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“You Made Your Bed, Now Lie In It!” Dickey’s BBQ And Franchisees Stuck Litigating And Arbitrating

August 26th, 2015

Takeaway: Before you enter a franchisee/franchisor agreement, try to devise an efficient and fair dispute resolution system so you don’t end up in this sticky situation.

Where and how a dispute between a franchisor and franchisee must be decided can have a major impact on the outcome of the case. Franchisees generally want the case to be decided in the court where they live and by a jury, while franchisors want it decided in their city and by a private arbitrator or a judge. State regulation of franchise sales intended to bolster franchisee’s rights on this issue can result in the franchisor and franchisee having to engage in both arbitration and court litigation in two different states. We explore how franchisors and franchisees might reasonably avoid that unwieldy situation.

The Maryland Securities Commissioner, as a condition of approving a registration, routinely requires franchisors to agree that its Maryland franchisees will have the right to bring a claim in a Maryland court for violation of the Maryland Franchise Registration & Disclosure Law (the “Franchise Law”) – even if the franchise agreement requires arbitration of all claims in the franchisor’s home state. However, what happens when a franchisor files an arbitration demand against a Maryland franchisee in its home state, and then the franchisee sues in a Maryland court alleging violation of the Franchise Law? In Chorley Enterprises, Inc. v. Dickey’s Barbecue Restaurants, Inc., the U.S. Court of Appeals for the Fourth Circuit ruled that the franchisor’s claims must be decided through arbitration in Texas, but the franchisees’ Franchise Law claims must be decided by a jury trial at the U.S. District Court in Baltimore.

The court’s reasoning was solid and logical. Dickey’s franchise agreement included a provision, specific to stores located in Maryland, stating that the franchisee had the right to sue in courts located in Maryland for claims arising under the Franchise Act. Otherwise, the agreement had a broad clause requiring arbitration of all claims arising from or related to the agreement or the parties’ relationship. The court noted that Dickey’s did not seek to obtain registration by the Maryland Securities Commissioner without including the litigation carve-out for Franchise Act claims, and it did not seek a court order declaring that the Securities Commissioner could not require such a carve-out from the arbitration provision. Instead, it chose to include the language typically required by the Securities Commissioner so that it could sell Maryland franchises. Accordingly, the court ruled that Dickey’s “made its own bed” and therefore would have to defend the Franchise Act claim in court.

However, the decision was not a clear victory for the franchisee. The next step in the dispute will be for the U.S. District Court judge to decide whether to delay the franchisees’ court case until the arbitration is completed in Texas. (The arbitration had been stayed pending the appeals court ruling.) If the court does so, then the franchisees will have to defend against Dickey’s claims in the arbitration and probably present their evidence showing that the Franchise Act violations, to convince the arbitrator that the franchise agreements are unenforceable. But win or lose in arbitration, to preserve their right to have a jury trial of their Franchise Act claims, the franchisee will have to present its case a second time in court to actually get a judgment against Dickey’s.
Is there a way to solve this mess going forward? Franchisors registering in Maryland probably should not include an addendum provision allowing franchisees to pursue Franchise Act claims in Maryland courts. If the Securities Commissioner demands that change, as is likely, then the franchisor should consider offering to agree that all claims (including Franchise Act claims) will be decided through arbitration, but the venue for arbitration will be in Maryland. The location of the dispute resolution is the big issue for franchisees, and having everything decided in one proceeding is ultimately to the benefit of both parties. Such a franchisor will benefit being able to avoid facing a franchisee group or class action in court and from having cases decided by arbitrators rather than court juries.

For most prospective franchisees, it would be best to negotiate away the right to bring a claim under the Franchise Act in Maryland court, if the franchisor will agree that all claims will be decided through arbitration conducted in or near Maryland. If dispute resolution is necessary, most franchisees will be better off not being stuck on “two tracks” and instead have all issues decided efficiently in a fairly convenient forum – even if that means giving up the right to have its “day in court.”

