filing portal that franchisors and other companies can use to file franchise, securities, and other business documents for California.
Having personally used it for a number of franchise-related filings, I can tell you that the portal was difficult to use and full of flaws. In fact, because of problems with uploading documents and managing filings for my franchisor clients, in some instances I was forced to send paper copies of documents to the DBO -- even though I had already e-filed them through the portal.
The good news is that the DBO has been listening to our complaints and making changes to the portal -- just in time for franchise renewal season.
The latest update now makes it possible for a single law firm to register and file documents for multiple franchise companies.
This is a vast improvement from the prior version, which required outside franchise counsel (like me) to register a different account for each franchisor I represent. Now, a franchise attorney will be able to manage multiple California franchise registrations through one account.
Here is the text of the DBO's press release (dated November 14, 2014) on the latest updates to DOCQNET:
DBO Self-Service Portal Users:
Based on feedback the Department of Business Oversight (DBO) received from DBO self-service portal users like you, the DBO will modify the portal to make the Franchise or Securities notice filing process more convenient and user-friendly.
Beginning on Monday, November 17, 2014 firms that file multiple franchise or securities notices, such as the Limited Offering Exemption Filing under Corporations Code Section 25102(f), will have the option to submit multiple filings under a single registered account. The notice filing history and payment history for 25102(f) filings will be available to you in the online portal.
However, please note that the notice filing history and payment history for any other notice filing is not available.
When you register (sign up) on the portal, you'll be given the option to select from one of two registration links:
1) To register as a Financial Services Licensee, as a securities issuer or franchisor filing on your own behalf, or a firm submitting Franchise registration applications or securities permit applications, you will go through the same registration process that exists currently, where both contact information and information about the Issuer/Licensee are required for registration.
2) To register a law firm seeking to file franchise and securities notices for multiple issuers, you will be asked to provide only your law firm's information and desired username. You will provide Issuer information with each individual filing.
More information on which registration form is appropriate for your user needs can be found on the self-service portal. You can also contact [email protected] with any questions.
If you have previously registered and filed multiple times (and therefore have multiple accounts), the Department will be combining your previous filings under a single account. We will send you a follow up email by Monday, November 17 with the username of the account that has been retained. If you choose not to continue to use that username, you can still create a new single user account to submit all future filings.
Other features and changes include:
We hope these changes further improve your experience using the DBO self-service portal. For more information, please visit the Frequently Asked Questions page.
The top story in franchising this week -- which has dominated the headlines -- is the minimum wage battle in Seattle.
The story, in brief: the Seattle City Council has voted to require Seattle's small businesses to raise the minimum wage of their workers from the current level to $15 an hour.
Under this new ordinance, 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.
Unsurprisingly, this is a hugely unpopular move in the franchising industry and an issue that has united both franchisors and franchisees. The International Franchise Association has announced that it will be filing a lawsuit against Seattle to protect franchisees and franchising in the city.
Here are this week's most interesting stories in franchising:
Editorial: Redefine franchises under Seattle's minimum-wage proposal
IFA to File Lawsuit Against Unfair and Discriminatory Seattle Minimum Wage Plan
And the non-Seattle related story:
Finally, if you haven't already done so, please read my two recent posts in a new series about common mistakes made by franchisors in their Franchise Disclosure Documents.
We are still recovering from a crisis of market collapse caused in major part by abuse on the part of banks and investment houses.
From mortgage backed securities where the mortgage portfolio was of extremely low quality to derivatives called credit default swaps, the Federal Reserve and the SEC enforcement division were asleep at the switch - called deregulation - and everything hit the fan.
As should be expected there are cries for more stringent laws and tough regulation by the current administration and a return to deregulation by the opposition.
Franchising is also an area in which there have been some wonderful entrepreneurial opportunities & yet many atrocious abuses that have not even been considered as enforcement opportunities by what most people think of as regulators of franchise sales and relationships.
For several years people have been going on to BlueMauMau or Unhappy Frranchise after having been unsuccessful in a franchise venture, calling for more stringent regulation of franchising.
They complain that securities are more stringently regulated than franchising.
But, franchising does not need a stronger hand controlling it. For two reasons.
1. To begin with, the regulation of franchising and the regulation of securities sales start from the same platform.
Both prohibit false or misleading statements, acts or practices in connection with the sales process and go another step beyond the common law of fraud in prohibiting omissions of fact needed to make what is said not misleading in the light of the circumstances under which the statements were made. (As a caveat, the common law of fraud in many states can also be used to cover omissions that produce fraudulent inducement, but under the common law it usually requires a very strong set of facts before a court will use omissions as the basis of a finding of fraudulent inducement.)
