Franchisee Associations

When we think of Gift/Loyalty Cards, we think about Christmas gifts. According to the 2006 Deloitte Touche Report on Gift Cards, Gift Cards the single most popular gift.

But it would be a mistake to focus on the major benefits of a Christmas Gift cards -getting the customer back in the store in January. A franchise system wants a program that will work year around. Harrah's provides an interesting example of what can be done with Gift/Loyalty Card program.

In 2003, Gary Loveman; CEO of Harrah's commented on Total Gold Program, in the Harvard Business Review:

"One tactic the company had already decided to use to enhance customer loyalty was called Total Gold, a player-card program that was modeled after the airline industry's frequent-flier programs. Launched in 1997, Total Gold was designed to provide regular customers with incentives to visit Harrah's properties throughout the country. Customers inserted their Total Gold cards into slot machines and earned credits as they played. They were rewarded with the standard fare that all casinos offer--free hotel rooms, dinners, show tickets, gift certificates. But there were three problems with the program. First, nothing differentiated this program from our competitors' efforts. Our customers simply took their free rooms and dinners and drifted across the street to do their gambling. Second, our customers earned different rewards at different properties; there was no uniformity in the program. Third, and most important, our customers were not given any incentives to consolidate their gaming with Harrah's."

Dr. Scott Shane, in his book, From Ice Cream to the Internet, describes one of the conflicts between the franchisor and franchisee. “A common way to increase sales is by offering a customer a coupon to generate interest in the system's products. Franchisors, almost always see the provision of coupons as a good idea because it increases sales, and hence, franchisor royalties. However, the use of coupons often increases costs along with sales because the company must provide the additional discounted or free items. The increase in sales and costs that comes from the use of the coupons frequently means that the higher level of sales occurs at a lower profit per unit, leaving the franchisee's profit to suffer. As a result, franchisees frequently oppose the use of coupons to increase sales that the franchisors try to get them to adopt”

It is unsurprising that both the franchisor and franchisee immediately see what is in their short term self-interest. What is that after fifty years of franchising, Dr. Shane's observation still holds true.

Remember the Harrah experiment with data mining and loyalty gift cards. Harrah's Total Gold Card was designed to provide incentives for Harrah's customers to return. It was a bit of bust in terms of providing those incentives. Harrah's re-engineered the program in order to be able to identify the expected long term worth of its customers, using the data that the Total Gold program provided to Harrahs.

But Harrah's was not merely passively collecting data; Loveman describes performing incentive experiments based upon what they thought the data was showing them. Instead of guessing or dictating the customer's preferences, Harrah's spent the time actually learning about its clients preferences and finding new ways to satisfy those preferences.

In the language of bargaining theory, coupons frame the relationship between the franchisor and franchisee as primarily zero sum, distributive, or that of claiming value. That is only part of the franchisor and franchisee relations; the other part can be described as coordinated, integrative, or creating value.

There is another difference between a discount coupon like the one I picked up recently from my local hot-dog street vendor and the Starbucks Gift Card,

provides a nice contract, in more ways than one. The hot dog street vendor is essentially selling me discounted dogs, to be paid in the future. With Starbucks, I am giving them both data and money, money they earn interest on until I either make a purchase or lose the card. We have seen how data is valuable, but let's not forget that that gift cards are a form of cash.

For franchise systems, the recent action by the FTC against Darden Gardens regarding their gift cards is instructive. The FTC complaint can be read here.

"According to the FTC's complaint, Darden advertised its gift cards on television and radio, and in its restaurants and Web sites. Darden represented that consumers could redeem the cards to buy goods or services at its restaurants equal to the card's monetary value. But Darden did not disclose adequately the "dormancy fees" that would be deducted after a certain period of time. For cards sold before February 2004, after 15 months of non-use, a $1.50 dormancy fee was deducted from the card's balance for each month of inactivity; for cards sold after February 2004, the monthly fee was deducted after 24 months of non-use."