How To Tell If You Are “Doing Business” In A Foreign State And Why It Is Important To Know

August 19th, 2015

In our previous article on the Moe’s Southwest Grill case, posted June 16, 2015, we explained the importance of complying with state filing requirements to maintain limited liability status in any state where your company is regularly doing business. The case demonstrated how a failure to do so could cost your business the ability to protect its rights and have other substantial legal repercussions. Now, we take up the important question of what instate activities constitute “doing business” to require such state registration as a foreign entity.

What does it mean to “do business” in a state?

Generally, a business’s level of activity in a state is a good indicator of whether or not they would be considered “doing business” for state registration purposes. For some corporations, it can be obvious when their business is operating a store or shop to conduct regular business in a state, as was true for Moe’s Southwest Grill restaurant. For companies not engaged in traditional retail or service provision businesses, it may be more unclear when the blurry line between “doing business” and conducting minor transactions is crossed. It is important to be mindful of this opacity and take caution so that your business is prepared to make the necessary arrangements for compliance.

The March 4, 1988 decision by the Maryland Court of Special Appeals in J.C. Snavely & Sons, Inc. v. Wheeler, No. 963, Sept. Term, 1987, outlined the test that Maryland courts use to determine if a corporation is “doing business” in the state. The Court established that a foreign corporation is essentially doing business in any state where it “transacts some substantial part of its ordinary business.” Unlike the similar jurisdictional standard, the “doing business” standard for state registration purposes calls for more than mere business solicitation, it requires an extensive set of activities and management functions within the state. It may be difficult to determine whether your corporation meets this vague standard because the factors, and their relative weights, vary with unique circumstances on a case by case basis. The March 7, 1994 decision by the Maryland Court of Appeals in Tiller Const. Corp. v. Nadler, No. 126, Sept. Term, 1993, affirmed the test from the Snavely case and restated four factors that should be particularly examined among other various factual considerations.

  1. Whether the foreign corporation pays state taxes. This is often demonstrated through contracts with local suppliers where sales taxes are paid, or where substantial inventory is bought and paid for locally with local taxes paid.
  2. Whether it maintains property, an office, telephone listings, employees, agents, inventory, research and development facilities, and advertising and bank accounts in the state. Although it is definitely possible to “do business” in Maryland without satisfying everything on this list, courts will examine the extent to which the corporation does maintain the listed items because as a whole they may indicate either substantial business activities over a long period of time, as opposed to lesser or temporary transactions within the state.
  3. Whether it makes contracts in the state. Courts consider the number of contracts with instate entities and their respective lengths because a few occasional contracts do not sufficiently indicate that a corporation is regularly “doing business” in that state.
  4. Whether its management functions in the state are pervasive. If few or none of the corporation’s decisions are made in Maryland, the instate interactions may be more transactional than they are suggestive of “doing business.”

According to the Tiller case, Maryland’s laws for foreign corporations are not unique. Such considerations to determine if a corporation is “doing business” for state registration purposes are fairly typical throughout the United States, as they are seemingly based on the Model Business Corporation Act. While this issue for limited liability companies (“LLCs”) has not been analyzed in any Maryland cases, based on the similarity of treatment between corporations and LLCs in other contexts it is likely that Maryland courts would use the same or similar analysis should an LLC context a finding that it is doing business in the state.

Conclusion

It is important to know whether your corporation or LLC is “doing business” in a state to the extent that it must be registered as a foreign entity. Failure to register a limited liability entity that is doing business in a state can have considerable consequences, including the prohibition from bringing suit in the state’s courts. Maryland’s fairly typical approach to determine if a company is subject to such state filing requirements is to consider the unique circumstances of each entity, and make an evaluation based on the “nature and extent of the business and activities which occur in the forum state.” Since this is not a straightforward test, the four factors delineated in both the Snavely case and the Tiller case may be indicative of whether your entity would be considered “doing business” in a state.

Jenny Morris, a J.D. candidate Class of 2017 Georgetown University and a law clerk with WTP in 2015, contributed to the preparation of this article.

Why maintain your company charter? Moe’s Southwest Grill will tell you!