What people fail to appreciate is that enactment of a law is not by itself regulation. In addition there has to be serious enforcement commitment and that costs a lot of money.
Money is not available for strict regulation - not even for casual regulation of franchising activity in today's world. There are too many higher priorities for every dollar.
There is also another important consideration when thinking of franchise regulation.
2. Can prospective franchise investors self protect without government intervention? Yes.
The self protection capability makes it a very tough argument to favor active regulation of franchising. They govern best who govern least applies here as much as it does in any other context.
The reason is that markets have to be free markets in order to function in their best mode. Regulated markets always allocate assets less efficiently than free markets. We make policy choices to justify government involvement in banks, utilities, airlines and securities markets. In each of those markets there is no ready availability for consumers to self protect.
Franchising is different.
What is different about franchising is that there are really competent resources available to potential franchise investors that can vet the legal and the business issues in any franchise offering. If you want to invest in a franchise and you have not previously been involved in the franchising process, you are unfamiliar with the intricacies of franchise selling.
It does not matter one bit what you did for the company you worked for or what degrees you hold from any university.
Franchising is a different kettle of fish and you do not know how to swim in it no matter how grand your opinion of yourself.
This statement is based on the actual experiences of several thousand former business executives who lost everything they owned because they thought they were smarter than the franchise salesmen.
These are the people who refuse to accept that their ineptitude may have contributed to their loss and who are demanding that the government step in and more stringently regulate franchising.
When it is pointed out to them that they could go on Google and search for FRANCHISE LAWYER and through questioning of the lawyers on the first page of the search results find competent legal and business issue due diligence assistance, they hurl epithets at the person making the suggestion. The notion that they may have had some responsibility in their own failure is beyond their ability to accept.
Let's look at a few of the kinds of mistakes these former executives made when they were vetting their own franchise project.
1. How Much Can I Make?
The most glaring is that in one way or another they were given financial performance projections for the franchised business they were looking at. These projections came directly from the franchisor in Item 19 of the FDD - least likely. They may have been given sales information and any financial information beyond that was so hedged as to be useless. They failed to spot the useless issue.
They were given financial performance information by reading Entrepreneur or some similar magazine. Franchisor P R and sales departments plant hortatory stories about their franchises in these magazines touting profitability. While a few franchisees may achieve that profitability it is never typical of the chain as a whole.
Often there are no franchisees in that system doing that well. They failed to spot that this magazine information was just a shill planted story and not some real journalistic piece. If a franchisor buys space for these planted stories and advert space in the magazine, the magazine will then hail, salute or designate that company as a leader in the industry or franchise segment, awarding the designation as though it was somehow earned. This utter charade was never spotted by the investing executives.
They prepared a business plan - fairy tale - to present to a lender in support of a start up loan application in which they inserted a financial performance pro forma. The information for the pro forma came from the franchisor, either directly or through some franchise broker or loan broker. The numbers provided always show what the lender would require to "show" that this was a loan worthy investment and almost never represent even a reasonable approximation of expected real financial performance of the franchise. The investing executives never spotted this charade or if they did spot it they pretended not to in order to get the start up loan.
The franchisor arranges for a franchisee to speak at a sales presentation and this franchisee provides financial performance information, usually saying that his shop does even better than what is provided. Even if true, it means nothing to the new investor. However the executive new investor isn't sharp enough to appreciate that he is being taken in.
There are other issues that follow the same path, but these two other examples are enough to show you what this is really about.
2. Not understanding a 500 page contract, and not caring.
When the time comes to read and sign a franchise agreement, if the executives read the contract at all - and many later testify that they didn't read any of it - they find clauses that say that the franchisor never gave any financial performance information that was not contained in Item 19 of the FDD; that no one is authorized to provide financial performance information on the part of the franchisor; that no one did provide any financial performance information about this franchise; and that if anyone did provide financial performance information, the investing executive did not rely upon such information in making his decision to invest in the franchise.
3. Agreeing to Falsehoods.
All of these clauses, plus the merger clause that says there were no promises not actually stated in the written agreement, are absolutely false. They represent a total fiction. The investing executive knows that they are false and that he did get the financial performance information and relied heavily on it in making his investment decision.
But he signs the contract anyway. He also in many cases fills out a questionnaire just before the deal closes in which he is asked in writing whether he received financial performance information and if so from whom.
He fills out the questionnaire saying that he received no financial performance information and signs his name to that document as well as to the franchise agreement. He has just screwed himself royally.
How will he be believable when he later claims he was defrauded through the giving of false financial performance information to induce him to buy the franchise? He won't be. It's that simple. Most judges will not even allow such testimony to be given in the face of his having signed those documents.
