Tag: employment

Signal 88 Security case illustrates the Challenge of Obtaining A Preliminary Injunction to Enforce a Franchise Non-Compete

August 4th, 2017

A covenant not to compete is typically included in a franchise agreement to ensure that customer goodwill, once developed in the name of franchise, is not destroyed by former franchisees. The ultimate weapon for a franchisor to enforce a covenant not to compete is obtaining a preliminary injunction against the former franchisee. However, many courts place a heavy burden on the franchisor to prove that a preliminary injunction is proper.  The recent case of Colorado Security Consultants, LLC v. Signal 88 Franchise Group,  decided in March 2017 by the U.S. District Court for the District of Nebraska, illustrates how difficult that burden can be to meet under unfavorable facts.

Colorado Security Consultants, LLC (CSC), had a three year franchise agreement with franchisor, Signal 88 Franchise Group, Inc., to provide on-site security guard services within a territory in Colorado Springs. CSC also had a right of first refusal over additional franchises to be added within a radius of Colorado Springs. At the end of the initial term, the franchisor and franchisee continued the franchise agreement on a month-to-month basis, subject to 30-day notice of termination.  Signal 88 informed CSC that another person, Rebecca Resendes, wished to enter into a franchise agreement for a territory in the right of first refusal area where CSC had developed contracts with some customers.  Resendes and CSC negotiated for several months over her either purchasing CSC’s franchise or compensating CSC for customers it had developed in her contemplated territory.  When no agreement was reached Resendes signed a direct franchise agreement with Signal 88.  After additional negotiations between CSC and Resendes failed, Signal 88 told CSC that it had to stop serving customers in Resendes’ territory and then terminated CSC’s franchise entirely.  CSC began providing security services under the name “Guardhail”, and then Signal 88 sued CSC for violation of the 2 year post termination non-compete and sought an injunction to stop it from providing any security services.

To obtain an injunction Signal 88 had to demonstrate the following: (a) without an injunction it would suffer irreparable harm greater than the harm the franchisee would suffer from its issuance; (b) it had more than 50% likelihood of demonstrating violation of an enforceable non-compete by CSC, and (c) the injunction would serve the public interest.

Signal 88 alleged that CSC was causing it irreparable harm because it “contacted Signal 88’s customers, undercut Signal 88 on price, and caused a number of customers to cancel contracts with Signal 88.” CSC responded that it did not use “any of the names or trademarks of Signal 88” nor did they use any confidential materials.  All customer contracts in the Signal 88 system are entered into in the name of the franchisor, which also does billing and collection. So if Guardhail sought to continue to serve the customers that CSC recruited for Signal 88 (as seems likely) then CSC would have had to utilize the customer contact information and likely would have made offers that were more attractive than the pricing offered under the franchise.

Nevertheless, in declining to issue a preliminary injunction, the Court determined that Signal 88 failed to show that the “harm is certain and great and of such imminence that there is a clear and present need for equitable relief,” because Signal 88 failed to show that in the harm of CSC’s actions “threatened the very existence” of Signal 88’s business. Accordingly, even if there is a loss of customers and revenue for Signal 88, money damages would still suffice without the “extraordinary” measure of a preliminary injunction.

Signal 88 also argued that failing to enforce the non-compete would cause “irreparable harm to its franchise system”, presumably by encouraging other franchisees to not renew and to flout the non-compete. The court said that Signal 88 had no evidence to back up that general supposition.  Since a preliminary injunction would effectively put CSC out of business and would moot the parties’ claims before addressing the merits of the case, including CSC’s breach of contract counterclaim, the court found that the balance of hardships heavily favored CSC.

Despite the case being heard in Signal 88’s hometown of Omaha and the franchise agreement stating that Nebraska law governed, the Court held that Colorado had a greater material interest in the franchise agreement and therefore its laws regarding non-competes applied. Under Colorado law non-compete provisions are disfavored except to protect trade secrets or if issued when selling one’s business. The Court found that the evidence presented did not demonstrate CSC’s use of Signal 88’s trade secrets with any specificity.  Moreover, CSC argued that, as Signal 88’s selling and servicing agent when dealing with the customers, its principals were Signal 88’s employees – an allegation that, if proven, would cause the non-compete being held to very strict scrutiny under applicable law.  Since that determination is fact-specific the Court would not make such a decision at the preliminary injunction stage.