June 16th, 2015

Co-Author: Jenny Morris, University of Maryland Law School, Class of 2017

Occasionally corporations and limited liability companies neglect to make the periodic filings required by their state of formation. Even more often, companies that open locations outside of their state of formation do not register as a foreign entity with that other state’s business regulatory agency. The May 29, 2015 decision by the Maryland Court of Special Appeals in Guy Named Moe LLC T/A Moe’s Southwest Grill v. Chipotle Mexican Grill of Colorado LLC et al., No. 2270, Sept. Term 2013, is an important reminder to restaurant operators and other business owners of just how dangerous it can be for a company to ignore those basic state filing requirements.

The Case

In 2012 the Annapolis department of planning and zoning approved Chipotle Mexican Grill’s application to open a restaurant in downtown Annapolis about 400 feet from a Moe’s Southwest Grill location owned by A Guy Named Moe, LLC (“Moe’s”). The Maryland Court of Special Appeals denied Moe’s standing to appeal this zoning approval because its limited liability company (“LLC”) had not been registered to do business in Maryland during the time period to appeal the zoning decision.

The Facts

The Land Use Article in § 4-401(a) of the Maryland Code grants standing to petition the circuit court for judicial review of a city or county’s zoning decision to a “person” who is a “taxpayer” or a “person aggrieved” and files suit within 30 days of the zoning decision. A “person” includes any business entity properly registered under Maryland law. After Moe’s filed a case protesting the zoning decision for Chipotle, the Circuit Court for Anne Arundel County dismissed the suit, holding that Moe’s did not have taxpayer standing because it did not pay real property taxes to the local jurisdiction whose zoning action was being challenged on appeal. The circuit court also determined Moe’s was not “a person aggrieved” because business competition does not constitute not a sufficient grievance in zoning decisions.

The Court of Special Appeals affirmed the dismissal, but on different grounds – that Moe’s petition was void since Moe’s did not have a right to do business in Maryland at the time of filing. Moe’s is a Virginia LLC, and all foreign LLC’s doing business in Maryland are required to register with the State Department of Assessment and Taxation (“SDAT”) in accordance with the relevant part of the Maryland Limited Liability Company Act, Corporations & Associations Code (“C.A.”) § 4A-1002(a). Moe’s registered in December 2015, but when it failed to file a 2006 personal property tax return with SDAT and pay the requisite $300 filing fee to remain registered, SDAT forfeited its right to operate in Maryland in November of 2006 under C.A. § 4A-1013. For the following seven years Moe’s did not revive this registration and thus continued to do business in Maryland with no right to do so.

C.A. § 4A-1007(a) bars unregistered foreign LLCs that are doing business in Maryland from maintaining a suit in Maryland courts. The Court of Special Appeals concluded that since Moe’s should not have even been operating its restaurant in Maryland at the time of the appeal, the appeal was “a nullity from the moment it was filed.” The SDAT did not restore Moe’s right to do business in Maryland until September 24, 2013, when the proper personal property tax returns were filed and the appropriate fees were paid. Unfortunately for Moe’s, this was already about 5 months past the 30-day deadline to appeal zoning decisions.

Take Away

Learn from Moe’s mistake and stay on top of this! Even if Moe’s attorneys did notice this issue immediately they still might not have been able to receive the requisite charter within the 30 day period to file suit because reviving a forfeited charter or foreign registration can take time.

Be cautious and make sure your business is compliant with all state filing requirements to maintain limited liability status in any state where it is regularly doing business. As the Moe’s case demonstrates, failure to do so can cost your business the ability to protect its rights and have other substantial legal repercussions.

NLRB Issues Advice Memo Finding That Franchisor Is Not Joint Employer

May 13th, 2015

On April 28, 2015 the National Labor Relations Board (“NLRB”), Office of the General Counsel, issued an Advice Memorandum to the NLRB’s Chicago area regional office finding that a restaurant franchisor and its Chicago area development agent are not joint employers with a Chicago franchisee. This is an important development in light of the current pursuit by the NLRB’s General Counsel of joint employer cases against McDonald’s Corporation.