Since he screwed himself by admitting what he knew was not true, he now claims that the government needs to protect the franchise investing public from the franchise scoundrels. And when someone points out that he had access to competent pre investment due diligence resources and failed or refused to use them, he becomes furious and calls that person all sorts of bad names. He will never accept responsibility for his own stupidity. His self inflicted wound will never heal and he will go to his grave whining about his misfortunes.
Conclusion - Know Yourself, even if it costs money.
It is easy to avoid these traps if you are willing to pay for the assistance.
No additional regulation of franchising is justified. Self help would prevent almost all franchise fraud.
Those who seek protection already have sufficient and ample resources, which they are not using. Why should the public be forced to pay when the individuals have sufficient resources?
It is that simple and that obvious.
The Maryland Securities Division, which is responsible for enforcing Maryland's franchise registration and disclosure law, recently announced that it has "posted a new publication for franchisors with information about filing renewal and amendment applications."
As experienced franchisors and franchise attorneys know, Maryland is one of the more challenging states for franchise registration.
Because incomplete or non-compliant applications can be a source of delay - sometimes significant delay - for a franchisor wishing to offer or sell franchises in Maryland, the guidance is important reading for the franchise industry.
The publication, entitled "Information on Renewing and Amending a Franchise Registration," can be found here.
If you continue having difficulty registering your franchise offering in Maryland, I would be happy to take a look at your documents and help you address any issues that are drawing comments from the state.
Happy franchise renewal season!
The Board of Directors of the North American Securities Administrators Association, Inc. (NASAA) has authorized the release, for both public and internal comment, of a proposed Multi‐Unit Commentary related to state franchise disclosure laws.
The proposal defines certain multi‐unit franchising arrangements that have become common in franchising and provides guidance for disclosing those arrangements in franchise disclosure documents.
The proposal addresses specific disclosure questions raised by franchise attorneys and state franchise examiners about multi‐unit franchising.
The comment period begins on 10/15/13 and will remain open for 30 days. All comments should be submitted on or before 11/15/13 .
Download: Proposed Multi‐Unit Commentary
Comments should be directed by e‐mail or in writing to:
Franchise and Business Opportunity Project Group
Dale E. Cantone, Chair
Office of the Attorney General, Securities Division
200 St. Paul Place
Baltimore, Maryland 21202‐2020
[email protected]
NASAA, Legal Department
Rick Fleming, Deputy General Counsel
NASAA
750 First Street, Suite 1140
Washington, DC 20002
[email protected]
In a move that will affect a number of franchise companies, yesterday California Governor Jerry Brown signed a new law that will require private home care agencies to become licensed in the State before providing service.
In addition to requiring licenses for home care organizations, the law requires individuals who provide services for those organizations -- called "home care aides" -- to be listed on California's home care aide registry.
To be listed, an individual must show that she or he is "of reputable and responsible character" and undergo a criminal background check.
A home care aide applicant also must acknowledge having read and understood California's laws that apply to people and companies private home care services. The full text of the bill is available here for review.
Governor Brown issued the following statement regarding the new law:
To the Members of the California State Assembly:
Assembly Bill 1217 would create a regulatory framework for the private homecare industry and home care aides.
Last year, I vetoed a more expansive bill, because I did not think that the time was right to create costly new regulatory burdens, given the economic uncertainty for many businesses and families in the homecare world.
I am signing AB 121 7 because it strikes a better balance between consumer protection and industry regulation, and because the author's office and legislative leadership have committed to delay the bill's effective date by one year to January 1, 2016.
The delay, coupled with other clarifying changes, will give the Department of Social Services enough time to accomplish what the bill seeks to achieve, and ultimately provide for smoother implementation of these good consumer protections.
Sincerely,
Edmund G. Brown, Jr.
As stated in Governor Brown's explanation, the law will not be implemented until January 1, 2016.
Because the law will make important changes to the way these agencies are regulated, however, franchisors and franchisees that provide private home care services in California should familiarize themselves with the law and begin planning for compliance.
Many states are attempting to level the playing field in franchising by creating statutes known as "fair franchising" laws.
These bills and enacted laws are created to soften the harsh remedies often found in franchise agreements.
They are created to make franchising less one sided and thereby fair to both franchisees and franchisors.
In essence, these fair franchising laws typically override the franchisor's franchise agreement and require that the franchisor provide greater notice and opportunity to remedy a default by a franchisee located in that state; require that the franchisor renew a franchise that would likely have terminated but for the state's fair franchising law; or require a greater time period for notice to a franchisee prior to terminating a franchise.