"Darden Restaurants Inc., which owns restaurant chains Olive Garden, Red Lobster, Smokey Bones, and Bahama Breeze, agreed to settle Federal Trade Commission charges that it engaged in deceptive practices in advertising and selling its gift cards. As part of the settlement, Darden will restore fees that were deducted from consumers' gift cards and disclose fees or expiration dates in future gift card sales. This is the agency's second law enforcement action involving allegedly deceptive gift card sales."

The other FTC Action was against K-Mart, which was similar.

"The FTC's complaint alleges that since 2003, Kmart did not disclose adequately that after 24 months of non-use, a $2.10 "dormancy fee" would be deducted from the card's balance for each month of inactivity, resulting in a $50.40 reduction from the card's value if the card was not used for 24 months. In many instances, the Commission alleges, consumers did not learn of the fee until they attempted to use their cards."

There have been similar lawsuits. The Attorney General of New Hampshire filed the suit in November of 2004, charging that Simon was in violation of a provision of the Consumer Protection Act that forbids the selling of gift certificates that bear expiration dates or fees that reduce the value of the gift certificate. In its lawsuit, the State noted that the Simon Gift Card, a prepaid debit card sold at shopping malls owned or operated by Simon, has both an expiration date and fees that are charged against the value of the card."

Tivo settled a class action regarding its gift cards. "Every state has a different set of rules, but in the Golden State, you're not allowed to put an expiration date on a gift certificate, except in very rare instances. This is largely because gift certificates are typically purchased with cash and it's not fair for a consumer to lose out on a service just because they didn't move quickly enough or because they received the gift on a later date. When it comes to rebates, coupons and other discounts anything goes, but once a consumer has purchased a gift certificate, it's good for life as far as California is concerned."

The FTC has published their own gift card buying brochure, but the best summary and comparisons of gift cards comes from the Montgomery County Office of Consumer Protection.

The Montgomery County of Consumer Protection organized their review of gift cards into these five categories: a) Is a Replacement Cards Available, b) Can the Gift Card be used to buy from the Website, c) Is there an Expiration date, d) Are there fees, and e) Are the expiration and the fees clearly disclosed on the card and the company's website.

The Montgomery County of Consumer Protection annual assessment provides a franchise system with a useful checklist.

Should franchise systems adopt the California rule, and have no expiration dates on their gift cards? This seems like a fairly consumer friendly move. But there is a problem here.

According to a March 2007 press release by the Florida State Police, "Gainesville WAL-MART stores notified the GPD of a gift card scheme being conducted at their stores. Several suspects were identified as using stolen credit cards to purchase large quantities of gift cards. Subsequent investigation revealed these suspects and others had been traveling throughout Florida purchasing large quantities of gift cards with stolen credit card accounts and then redeeming the cards at WAL-MART Stores and Sam’s Clubs. Items purchased included computers, gaming devices and big screen televisions. Losses experienced by WAL-MART and the banks issuing the credit cards currently total more than $8 million in Florida and are still being calculated."

This is somewhat ironic, given the move from paper based coupon loyalty to programs to electronic gift cards was motivated by security and fraud concerns. Interesting that the suspects first stole credit card accounts, and rather than using them to purchase items, they immediately purchased gift cards. I am surprised that they didn't try to auction off the cards on eBay instead of buying retail.

What we are going to find is that the introduction of gift cards, primarily designed to appease men shopping at Christmas, has introduced a whole new dimension of fraud.

Skimming fraud is going to expand, while technical solutions will be offered up -largely as a pancea. The possibility of large scale fraud is an important factor to consider when introducing any stored value card.