The Advice Memo, in the case of In Re. Nutritionality, Inc. d/b/a/ Freshii, involves a union organizing effort at a Freshii “fast casual” restaurant owned in Chicago by single unit franchisee. The franchisee terminated employees who were attempting to organize a union for the employees of the restaurant. The Region requested advice as to whether franchisor Freshii Development, LLC (“Freshii”) or its development agent for the “Chicagoland” region is a joint employer.

The essential thrust of the Advice Memo is that Freshii’s control over the franchisee’s operations, as implemented through the development agent, “are limited to ensuring a standardized product and customer experience, factors that clearly do not evince sharing or codetermining matters governing the essential terms and conditions of employment.” While this was a sufficient conclusion under the NLRB’s current “joint employer” standard, the Advice Memo held that even under the more inclusive “industrial realities” standard advocated by the General Counsel in the McDonald’s cases, Freshii and the development agents are not joint employers.

The Facts That Determined The Outcome

Freshii’s franchise agreement expressly disclaims any involvement in the franchisee’s employment or labor relations practices. More specifically, while the franchisee must comply with “System Standards,” on pain of potential termination if it fails to cure a breach of the standards within 30 days of receiving a default notice, the franchise agreement, “the franchise agreement specifies that System Standards do not include ‘any personnel policies or procedures or procedures,’ which Freshii may make available for franchisees’ optional use, and that the franchisee alone will ‘determine to what extent, if any, these policies and procedures might apply’ to its restaurant operations.”

While Freshii’s Operations Manual contains advice on human resources, such as hiring and scheduling employees, how to calculate “labor cost percentage” and how to project labor costs in scheduling, all of this falls in the realm of training and the franchisee is free to accept or reject the advice. While Freshii provides a sample employee handbook, many of its franchisees (including the development agent) obtain other handbooks containing different employment policies.

The development agent provides extensive training to the franchise owner before store opening, and some direct training to the restaurant’s staff around the grand opening, but thereafter the franchisee is solely responsible for training and supervising its staff. The development agent conducts monthly store inspections and also informally “drops by” Freshii restaurants to monitor things like whether the employees are wearing uniforms, store cleanliness, and food preparation, and provides reports to both the franchisee and the franchisor if there are deviations from standards. On one occasion the development agent told a different franchisee that there were too many employees working during a slow time of day, but the franchisee was not required to change its scheduling policies.

While Freshii has a section of its website where prospective employees can apply for a job at a specific location, the only thing Freshii does with the information is forward it to the franchise owner. The franchisee exclusively decides who to hire as its employees.

Freshii has no standard software to monitor employee scheduling or labor costs. This is a substantial difference from the facts alleged in the McDonald’s cases. Individual franchisees are exclusively responsible for setting employee wages and benefits, and the complaining employees (and the union sponsoring them) were unable to produce any evidence that franchisees need to consult with Freshii or the development agent to grant wage increases, decreases, or changes to benefits.

While the development agent can raise an issue about an employee’s performance in a review, there was no evidence that any employee had ever been disciplined or discharged by a Freshii franchisee because of a development agent’s comments. By contrast, Nutritionality (the franchisee) has disciplined and discharged employees without consulting Freshii or the development agent.

Finally, and most pertinently, the evidence was that when the union began to organize at Nutritionality’s store, Nutritionality’s owner told the development agent about it. The development agent did not respond but reported it to Freshii, and neither Freshii nor the development agent communicated with Nutritionality about the organizing effort.

Legal Conclusions

Under the NLRB’s existing standard, the alleged joint employer “must meaningfully affect matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction.” Since neither Freshii nor the development agent has any meaningful impact over Nutritionality’s hiring, compensation, scheduling, discipline, or ongoing supervision, the conclusion that they are not joint employers was self-evident.

Under the standard proposed in the McDonald’s cases and in a case pending against Browning-Ferris Industries of California, the NLRB would examine “the totality of the circumstances, including the way that separate entities have structured their commercial relationship,” to determine whether “the putative joint employer wields sufficient influence of the working conditions of the other entity’s employees such that meaningful [collective] bargaining could not occur in its absence.” This is referred to as the “industrial realities” test. Even under that relaxed standard, the Advice Memo states, “[B]ecause Freshii does not directly or indirectly control or otherwise restrict the employees’ core terms and conditions of employment, meaningful collective bargaining between Nutritionality and any potential collective bargaining representative of the employees could occur in Freshii’s absence.”