For example in 2012, California was considering, a new fair franchising law that would:
1. Require a franchisor to provide 60 days opportunity to remedy a financial default;
2. Prevent a franchisor from terminating a franchisee except for "good cause";
3. Provide remedies to franchisees for franchisor's failures to provide a "duty of competence" to franchisees, etc.
This bill, if it had passed and enacted into law, would have provided the most far reaching fair franchising law in the country. It died in the Judicial Committee, lacking 1 vote.
So, do you think that these fair franchising laws are fair?
Obviously it depends on your perspective.
If you are a franchisee, these laws that require more stringent standards for default, termination and non-renewal of a franchise are wonderful.
For a franchisor, these laws create a situation in which a franchisor will have greater difficulty enforcing system standards.
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As I've reported previously, the California legislature has during this session been considering a bill that would add additional regulation to the franchisor-franchisee relationship.
As proposed, Senate Bill 610 would have modified the existing California Franchise Relationship Act (the "CFRA") by:
All consideration of SB 610 ended for the year when, last night, the bill's sponsor pulled the legislation off the docket.
Apparently, this was because the bill had little support among the Democrats and Republicans on the California Assembly's Business, Professions & Consumer Protections Committee, which was scheduled to consider the bill today.
The International Franchise Association, which lobbied strenuously against SB 610, called last night's actions "a critically important victory for the IFA and the franchising industry."
The IFA further commented that "SB 610 undermined brand integrity by allowing substandard operators to remain in operation. . . [which] in turn hurts franchise brands and the equity and investment of both franchisors and franchisees."
Robert Purvin, Chair of the American Association of Franchisees and Dealers (which co-sponsored the bill) commented that "[i]t was clear that we wouldn't have the votes [this year], although we discerned sympathy for the cause."
Consideration of SB 610 has been tabled for now, but may be reconsidered by the Business, Professions & Consumer Protections Committee next year.
This is not a franchise post, but if you have been reading my blog for some time, you will know that it's on an issue that is important to me: film incentives for Nevada.
As I've previously written, Nevada was one of the few states in the country without tax incentives for companies that film their movies or television shows here.
It's always been my opinion that the lack of these incentives has discouraged companies from filming here -- even when the action is set in Nevada.
Fortunately, that is all changing due to recent action from our legislature. The Nevada legislature recently passed SB 165, which was signed into law by Governor Sandoval on June 11, 2013.
As a result, beginning on January 1, 2014, Nevada will offer tax credits to motion picture, television, and commercial productions that shoot at least 60% of their production here in Nevada and spend between $500,000 and $40 million in the state.
Those companies are eligible to earn a transferrable tax credit worth 15-19% of their in-state qualified expenses. These "qualified expenses" include Nevada cast members, labor, crew members, and other Nevada expenditures.
I am really looking forward to watching the film industry in Nevada grow!
An update to my previous post regarding the "fair franchising bill" being considered in California's Senate: on Tuesday, April 16, 2013, the California Senate Judiciary Committee approved the proposed legislation (SB 610), which is being supported by the American Association of Franchisees and Dealers ("AAFD") and opposed by the International Franchise Association ("IFA").
If passed, SB 610 would make the following amendments to the California Franchise Relations Act ("CFRA"):
SB 610 would also amend the CFRA by permitting a franchisee to sue a franchisor or subfranchisor who violates the CFRA for damages, rescission, or other relief deemed appropriate by a court. Moreover, SB 610 would authorize a court in its discretion to award treble (3 times) damages to the suing franchisee, as well as reasonable costs and attorney's fees.
The AAFD, in support of the bill, argues that:
Modern franchise relationships are most always governed by one-sided "take it or leave it" adhesion contracts that elicit substantial monetary investment from franchise owners, provide substantial protection for franchisors, but severely limit a franchisee's rights in franchise relationship. Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive manner.
The IFA, on the other hand, argues that the good faith requirement is problematic because "good faith" is:
[An] amorphous term to be applied to the franchisor in its relationship with the franchisee. The concept of "good faith" was created in the Uniform Commercial Code to fill in the blanks on short form contracts for the sale of goods. However, it provides no benefit in the context of detailed franchise contracts which govern complex and ongoing business relationships.
The bill was passed in the California Senate Judiciary Committee with a vote of 5-2. Next, the bill will be voted on by the full Senate. If passed, it would go before the California Assembly for consideration.
The SB 610 Fair Franchisee Bill passed via a 5 to 2 vote yesterday at Senate Judiciary Committee.
It is will now go the Senate floor for full Senate vote. If it passes, then it must pass the Assembly and be signed into law by the Governor.
"This bill would modify the California Franchise Relations Act (CFRA) to enhance the protections for and rights of franchisees in the performance and enforcement of the franchise agreement.