It is likely that these factors heavily influenced the Court’s denial of the preliminary injunction: (a) CSC recruited and developed the Signal 88 security customers in Colorado Springs, probably through the sales efforts of its owners more than franchisor-provided marketing; (b) accordingly CSC was not provided a customer list and did not inherit a list of long-standing Signal 88 customers, so the Colorado Springs customer list was not trade secret provided by Signal 88; and (c) Signal 88 terminated its relationship with CSC, apparently without cause, and allowed new franchisee Resendes to service all of CSC’s contracts without requiring her to pay for the goodwill that CSC had developed in them.

As this case shows, absent favorable facts it is very difficult for a franchisor to obtain a preliminary injunction enforcing a non-compete. Accordingly, certain franchisors may be well-served by adding a provision requiring a former franchisee that violates a post-expiration covenant not to compete to pay 2 years’ worth of continuing franchise fees.  Such a liquidated damages provision is more easily enforced and represents a fair compromise between franchisor’s interest in retaining customer goodwill and franchisees’ interests in making sure that the franchisor’s brand and business system continue to provide value.

Courts Enforce Waivers of Class Actions in Arbitration By Franchisees, Employees and Small Businesses

July 18th, 2013

In 1925, the Federal Arbitration Act (“FAA”) was enacted to strengthen the ability of parties to enforce “purely voluntary” pre-dispute promises to have disputes determined through arbitration. See, e.g., David S. Clancy & Matthew M.K. Stein, An Uninvited Guest: Class Arbitration and the Federal Arbitration Act’s Legislative History, 63 Bus. Law. 55, 60-61 (Nov. 2007). In the decades since, countless federal and state statutes have been passed to protect consumers, employees, franchisees, small businesses and investors, and class and collective lawsuits have developed as an avenue to vindicate those statutory rights. In response, companies have used arbitration clauses to decrease the risks of having to defend against such large potential liabilities. Recent decisions by both the U.S. Court of Appeals for the Fourth Circuit and the U.S. Supreme Court have emphasized that, if the arbitration clause clearly bars class or collective actions, then the FAA precludes parties to the agreement from pursuing a class or group action through court or arbitration. This established trend of statutory interpretation also may be increasing the possibility of that the U.S. Congress will pass the “Arbitration Fairness Act” to limit companies’ ability to use arbitration clauses as a bar to collective legal actions.

Shuttle Express Case – Fourth Circuit

In the case of Muriithi v. Shuttle Express, Inc., issued April 1, 2013, the U.S. Court of Appeals for the Fourth Circuit required individual arbitration of claims due to a franchise agreement’s inclusion of an arbitration clause 1) forbidding any class or group actions, 2) requiring the parties to split the cost of arbitration, and 3) containing a one-year limitations provision.

Plaintiff Samuel Muriithi was a driver for defendant Shuttle Express, who provided transportation for passengers to and from the Baltimore-Washington International Airport. Muriithi filed a class action in federal court against Shuttle Express asserting claims under the federal Fair Labor Standards Act (FLSA) and under Maryland law on behalf of himself and all other Shuttle Express drivers. Muriihi alleged that Shuttle Express misled the drivers about the compensation they would earn, inducing them to sign franchise agreements when they would be employees as a matter of law. Shuttle Express moved to dismiss the complaint, or in the alternative, to compel arbitration under the arbitration provision. The district court refused to compel arbitration on the grounds that the agreement contained three unconscionable provisions, which rendered the arbitration clause unenforceable. On appeal, the Fourth Circuit reversed the district court’s decision, holding that all three provisions at issue were not unconscionable and, therefore, the arbitration clause was enforceable.