Take Away

By finding that they are not, the effect is that the unfair labor practice claims against the franchisor and development agent will be dismissed. This obviously does not suit the agenda of the union conducting the organizing drive, since it wants to organize all employees of stores operating under a trademark – regardless of franchise ownership. Organizing the few employees in a single store is unlikely to yield sufficient union dues to be worth the time devoted by union staff.

However, this is potentially a huge win for franchising. The decision affirms that a restaurant franchisor’s “requirements regarding food preparation, recipes, menu, uniforms, décor, store hours, and initial employee training prior to a franchise opening are not evidence of control over [its franchisees’] labor relations but rather establish [its] legitimate interest in protecting the quality of its product and brand.” If the NLRB follows this reasoning going forward, this sort of ruling will mean that “the sky is not falling” on traditional and reasonable franchising practices.

What’s the Value-Add of a “Full-Service” Law Firm?

August 7th, 2014
David Cahn

David Cahn

Over the past decade I have been a solo legal services provider, then managing member of a boutique firm, and then a part of a much larger firm, Whiteford Taylor & Preston, since 2011. So I have really seen the legal profession from all sides—and of course, like all lawyers, I have heard the grumbles from clients about “big law firms.”

So maybe my three-faceted experience in providing legal services will help you gain some perspective as well.

When I first joined WTP, I seemed to be “on an island” (or at least a skinny peninsula), receiving referrals from people in the franchising world, but not from within the firm. No one else at WTP did any franchising work, and at first it seemed as if none of the firm’s clients did either. However, three years later, the landscape has changed. I know my new colleagues and they know me, and the connections between us have grown stronger. As a result, I see the value of WTP’s attorneys for clients who originally hired me and my value for clients who originally hired other WTP attorneys.

Just in the past eight months, other WTP lawyers have provided the following services to clients who originally hired me:

 

In addition, senior WTP attorneys have provided me with valuable advice on issues such as the tax consequences of business entity structures and transactions, preparing agreements among owners of a company (such as an LLC Operating Agreement) and with key management employees, and handling disputes between majority and minority owners of companies. All of this insight has helped me provide more sophisticated and creative insights to clients.

On the flip side, on behalf of WTP clients who originally hired other attorneys of the firm, so far during 2014 I have worked on the following projects:

  • prepared wholesaler and retailer agreements for a consumer products manufacturer;
  • negotiated an exclusive North American distribution agreement with a European manufacturer of construction equipment;
  • prepared and negotiated an exclusive U.S. distribution agreement for the sale of a unique product in the precious metals industry;
  • advised national trade associations on antitrust law compliance in their dealings with members and outside suppliers;
  • advised a provider of online ordering services with the contracts necessary to expand into providing delivery of the ordered products;
  • negotiated the terms of terminating a franchise agreement, on behalf of an unhappy and struggling franchisee; and
  • prepared exclusive distribution and sales agency agreements for a European company entering the U.S. market.

 

The attorneys for whose clients I have provided those services have practice focuses in areas such as international trade, taxation, securities, intellectual property litigation, and business litigation.

The Takeaway: if you hire any of the attorneys of WTP, you have our team behind you with a wide variety of experience in working with clients on a wide variety of industries, as well as in virtually every area of the law that impacts business. We serve companies and entrepreneurs doing business between New York and Virginia, with connections to provide additional services as needed throughout the rest of the United States and in foreign countries. That is a long way from the boutique existence at Franchise & Business Law Group!

IFA Convention Roundtable on Negotiating a Franchise Agreement – or Not

March 23rd, 2014

I had the honor of facilitating a roundtable discussion on Negotiating the Franchise Agreement at the International Franchise Association’s 2014 Convention.  Since I am often negotiating such agreements for franchisors and franchisees, the comments of the franchisor executives at this Business Roundtable Solutions program were quite enlightening.