As noted in the Background, the CFRA governs the ongoing relationships between franchisors (including subfranchisors) andfranchisees to generally prevent unfair practices in the termination, renewal, or transfer of a franchise.
Consistent with the general goal of the CFRA, this bill would require franchisors, subfranchisors and franchisees to deal with each other in good faith in the performance and enforcement of the franchise agreement. The bill would define good faith for these purposes to mean honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
A franchisor or subfranchisor who violates this provision could be sued by the franchisee for specified damages.
In opposition to the bill, a coalition comprised of the International Franchise Association, California Chamber of Commerce, Civil Justice Association of California, California Grocers Association, and California Retailers Association, raise concerns with the good faith requirement, arguing that it is an "amorphous term . . . to be applied to the franchisor in its relationship with the franchisee.
The concept of 'good faith' was created in the Uniform Commercial Code to fill in the blankson short form contracts for the sale of goods. However, it provides no benefit in the context of detailed franchise contracts which govern complex and ongoing business relationships."
In response, co-sponsor American Association of Franchisees and Dealers states that "modern franchise relationships are most always governed by one-sided 'take it or leave it' adhesion contracts that elicit substantial monetary investment from franchise owners, provide substantial protection for
franchisors, but severely limit a franchisee's rights in the franchise relationship.
Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive
manner." (Other details of the California Bill, click here.)
The Senate Judiciary Committee of California is scheduled to consider a franchising bill at a hearing scheduled for Tuesday, April 16, 2013, at 1:30 p.m.
If passed by California's legislature (the State Assembly and Senate), SB 610 would amend the California Franchise Relations Act ("CFRA") as follows:
SB 610 would also amend the CFRA by permitting a franchisee to sue a franchisor or subfranchisor who violates the CFRA for damages, rescission, or other relief deemed appropriate by a court.
Moreover, SB 610 would authorize a court in its discretion to award treble (3 times) damages to the suing franchisee, as well as reasonable costs and attorney's fees.
For more information about SB 610 and a copy of the full text of the bill, visit www.leginfo.ca.gov.
A live audio / video feed may be available during the hearing at http://www.calchannel.com/.
Disturbing trends have emerged recently in both South Korea and Indonesia as governments move to place restrictions on the number of stores large franchise companies can develop.
I believe that these policies are misguided and the government officials involved lack a basic understanding of the industry and its impact on self-employment and entrepreneurship.
Indonesia is still a developing country and many large scale conglomerates do exist with sizable control over retail, mining and the agricultural sector. Some of these conglomerates are close to the government and license brands in the country such as Starbucks.
However, there are also local coffee house chains like EXCELSO that cater to a growing Indonesian middle class and are doing well. There are also chains like Hoka Hoka Bento with over 200 stores and growing offering affordable meals for US$ 2-3, primarily located in food courts.
Indonesia is not developed sufficiently to support single unit franchising successfully so even if the big chains are pressured to sub-franchise or sell off stores they are likely to be purchased by other large groups and defeat the government's purpose entirely.
No one can say that the franchise industry in South Korea lacks competition or that there is limited choice. One only needs to look at the coffee house or chicken sector to see the highly fragmented nature of the industry.
Of course some of the chaebol do have ownership positions in certain local chains, but there are many growing chains founded by local entrepreneurs as well.
Famous brands such as BBQ, Kyochon, Mister Pizza, Bonjuk, and Nolboo, for example, were all founded by local individuals, and while they all have strong positions in the marketplace, it is easy to find alternative concepts to visit as well.
Franchising in South Korea offers new opportunities to retirees looking to extend their business lives or to younger people seeking self-employment. This has a positive effect on the overall economy and restricting the number of successful franchise chain stores will likely have a negative effect as these potential franchisees may be forced to invest in less proven concepts with higher risk.
Government does have an important role to play to ensure that the franchiser provides clear and honest documentation to a potential franchisee in a manner that represents the business model fairly. The franchisee in turn is expected to do his own due diligence by meeting with the management of the franchiser and speaking with other franchisees operating the concept. Once this relationship is established it is in the mutual interest of both parties to ensure that the business is successful.
I hope that both the Indonesian and Korean politicians will study this issue more carefully before trying to solve a problem that probably does not exist.
The British Columbia Law Institute (BCLI) is proposing franchise legislation for British Columbia.
BCLI has issued the Consultation Paper on a Franchise Act for British Columbia to obtain input from franchisors, franchisees, business and consumer organizations and the general public on the proposed legislation to govern franchising, which would resemble legislation already in force in five other provinces.
"Given the prevalence of franchised businesses in BC and their importance to the provincial economy, it is surprising that BC has no franchising legislation," said Jim Emmerton, Executive Director of BCLI. "The introduction of BC franchise legislation would further increase the degree of harmonization of regulatory standards within Canada, while also giving appropriate and needed protection to BC franchise owners."