Court Orders Three Individuals to Stop Illegal
The FTC's Complaint: According to the FTC's complaint, filed in September 2005, since at least 2004, the defendants used outbound telemarketing to contact consumers in the United States, falsely offering major credit cards, such as MasterCard and Visa, to people who agreed to have the defendants electronically debit their bank accounts for an advance fee of $249. The defendants typically claimed that the credit cards would have a $2,000 credit limit, zero percent interest, and no annual fees, and often targeted their offers at consumers with poor credit histories. Consumers who provided their bank account information did not receive a major credit card, but instead were sent an application for either a "stored value card" or "cash card" that had no line of credit associated with it and could be used only if the consumer first loaded funds onto the card. The complaint also alleged that the defendants violated the law by calling consumers on the FTC's National Do Not Call Registry.

The complaint named the following entities as defendants, both individually and as corporate officers: Sean Somma aka Sean Soma, individually and as an officer of corporate defendants Centurion Financial Benefits LLC and 1629936 Ontario Ltd, also dba Spectra Financial Benefits; Antonio Marchese aka Tony Marchese, individually and as an officer of corporate defendant 1644738 Ontario Ltd., also dba Sureway Beneficial, Simple Choice Benefits, and Oxford Financial Benefits; Tony Andreopoulos, individually and as an officer of corporate defendants American Getaway Vacations Inc., Credence Travel Processing Inc., and Topstar Media Inc., also dba Integra Financial Benefits; and Dennis Andreopoulos, individually and as an officer of corporate defendants American Getaway Vacations Inc. and Topstar Media Inc., also dba Integra Financial Benefits.

The complaint also charged the following corporations: Centurion Financial Benefits LLC; 1629936 Ontario Ltd., also dba Centurion Financial Benefits; 1644738 Ontario Ltd, dba Integra Financial Benefits; American Getaway Vacations Inc., also dba Integra Financial Benefits; Credence Travel Processing Inc., dba Integra Financial Benefits; and Topstar Media Inc., also dba Integra Financial Benefits. The FTC filed an amended complaint in December 2006, adding several corporate and individual defendants. Litigation continues against all defendants other than Somma, Cholette, Marchese, and Dennis Andreopoulos, whom the Commission voluntarily dismissed as a defendant.

The Stipulated Final Orders: The court orders announced today against defendants Soma, Cholette, and Marchese include strong injunctive relief that will help ensure that they do not engage in similar illegal conduct in the future. Specifically, the orders prohibit the defendants from making misrepresentations regarding credit cards or any other product, program, or service offered to consumers. They prohibit the defendants from violating the Do Not Call provisions of the Telemarketing Sales Rule and from selling, leasing, or transferring the information in their customer lists to anyone. In addition, the orders subject them to strict monitoring and compliance requirements.

Finally, the orders contain an avalanche clause that would require the defendants to pay more than $9.8 million, the total amount of consumer injury caused by the scam, if they are found to have misrepresented their financial condition. The orders also require them to cooperate with the FTC in its ongoing litigation against the remaining Centurion defendants.

From the DFA, "The judge in the United States District Court for the District of Minnesota granted the franchisees' motion for summary judgment. Effectively this ruling determined that the franchise agreements preclude the PULSE mandate and requires Domino's to provide franchisees with specifications for computer hardware and software so that the franchisees can acquire such computer hardware and software from any source. More particularly, the judge ruled that:

1. Section 8.2 precludes Domino's from mandating PULSE, or any other computer system, for that matter.

2. Section 8.2 requires Domino's to provide franchisees with the specifications for a computer system.

3. Specifications and/or standards are guides to constructing a finished product, and therefore they cannot be a finished product.

4. Section 8.2 requires Domino's to provide franchisees with specifications for computer hardware and software that would render it possible to obtain such items from multiple sources.

Given this ruling it is even more critical that you do not sign the current PULSE License Agreement, since the signing of such an agreement could impact your ability to exercise your rights under the franchise agreement, as clarified by the District Court ruling.

As stated in the past, we are neither pro-PULSE or anti-PULSE, we simply are pleased that the District Court has confirmed our belief that we have the right to acquire computer equipment meeting Domino's reasonable specifications from any source."

The entire ruling can be read here., and the DFA's press release is here.