One large franchisor representatives said that his company never negotiates any of the terms.  Instead, as part of the “discovery” process they have 2 telephone conferences with each prospect (both of about 1 hour of duration) to discuss in detail the contents of the FDD and the terms of the franchise agreement.  They not only explain what the terms mean, but why they are included.  The representative reported that this exercise builds credibility with the prospects and, for those who sign up, also improve franchisee compliance with the terms of the contract.

Other franchisors have set programs for providing fee concessions for certain classes of franchisees.  An example is royalty discounts for franchisees that open and continue to operate at least 3 locations.  Another is reduced royalty rates for Annual Gross Sales over a specific threshold or “break point.”  A creative version is a system of “service credits” that franchisees earn by remaining in compliance with “brand standards,” resulting in reduced royalty rates.

Some participants, generally from emerging systems, will negotiate an addendum to a franchise agreement on specific issues.  Examples raised were removing “cross-default” provisions for franchisees that are purchasing additional locations; allowing the franchise owner to “designate” a spouse or child as an authorized successor owner, provided that person satisfies certain criteria; and reducing or eliminating personal guaranty liability for an existing franchisee taking over a “distressed location.”

BOTTOM LINE:  As in most of life, whether a franchisor chooses to negotiate the terms of its franchise agreement depends on the franchisor’s position in the marketplace.  A franchisor that is well-established or has a “hot” growing concept understandably will not negotiate.  A franchisor that is struggling to grow often will be more flexible, particularly on issues of greatest risk for the prospective franchisee.  However, what all participants agreed on was that a franchisor should shape and update the franchise agreement it offers to remove provisions that will unnecessarily burden the process of recruiting qualified, responsible franchisees.

Restaurateurs’ Roundtable Sheds Light on Issues

March 23rd, 2014

I recently attended an invitation-only “Restaurateur’s Roundtable” hosted by Cohn Reznick, a well-regarded accounting firm with a strong focus on representing restaurants.  I was privileged to bring along client representatives from franchisor Seasons Pizza and from Izz, LLC, which is a Maryland franchisee of Hurricane Grill & Wings.  Some tidbits of knowledge that I gleaned were:

1.            Restaurants, particularly quick service franchises, are automating functions even more aggressively to decrease their employee count, both because of Affordable Care Act concerns and because of projected increases in minimum wages.

2.            Tablet ordering and payment processing, at the tabletop, is growing rapidly because consumers like it and it enables restaurants to “turn tables” more rapidly.  Casual dining franchise systems such as Applebee’s are among the converts.

3.            The most successful operators focus on making their restaurants more efficient and effective during their busy hours, and the “shoulder hours” before and after, rather than worrying about building up slow hours.

4.            If some tables are generally more popular and profitable than others, such as those by the windows, balance the servers’ stations so that each have some of the “best tables;” this will motivate the whole wait staff.

5.            Consider methods to make assistant managers “take ownership” of slower nights, and reward them for improving performance.  One method is encouraging the manager to learn the names of all of the “regular” customers on that night.  It is sort of like a mini-franchise.

I am happy to invite other clients who operate restaurants to future editions of these quarterly Restaurateurs’ Roundtables.

IFE Offers Interesting Look at the Future of Franchising (updated)

June 28th, 2013

For the second straight year the annual International Franchise Expo took place in New York City from June 20 – 22, 2013, and it seemed even bigger and better than ever! This post highlights interesting young franchisors on display at the franchise expo.

One aspect of the Expo that is notably improved is the depth of seminar and educational offerings. I attended a seminar called “Maintaining Brand Standards When Franchising”, presented by Mark Siebert, CEO of the iFranchise Group of franchising consultants and by Harold Kestenbaum, a senior attorney from Long Island. They provided some great “war stories,” but the gist was Siebert’s “Four Pillars of Quality Control,” which are (1) Franchisee Selection, (2) Documentation & Training Tools, (3) Support, and (4) Compliance Program backed by Legal Documents. The most memorable “punch line” was Siebert’s: franchisors are generally better if they choose franchisees who have been married for a long time, because “they can handle pain.”