Alberta, Ontario, Manitoba, PEI and New Brunswick have legislation in place that imposes pre-sale disclosure requirements to guard against investors being misled when purchasing a franchise. Their legislation contains certain other important protections also aimed at levelling the playing field between franchisors and franchisees. The Uniform Franchises Act developed under the Uniform Law Conference of Canada Commercial Law Strategy was the model for the franchise enactments of several of those provinces.
The proposed BC legislation would also be based primarily on the Uniform Franchises Act.
BCLI hopes the Consultation Paper on a Franchise Act for British Columbia will be a catalyst for an informed discussion about franchise regulation in BC.
After consideration of responses received, BCLI will produce a report with final recommendations and draft legislation.
BCLI strives to be a leader in law reform by carrying out the best in scholarly law-reform research and writing and the best in outreach relating to law reform.
Contact:
Greg Blue
Senior Staff Lawyer (604) 827-5337 [email protected]
Last week, the International Franchise Association's Franchise Congress conducted a number of meetings with lawmakers in Massachusetts to discuss legislation that would clearly state that franchisees are independent contractors, and not employees.
If adopted, the law would address the problem that manifested itself in Massachusetts two years ago, when the United States District Court for Massachusetts caused shockwaves through the franchise world when he called franchising a "modified Ponzi scheme."
In that case (Awuah v. Coverall North America), which I discussed in more detail in my blog posts here, here, and here, the Court found that the franchisees of Coverall (a janitorial service company) were employees, and not independent contractors.
As the law currently exists under the Massachusetts Independent Contractor Act (the "Act"), an individual performing a service is considered an employee unless:
The court in Awuah found that the Coverall franchisees were not independent contractors under this test because the second prong of the test was not met, noting that "franchising is not in itself a business, rather a company is in the business of selling goods or services and uses the franchise model as a means of distributing the goods or services to the final end user without acquiring significant distribution costs."
To address the problem, the IFA seeks legislation in Massachusetts that would clarify that franchisees are independent contractors, and not employees. The IFA expects that the Massachusetts legislature will hold hearings on the proposed legislation within the next few months.
On October 11, 2012, the California Supreme Court granted review of Patterson v. Domino's Pizza to address the circumstances in which a defendant franchisor may be held vicariously liable for tortious conduct by a supervising employee of a franchisee.
Like many fast food chains, Domino’s Pizza (“Domino’s”) is a franchising operation in which individual franchisees operate storefronts under the Domino’s name.
In Patterson, the plaintiff, a sixteen-year-old employee of a Sui Juris, a Domino’s Pizza franchisee (“Sui Juris”), alleged that she was sexually harassed and assaulted at work by an assistant manager of the store. She filed a lawsuit against various Domino’s-related entities, including Sui Juris and Domino’s, as well as the assistant manager, alleging causes of action under the California Fair Employment and Housing Act, along with assault, battery and intentional infliction of emotional distress. She claimed that Domino’s was vicariously liable for the supervisor’s actions.
Although Sui Juris’ owner testified that he received employment direction from Domino’s and that his operation was monitored by Domino’s inspectors, the trial court granted summary judgment for Domino’s on the grounds that Sui Juris was an independent contract and was not an agent of Domino’s.
Particularly, it noted that the franchise agreement between Domino’s and Sui Juris provided that the latter was responsible for supervising and paying store employees. On this basis, the trial court concluded that Domino’s had no role in Sui Juris’ employment decisions.
The plaintiff appealed and the California Court of Appeal reversed the trial court. The appellate court stated that the nature of the franchise relationship will determine whether a franchisor is vicariously liable for injuries to a franchisee’s employee and that while a franchise agreement is relevant, it is not the exclusive evidence of the relationship between a franchisor and a franchisee.
The franchisor may be subject to vicarious liability where it assumes substantial control over the franchisee's local operation, its management-employee relations or employee discipline.
Accordingly, the court reversed the order of summary judgment.
Domino’s has appealed to the California Supreme Court, which will determine whether a franchisee’s employee may bring an action against the franchisor for harassment or other wrongful acts alleged to have been committed by another employee of the franchisee.
The line drawn by the Court will be of interest to any retail establishments operating under franchise agreements.
If the appellate court’s decision is affirmed, franchisors that establish employment standards or communicate opinions regarding hiring or firing decisions to their franchisees may risk vicarious liability in actions brought by the franchisee’s employees, even if they do not facilitate operations of the franchisee on a daily or continual basis.
The Federal Trade Commission has warned 22 hotel operators that their online reservation sites may violate the law by providing a deceptively low estimate of what consumers can expect to pay for their hotel rooms.