In addressing the enforceability of the class action waiver, the Fourth Circuit rejected the district court’s decision, which identified the class action waiver as a factor in preventing Muriihi from “fully vindicating his statutory rights.” The Fourth Circuit explained that, subsequent to the district court’s decision, the U.S. Supreme Court addressed the issue of class action waivers in AT&T Mobility LLV v. Concepcion, 131 S. Ct. 1740 (2011). According to the court, the FAA, as interpreted in the Concepcion decision and prior Supreme Court rulings, “prohibited courts from altering otherwise valid arbitration agreements by applying the doctrine of unconscionability to eliminate a term barring classwide procedures.” Because the district court reached an opposite conclusion prior to Concepcion, the Fourth Circuit reversed the district court’s decision, finding the class action waiver enforceable.

The Fourth Circuit then addressed the enforceability of the fee-splitting provision. The court found that Muriithi failed to meet his “substantial” burden of showing the likelihood of incurring prohibitive costs as required to invalidate an arbitration agreement. The court explained that a fee-splitting provision has the ability to render an arbitration agreement unenforceable if the arbitration costs are “so prohibitive as to effectively deny the employee access to the arbitral forum.” According to the court, a number of factors are considered when determining prohibitive costs including, “the costs and fees of arbitration, the claimant’s ability to pay, the value of the claim, and the difference between arbitration and litigation.” The court concluded that Muriithi did not meet his substantial burden for proving prohibitive costs because he failed to show the costs of arbitration, “the most basic element” of the challenge. The court further explained that Muriihi could not meet his burden “simply by showing the fees that some arbitrators are charging somewhere.” Muriithi also failed to show the value of his claims, which were necessary to determine the fees under the American Arbitration Association’s rules. Because Murihhi failed to prove these “critical factors”, the Fourth Circuit concluded that he had failed to meet the substantial burden required for a finding of prohibitive costs.

Finally, the Fourth Circuit held that the one-year limitations provision could not be considered in a motion to compel arbitration because it was “not referenced in the Arbitration Clause.” The court referred to Section 2 of the FAA, which states that a party challenging the enforceability of an arbitration clause must rely on grounds that “relate specifically to the arbitration clause and not just to the contract as a whole.” The court stated that the one-year limitations provision related to the general agreement itself rather than the arbitration clause because the language and terms of the provision “did not overlap” with the language of contract’s arbitration clause. Therefore, its enforceability was an issue to be decided by the arbitrator and could not be considered in the motion to compel arbitration.

American Express Antitrust Case – U.S. Supreme Court

In American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013), the U.S. Supreme Court, by a 5-4 majority, held that the prohibitively high cost of pursuing an individual claim is not a sufficient reason to invalidate a class action waiver in an arbitration agreement. This decision reinforces Concepcion in demonstrating the Court’s willingness to allow arbitration clauses to be used as class action avoidance mechanisms. This ruling also validates the Fourth Circuit’s interpretation of Concepcion in its Shuttle Express decision.

American Express (“Amex”) requires all of its merchants to enter into a standard form contract. These agreements contain arbitration provisions that require all disputes between the parties to be resolved by arbitration and prohibit all class action claims. In this case, a group of merchants filed individual claims against Amex, claiming that Amex used its “monopoly power” to force them into contractual agreements that violate anti-trust laws. Amex moved to dismiss and to compel arbitration. The district court agreed with Amex, and the merchants appealed. On appeal, the United States Court of Appeals for the Second Circuit reversed, finding the class action waiver unenforceable because the costs that an individual merchant would incur to pursue its claim would substantially exceed the amount of that individual merchant’s damages. The Supreme Court reversed the Second Circuit’s decision.

Justice Scalia, writing for the narrow majority, emphasized that the “overarching principle” of arbitration is a matter of contract, and that courts must “rigorously enforce” arbitration agreements by their expressed terms unless the FAA’s mandate has been “overridden by a contrary congressional command.” The majority failed to find any contrary congressional command that would require a rejection of the class action waiver. According to the Court, antitrust laws do not guarantee that a claim will be resolved affordably, nor do they “evince[e] an intention to preclude a waiver” of class-action procedure.

The Court rejected the merchants’ argument that enforcing the waiver of class arbitration bars effective vindication because merchants have no economic incentive to pursue their antitrust claims individually in arbitration. The Court declined to apply the “effective vindication” exception to the case at hand on the grounds that the exception’s purpose is to prevent “prospective waiver of a party’s right to pursue statutory remedies.” The Court explained that not being worth the costs to prove a statutory remedy is not an elimination of the right to pursue that remedy. In other words, according to the Court, class action waivers merely limit arbitration to the two contracting parties and do not eliminate parties’ rights to pursue statutory remedies.