The exhibit hall featured many well-known large franchisors such as Choice Hotels and 7-Eleven. However, as a counselor for emerging franchisors and for many franchisees of emerging systems, I always find innovative newer brands to be interesting. Here are a few that intrigued me, with the proviso that none of the descriptions are an endorsement of the franchise:

Restoration 1: tested by handling flood, water and mold damage remediation in the very busy south Florida area, this franchise combines high-quality restoration services with unique marketing methods to differentiate itself from incumbants in this industry such as ServiceMaster and ServPro. It also offers large exclusive territories not available from the established restoration services franchisors.

America’s Taco Shop: an authentic Mexican fast casual restaurant founded by America Corrales Bortin, who is originally from Culiachán, Sinaloa, Mexico. This is a repeat from last year, but their food is incredibly great! I once again talked with the founder’s husband Terry who told me about their steady expansion from Arizona. They are owned by Kahala Corp., which is a highly experienced franchisor with a strong team for site selection and location development.

Ping Pong Dim Sum: an apparently hip, upscale version of the traditional Chinese version of “tapas,” with an interesting mix of teas and mixed drinks. There are company owned locations in Washington D.C. (Dupont Corner and Chinatown) plus in London and Dubai.

Cooperstown Connection: a sports apparel and souvenir shop founded in Cooperstown, New York, the home of the National Baseball Hall of Fame. As a baseball fan I like the name, which this franchisor has registered as a trademark. When I asked why there would be an advantage to operating this store, as opposed to many other sports apparel shops, the franchise seller claimed to have a wide variety of custom products as well as strong buying power. Prospects should put them to the test on those selling points!

CPR Cell Phone Repair: Getting quality service at stores that focus on selling smart phones and tablets is not a pleasant experience, and the demand and need for repair of mobile devices just keeps growing. I have no idea the quality of service provided at CPR stores, but this franchise seems intriguing because of the name and the need.

Taziki’s Cafe: a fast casual Greek and Mediterranean Café from Birmingham, Alabama (not a typo). The youthful founders, who definitely sound like Alabama natives, honeymooned in Greece in 1998 and decided to imitate their favorite café when they returned. The franchisor claims average store level gross sales of $1.45 million and average “gross profit” of $502,000.

Grade Power Learning: an off-shoot of the well-established Canadian tutoring chain Oxford Learning, this new U.S. competitor is being franchised by the same team that runs the Minuteman Press franchise system. The company’s literature says, “Our cognitive approach to learning, designed by educational experts, is based on proven scientific research into how children actually learn. Learning is not about memorizing facts. It’s about knowing, really understanding, how to integrate and retain new information.” While this competes in a crowded supplemental education field, the need for this type of service continues to be great.

Web XL: a website developer with a twist – focused on creating efficient e-Commerce and payment gateway solutions, along with Internet marketing support, on a monthly plan basis. While anyone can make a website, if this company really provides efficient e-Commerce solutions, then affiliating with them may be a great opportunity for a good salesperson. The franchisor offers “no money down” one year financing on the Initial Franchise Fee.

Froyo World: yes, I know, what’s interesting about another self-serve frozen yogurt chain? This one’s flavors are unique and the quality is truly outstanding, the most distinctive I’ve tasted.

Bed Bug Chasers – could be an excellent add-on to pest management or disaster restoration.

Churro Mania – mall food court or small location dessert business, specializing in Mexican Churro products, which given U.S. demographics only figure to get more popular!

If you decide to pursue these opportunities or a different one, we stand ready to assist you with due diligence, evaluation of the franchise offering, and contract negotiation.

Contingency Planning For The Business Owner – Are You Covered?

November 8th, 2012

David Cahn

Most of the work that I do for franchise owners (or “franchisees”) falls into two categories: (1) helping to evaluate a potential franchise opportunity and negotiating the franchise agreement and real estate lease, and (2) representing franchisees seeking to exit the franchise, including evaluating claims against the franchisor. While grateful to serve in those capacities, I worry whether franchisees and other small business owners are adequately planning for and protecting against their own death or disability.