The warning letters cited consumer complaints that surfaced at a recent conference the FTC held on "drip pricing," a pricing technique in which firms advertise only part of a product's price and reveal other charges as the customer goes through the buying process.
According to the FTC letters, "One common complaint consumers raised involved mandatory fees hotels charge for amenities such as newspapers, use of onsite exercise or pool facilities, or internet access, sometimes referred to as 'resort fees.'
These mandatory fees can be as high as $30 per night, a sum that could certainly affect consumer purchasing decisions."
The warning letters also state that consumers often did not know they would be required to pay resort fees in addition to the quoted hotel rate.
"Consumers are entitled to know in advance the total cost of their hotel stays," said Federal Trade Commission Chairman Jon Leibowitz.
"So-called 'drip pricing' charges, sometimes portrayed as 'convenience' or 'service' fees, are anything but convenient, and businesses that hide them are doing a huge disservice to American consumers."
The letters strongly encourage the companies to review their websites and ensure that their ads do not misrepresent the total price consumers can expect to pay.
The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them.
To file a complaint in English or Spanish, visit the FTC's online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357).
The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 2,000 civil and criminal law enforcement agencies in the U.S. and abroad.
The FTC's website provides free information on a variety of consumer topics.
Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.
The British Columbia Law Institute (BCLI) has an announcement, relevant to all those in the franchise industry, with special focus on the legal profession.
British Columbia does not have franchise legislation, being one of the last provinces in Canada to look at the problem. Here is the announcement.
"The British Columbia Law Institute (BCLI) has begun a new project on franchise legislation for British Columbia. The project will examine whether there is a need for franchise legislation in British Columbia and, if so, what features it should have.There is typically an inequality in bargaining power between franchisees and franchisors in negotiating complex legal agreements, with franchisees at a significant disadvantage in terms of disclosure of information and control of business decisions.
"Unlike some other provinces in Canada, BC does not have any legislation to regulate franchises and provide legal protections for franchisees," noted BCLI executive director Jim Emmerton. "Through this project we hope to address this concern by reviewing the Uniform Franchises Act and making recommendations on whether this Act is an appropriate model for BC".
Key features of the Uniform Franchises Act, a prototype statute developed by the Uniform Law Conference of Canada, are provisions dealing with disclosure, the duty of fair dealing, rights to rescission, damages for misrepresentation, and dispute resolution.
BCLI aims to promote and contribute extensively to an informed discussion on the question of franchise regulation in BC. BCLI will publish a consultation paper with tentative recommendations, which will be used to consult broadly with the public. BCLI will then produce a report with final recommendations and draft legislation. A backgrounder on the project is available on the BCLI website
BCLI strives to be a leader in law reform by carrying out the best in scholarly law reform research and writing and the best in outreach relating to law reform."
For Further Information, Please Contact:
Greg Blue, Q.C., Senior Staff Lawyer
British Columbia Law Institute
Email: [email protected]
Tel: (604) 827-5337
I am serving as the Chair of the Franchise Law Committee of the State Bar of California.
Recently, I have heard reports from some of our members that they are having greater difficulties in the last few months in obtaining approval for their clients to be part of the SBA Registry of "approved" franchisors for SBA Loans.
The reports are that provisions in franchise agreements that had never been questioned in the past are now resulting in comments that the language must be changed.
Are others having similar experiences?
I understand that the IFA Legal Legislative Committee formed a task force to work with the SBA and that the task force developed proposed standard addendum language related to the Franchisor setting prices. The SBA is considering that language.
Here are some further requests that I understand that have been made by the SBA:
1. To include in an SBA addendum language to the effect that the franchisor would not exercise its right of first refusal in the event of a franchisee partial assignment (i.e. less than 100%), the concern being that if the franchisor took an assignment of less than 100% the franchisor would become a partner in the franchise, and would thereby be able to exert control to an extent that might eliminate the independence of the franchisee.
2. The SBA will require the franchise contract to be amended to reflect a time frame in which the franchisor will operate the business which cannot be more than 90 days, renewable as necessary for up to one year and that franchisor will periodically discuss the status with the franchisee.
3. Some franchisors have experienced resistance with the services the provide, such as customer scheduling. The SBA is requiring these services be provided on an optional basis.
Dennis E. Wieczorek has a list of other changes demanded by the SBA. I would appreciate any comments that people would be willing to share.
There is no need for you to identify the client, but I would appreciate hearing (a) the type of comment; (b) the general industry segment in which the franchisor operates; and (c) any other information that you think is relevant.
You can contact me below. Thanks.