This is area of commerce is going to be increasingly important. Domino's spent years developing the Pulse system, no doubt in part to track the consumer preference information.

What is emerges from a reading of the Court order that Domino's developed the new computer system without involving the Franchisee Association on how to share the additional revenue or information gathered.

Without such input and collaboration, it is no wonder why the DFA opposed the mandatory use of the Pulse system.

What does this mean for other franchise systems, who seek to share revenue or information by introducing new point of sale systems? Well unfortunately, like all hard won franchisee victories, this ruling would have been different had the franchisor thought to include computers and point of sale systems under items that had to be supplied by the franchisor in the contract. Would you like to bet about what is on the agenda for the next IFA's legal conference?

Let's hope that the DFA and the franchisor can now put behind them this contentious litigaiton and work together on setting joint goals, and devising fair procedures to split the value from obtaining those joint goals fairly. Ironically, there are great gains to be had for both

According to a press release by Department of Justice, Indicted corporation agrees to cooperate in investigation and prosecution of executives and other individuals in $250 million coupon fraud scheme.

'United States Attorney Steven M. Biskupic announced today that the United States has agreed to dismiss without prejudice pending wire-fraud charges against International Outsourcing Services ('IOS'), a privately-held corporation. The dismissal comes as a result of an offer by the new management at the company to assist the government in the ongoing investigation and current prosecution of 11 individuals, including multiple former IOS executives, who were indicted with the company on March 6, 2007.

United States Attorney Biskupic said, 'This dismissal is the result of the company's change in its upper management and recent commitment to provide complete and total cooperation in the further investigation and prosecution of the coupon fraud scheme that others allegedly committed by using the company. The dismissal helps company employees and provides new information to assist the government in determining who may have been responsible for the alleged fraud.

This resolution also benefits the victims of the alleged fraud scheme by requiring the company to place any future distributions to its shareholders in escrow for use if individual defendants are convicted and ordered to pay restitution.

According to the government's motion to dismiss the case against IOS, the company has agreed to take several steps, including:

Cooperating completely in the ongoing prosecution of individuals concerning the charged fraud scheme as well as in the investigation and prosecution of IOS's executives for possible obstruction of justice both before and after the indictment;

Installing a new management team and removing the indicted individuals from their roles with the company;

Placing all putative distributions to shareholders, including any potential proceeds available for shareholders if the company were ever sold, in escrow pending resolution of the criminal cases;

Making IOS employees and representatives available for interview and testimony as necessary;

Making its files available to the United States for unrestricted inspection and use in the criminal cases and voluntarily waiving any privileges that might otherwise apply to its documents;

Designating a management-level employee to assist the United States to facilitate admissibility of any IOS records at the trial of any indicted individual; and

Maintaining an independent, on-site monitor to oversee company operations and finances.

United States Attorney Biskupic further explained that charges could be re-filed if IOS fails to live up to its cooperation agreement and that IOS has agreed that if charges were to be re-filed, the company has waived the statute of limitations for the charged offenses.

On March 6, 2007, a federal grand jury had returned a 25-count indictment charging IOS and 11 individuals with carrying out a wire-fraud scheme to defraud manufacturers that use coupons to market their products to consumers. The indictment alleged that as a result of the scheme, the defendants caused over $250,000,000 in loss to manufacturers nationwide and over $15,000,000 to Wisconsin-based companies.

No trial date has been set for the case against the 11 indicted individuals. If convicted, individual defendants would face (per count): up to 20 years' imprisonment, up to $250,000 in fines, up to 3 years of supervised release, and a restitution order covering the amount of established loss. The public is cautioned that an indictment is merely the formal method of returning charges against an individual and does not constitute inference of his guilt. An individual is presumed innocent until such time, if ever, that the government establishes his or her guilt beyond a reasonable doubt.