While life and disability income insurance are very important, there are several legal and practical issues that business owners (or indeed all reasonably solvent adults) should address while they are healthy and of sound mind. Some of those issues are:

1. Will: Why do you need a will? Without one, after you die the laws of the state where you live and held property will determine what happens to that property. Your spouse, children or other heirs could end up with less than you planned, the assets could be mismanaged, your minor children might not have the guardian you wished, or your estate could end up paying more in taxes and legal fees than necessary. Writing a will allows you to control who gets what, and also could enable you to leave some of your assets to charities or other causes. Clarity is particularly important if you own a business since succession planning is critical to the wellbeing of the business’s employees and other stakeholders.

2. Titling of Assets: How you hold title to certain assets can have a significant effect on the ability of your creditors to take away those assets. If you are married, holding an asset in the names of yourself and your spouse may prevent a creditor of only one of you from taking that asset. However, this is often more appropriate for personal assets (such as homes and cars) than ownership interests in a business. If you are not married then there are other legal devices that, under appropriate circumstances, could enable you to shield assets from seizure if your financial fortunes decline.

3. Durable Power of Attorney: A power of attorney (“POA”) designates a representative to perform certain actions on your behalf. A durable POA can be particularly important if you are a small business owner, to make sure that the business is able to function on your behalf if you become ill, incapacitated or otherwise unable to manage your affairs, since otherwise your chosen representative (usually a spouse, parent or sibling) will have to receive court approval to perform needed financial transactions. However, the durable POA also needs to be crafted with some care to avoid any abuse by the appointed representative.

4. Living Will and Medical Proxy: A living will is a written declaration of what life-sustaining medical treatments you will allow or not allow if you are incapacitated; for example, life-sustaining nourishment when terminally ill. The medical proxy or medical POA authorizes a specific individual to make medical decisions for you if you are unable to do so.

5. Letters of Instruction: In this digital age a lot of our personal and digital information is saved electronically in password-protected accounts. After your death the person you chose to manage your estate (your “personal representative”) will benefit greatly from written instructions on how to access those accounts. Since the will itself is meant to cover the disposition of categories of property, the letters of instruction can aid your personal representative in disposing of specific pieces of property (such as family heirlooms) in the manner that you wish.

6. Life Insurance Trust. One common trust for people of even relatively modest means is a trust to hold life insurance policies. Estates with net assets of over $1,000,000 are subject to the estate taxes in Maryland and several other states, and the federal (U.S.) estate tax threshold has been moved several times in recent years but may move down to $1,000,000 effective January 1, 2013. Utilizing an irrevocable trust to hold your life insurance policy excludes their death benefits from your estate, which may allow your estate to be completely exempt from taxation.

Estate planning is not just for people like Bill Gates, Oprah Winfrey or Mark Zuckerberg – it is necessary for all reasonably successful adults and particularly for franchise owners. At Whiteford Taylor & Preston we have a talented team of estates and trust attorneys licensed in Maryland, New York, Pennsylvania, Virginia and the District of Columbia who can assist you on the types of issues described above at either fixed fees or reasonable hourly rates. Contact us so we can help you make sure that your bases are covered.

Bargain Basement Pricing, epilogue

May 24th, 2012

This is a follow-up to prior post Can I Stop Bargain Basement of My Branded Products?

On May 8, 2012, the New York Supreme Court, Appellate Division, affirmed a trial court’s dismissal of People of the State of New York v. Tempur-Pedic International, Inc. In addition to finding that a New York law merely made contracts to mandate minimum pricing unenforceable, as opposed to illegal, the court held that a vertical minimum advertised pricing agreement is not an agreement to fix prices, and also that Tempur-Pedic was protected by the “unilateral conduct” principles emphasized by the U.S. Supreme Court in its Leegin Creative Leather Products (2007) and Monsanto (1984) rulings. It remains to be seen whether the Attorney General’s office will appeal to New York’s highest court.

On the flip side, at the May 2012 International Franchise Association Legal Symposium, a prominent European attorney told this author that any vertical arrangements or practices intended to or causing resale price maintenance remains per se illegal in the European Community, regardless of the size of the manufacturer, distributor and/or retailers involved.