Californians need jobs. Franchising has historically provided those jobs in the hotel, restaurant and service industry. Without a change which rewards franchisees as owners, risk capital will not be attracted to California. California will lose out on job creation, and its budget woes will be worsened if the Level Playing Field for Small Business Act of 2012 is not passed, Bill AB 2305.
California and San Bernadino are the spiritual home of franchising. In the late 50's, the McDonald brother's restaurant routinely recreated the secular miracle of feeding the hungry with a nutritious and delicious 15 cent Hamburger Meal -burger, fries and a milk-shake.
But, it took the owner of a franchised business, franchisee Ray Kroc from Chicago, to export California's golden miracle. Ray Kroc formalized the McDonald's brother's system. Ray Kroc created the scalable restaurant system - as a franchisee.
Before he bought out the McDonald's brothers, Ray was a master franchisee, a company that was granted a master license. Ray was a supply chain genius, and had an operator's understanding of what made a restaurant profitable. He was constantly challenging the supply system to scale and grow the franchise system.
In the 1950's, Ray broke every rule in his license or franchise agreement, and ended up paying a penalty of some $5 million to the McDonald brothers. He was brilliant, ungovernable, yet made many of his operators millionaires — enriching the middle class and contributing to many state's coffers.
Ray could attract a variety of operators in the 1950's and 1960's because he could legitimately offer them the prospect of real wealth.
The current franchise legal model allows the franchisor to exercise so much control over the franchisee as to be an employer. This legal model creates employees where there should be owners. This is the fairness issue is being addressed by Bill AB 2305: the problem of too much control and not enough sharing. Such a model does not attract risk capital.
Today many franchisees are nothing more than employees who pay good cash money to obtain jobs. No serious minded entrepreneur is attracted to this business model. The growth of franchising is largely fueled by those who are seeking to buy a job.
Without AB 2305 being passed, franchising will stagnant because it will not and cannot attract the Ray Kroc's as franchisees - the operators with boots on the ground who have the experience and capital to implement systems that scale and deliver value to the consumer.
It is not merely a matter of downloading these payments to the franchisee/employees. It is a matter of making the franchisee nothing more than an employee who pays for the right to work.
The California example, United Parcel Service franchises
The widely and rightly praised United Parcel Service Company (UPS) has used the current franchise legal model in this manner.
Prior to acquiring the franchising firm Mailboxes Etc. in San Diego, Atlanta-based UPS had a series of depots and unmanned drop-off boxes to process returns. UPS makes money when more packages are shipped, and their business model is to increase this volume. Some packages must be returned from where they were shipped to: the part is defective, the address is wrong, or the customer has lost interest in the product.
United Parcel Service would need to recruit employees to man and manage the returns and could have done so by expanding their depots. They did not hire more employees. Instead, they acquired an existing franchise system, Mailboxes Etc. out of bankruptcy. They changed the franchise agreement, giving the franchisor more control. They put their signage in front and the public now believes that they are dealing with UPS employees.
UPS achieved their business goals: they effectively turned these franchisees into employees who will not be a payroll expense to the franchising firm. All of this is currently legal —as many court filings in California's courts show. It was also a very shrewd business decision.
But it is time to end this overreaching and return balance and fairness to franchising.
Now, you will hear from franchisors about how important franchising is as an industry. But what you will not hear from the franchisor corporatist apologists is this secret: the current franchise legal model is detrimental to California's public interest.
The current legal model allows the franchisor, which is the company who grants a franchise license to a local business, to escape or evade paying state taxes compared to other firms trading in California.
This is how it is done. A franchisor incorporates a company in Delaware and that company owns the franchisor's trademarks and other intellectual property. Delaware does not tax royalty payments made to the holders of intellectual property. A franchisor funnels the royalty payments made by its California franchisees to Delaware - minimizing or sometimes eliminating the correct amount to remit to California for income tax.
This tax issue is not addressed by Bill AB 2305. But, you need to be aware of it when the franchisor apologist urges upon you the value of the great economic engine of franchising. Such industry does exist - what benefit is it to California if the surplus is untaxed and moved out of state?
California, in particular Silicon Valley, creates great immediate weatlh. For that wealth to become capital, it makes sense to woo those individuals into investing into a restaurant, hotel or service franchise — creating permanent jobs in the restaurant, hotel and service industries in California.
But the current franchise legal model is not hospitable to risk capital. Proper balance between control and reward must be restored.
Bill AB 2305 is aimed at correcting or restoring this imbalance. By returning the franchise legal model model to the correct balance, where the franchisor creates and mantains brand standards, while the franchisee executes those standards and everyone shares in the surplus value as owners, Bill AB 2305 creates a hospitable environment for operator and supply chain geniuses like Ray Kroc.
Jobs and growth will follow.