The FBI is the lead agency in this investigation. Anyone who may wish to provide additional information pertaining to this investigation should contact the Milwaukee Office of the FBI at 414-276-4684. This case has been assigned to AUSAs Stephen A. Ingraham, Richard G. Frohling, Matthew L. Jacobs, and Kelly B. Watzka for prosecution.

For more information contact: Michelle L. Jacobs, First Assistant United States Attorney Richard G. Frohling, Deputy Criminal Chief Stephen A. Ingraham, Assistant United States Attorney 414-297-1700

You are in charge of designing your franchise's new gift card prize - the winner gets a dinner once a week, or can share a dinner with one friend twice a week. The consumer preferences of the winner and friend are known, because of your tremendously sophisticated consumer sampling methods.

The winner is announced, a charming gentleman known only as "Fred". Fred is a sandwich sort of customer - who leans towards the salami submarine (S) type of fare. Our consumer preference database also reveals that Fred also likes ham sandwiches (H), and from time to time is known to indulge by scarfing back a burrito (B). In the language of economists, we say that Fred prefers S to H to B, S>H>B. Armed with this sophisticated notation makes us feel better about the task we are embarking upon - how to mix up H, S, and B to serve to Fred so that over the year Fred obtains maximal satisfaction. (We are told that Fred can be a bit demand, on occasion - so we really want to get it right.)

Since variety is the spice of life, as everyone knows, we need to mix up the delivery of sandwiches to Fred so that he doesn't get bored. We know that he would not be satisfied by a year's supply of S, we could even ask him.

We could ask him, and we would be wrong. Fred, whatever other qualities he might possess, according to the psychologist Daniel Gilbert would get his prediction of his own preferences wrong. Fred like most of us, believing in the spice of life, would not pick a diet which consisted of each week eating a salami submarine. And he would be wrong.

According to Gilbert, "Researchers studied this experience by inviting volunteers to come to the laboratory for a snack once a week for several weeks. They asked some of the volunteers to choose all their snacks in advance, and just as [we asked Fred to do] the choosers usually opted for a healthy dose of variety. Next, the researchers asked a new group of volunteers to come to the lab once a week for several weeks. They fed some of these volunteers their favourite snack every time, an they fed other volunteers their favourite snack on some occasions and their second favourite on others." The first group was more satisfied than the second - variety is not the spice of life.

Over a week, the taste of ones favourite food is no longer subject to habituation - the force that makes the tenth bite of a submarine not as exciting as the first bite. We confuse, says Gilbert, the decision between having ten salami submarines over ten weeks with having the choice between 10 bites of a salami sandwich versus five bites of a salami sandwich interspersed with five bites of a ham sandwich. Fred, for all his sandwich making skills, is no better than you or I avoiding this paradox.

According to a FTC Press Release, FTC Charges Pitchmen with Deceptive Magazine Subscription Telemarketing

The Federal Trade Commission has charged several Pennsylvania-based defendants with violating the FTC Act and the Telemarketing Sales Rule (TSR) by calling consumers and telling them they were eligible to receive 'valuable coupons' for groceries and other items, when in fact they were luring them into signing up to purchase unwanted magazine subscriptions. The Commission's complaint states that the defendants, collectively known as Magazine Solutions, often did not tell consumers up-front that to get the coupons they had to buy the subscriptions, and sometimes claimed the magazines were free or that the consumers only had to pay shipping and handling. When consumers tried to cancel their orders, many found it was nearly impossible to do, and were stuck with subscriptions to magazines they never wanted in the first place.

According to the Commission's complaint, the defendants violated Section 5 of the FTC Act and the TSR through their sale of magazine subscriptions and a coupon-redemption program. Since at least 2002, the FTC contends, they telemarketed to consumers nationwide in a campaign that supposedly offered free coupons worth over $1,000, but actually was a pitch for magazine subscriptions.

According to the complaint, defendants typically place a series of telephone calls to consumers in which they misrepresent that they are calling to conduct a survey; misrepresent that they are not selling anything; and misrepresent that the consumer will receive valuable coupons worth over $1000. Eventually, defendants disclose that to receive the coupons consumers must agree to receive magazine subscriptions, but misrepresent the total cost and terms of the subscriptions.

The Commission also charges that many consumers refused defendants' offer and agreed only to receive information about it in the mail, yet defendants misrepresent that these consumers are legally obligated to pay and attempt to collect a monthly fee from them. The defendants also threaten to take legal action to collect payment from consumers if necessary, but do not. The FTC contends that in many cases, consumers never got the coupons that they were promised or never agreed to the defendants' offer to begin with, yet were charged hundreds of dollars and harassed and threatened by the defendants when they refused to pay for their 'service.' The defendants also reported consumers' failure to pay to credit bureaus.

The Commission specifically alleged that the defendants violated the TSR when they called consumers and often did not make it clear that they were offering products for sale, failed to disclose the total cost of their program before obtaining payment information, made misrepresentations to induce consumers to make a purchase, and misrepresented their cancellation policy.

The complaint names the following individuals and organizations as defendants: 1) Magazine Solutions, LLC, a Pennsylvania limited liability company also doing business as (d/b/a) MagazineSolutions, United Publishers' Service, and Read-N-Save America; 2) United Publishers' Service, Inc., also d/b/a Magazine Solutions, MagazineSolutions, and Read-N-Save America; 3) Joseph Martinelli, individually and as an officer of Magazine Solutions, LLC and United Publishers' Service, Inc.; 4) Barbara DeRiggi, a/k/a Barbara Nicely, individually and as a manager of Magazine Solutions, LLC and United Publishers' Service, Inc.; and 4) James Rushnock, a/k/a Jay Gilbert, individually and as a manager of Magazine Solutions, LLC and United Publishers' Service, Inc.

The FTC's complaint seeks to permanently bar the deceptive marketing and freeze the defendants' assets to preserve them for consumer redress. The Commission's filing comes shortly after the Pennsylvania Attorney General's Office filed contempt charges against defendant United Publishers' Service, Inc. for violating a previous court order prohibiting the company from, among other things, violating Pennsylvania's consumer protection law and the FTC's TSR.

Good article from Brian Kreps at Washington Post on Internet Coupon Fraud

Hacking Groceries: Internet Coupon Fraud - Security Fix

"Over the weekend, my wife and I were shopping at Magruder's, a local grocery chain to which we're fiercely loyal, and we noticed a handwritten sign attached to the credit-card reader in the checkout line:

"Attn customers: Due to coupon fraud, we are unable to take Internet coupons."

A store manager, who asked me to kindly leave his name out of this post, said the store-wide policy went into effect last year, after it became apparent that there was "a lot of cheating going on. People were gang-printing these things by the reamfuls."

I've written about teenage hackers creating wholesale counterfeit coupons to get free pizza and other stuff at popular fast food joints, but the type of coupon fraud that's going on these days makes that type of activity seem like amateur hour.

Curious as to just how bad the coupon fraud problem really is, I checked out the Web site for the Coupon Information Center, a non-profit group based here in Alexandria, Va., which represents the manufacturers that issue 70 percent of the coupons in the United States today. Turns out that the Internet is helping to facilitate coupon fraud on a unprecedented scale."

From CNN Money

Gift certificate rules burn small business - Sep. 5, 2007

(FSB Magazine) -- With consumers screaming about abuses, more than 30 states have enacted laws banning gift cards and certificates with short expiration periods and requiring issuers to turn over cash from expired cards to the state. Eight states have added such laws in 2007 alone.

Caught on the bad side of good intentions, however, are small businesses that thrive on gift certificates - spas, salons, and restaurants. Fountain of Youth Day Spa in Albuquerque stopped selling certificates when the New Mexico law went into effect in July - even though gifts account for 25% of sales - because it requires certificates to be valid for five years and forces issuers to turn over 60% of the value of expired cards.

Read more about gift certificate cards and small business.