The majority referred to its decisions in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and AT&T Mobility LLC v. Concepcion, 130 S. Ct. 1740 (2011) (also decided by a 5-4 vote), to validate that class action waivers in arbitration agreements are, indeed, enforceable and therefore do not preclude the effective vindication of statutory rights. In Gilmer, the Court had “no qualms in enforcing a class waiver in an arbitration agreement even though the federal statute at issue…expressly permitted collective actions.” In Concepcion, the Court stated that class arbitration was not necessary to prosecute claims “that might otherwise slip through the legal system.”

In Justice Kagan’s dissent, she emphasized that the purpose of the FAA is to resolve disputes and facilitate compensation of injuries. According to Justice Kagan, the majority’s decision “admirably flaunt[s]” the fact that monopolists get to use their power to force merchants into contracts that deprive them of all legal recourse. “Too darn bad,” says Justice Kagan, as she describes the majority’s decision in a nutshell. Justice Kagan explains that the majority’s decision offers support to parties who intend to confer immunity from potentially meritorious federal claims through arbitration clauses in standardized form “contracts of adhesion”, which is contrary to the purpose of the FAA as enacted in 1925.

What does this mean?

In light of the body of U.S. Supreme Court precedent in this issue, nearly all parties offering contracts to large groups of similarly situated persons such as employees, franchisees, and consumers of services, should strongly consider including an arbitration provision in the contract that explicitly bars class or collective actions. Under current law, those waivers will almost certainly be enforced and therefore sharply limit the likelihood that the company will have to defend against large-scale litigation brought by disaffected members of such groups. Such arbitration clauses do need to be carefully drafted and implemented to avoid other defenses to their enforcement, and they should be prepared and implemented with the assistance of experienced counsel.

Of course, ubiquitous arbitration clauses and these judicial decisions sharply limit the ability of private practice attorneys to deter violations of protective statutes through civil dispute resolution, leaving an even greater burden of enforcement on overburdened government regulators. This is unlikely to change unless the FAA is amended through legislation. In recent years, the “Arbitration Fairness Act” has been pending in the U.S. Congress. This act would invalidate the enforceability of pre-dispute arbitration clauses with regard to employment, consumer, and civil rights disputes, and antitrust class action proceedings. The bill has been languishing in recent years, and it remains to be seen whether the Supreme Court’s latest decision spurs more aggressive Congressional action on this issue.

AUTHOR’S NOTE: THIS ARTICLE WAS CO-WRITTEN BY DAVID L. CAHN, CHAIR OF THE FRANCHISE BUSINESS LAW GROUP AT WHITEFORD TAYLOR & PRESTON, AND KATELYN P. VU, WHO IS A SUMMER ASSOCIATE AT THE FIRM AND A 2015 J.D. CANDIDATE AT UNIVERSITY OF BALTIMORE LAW SCHOOL.

PLEASE ALSO NOTE THAT THIS ARTICLE REPRESENTS THE VIEWS OF THE AUTHORS AND NOT THE VIEWS OF WHITEFORD TAYLOR & PRESTON L.L.P.

NLRB “Pushing the Envelope” to Protect Employees’ Rights to Communicate Online

July 11th, 2012

David Cahn

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

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

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

This provision and the balance of the NLRA, which was enacted during the Great Depression of the 1930’s, are primarily focused on the right to join a union and collectively bargain. As the percentage of U.S. private sector employees represented by unions has dropped substantially over recent decades, the NLRA has become a much less prominent part of the discussion of employment-related legal matters. However, through its recent activities the current National Labor Relations Board (“NLRB”) has indicated its determination to make the NLRA relevant to all U.S. employees (and employers), by focusing on the last part of the quoted portion of Section 7, “Employees shall have the right . . . to engage in other concerted activities for the purpose of . . . mutual aid or protection.”

Among the areas where this emphasis is being shown is the ability of employers to limit employees’ use of social media networks such as Facebook. The “social media policies” area is particularly interesting because many (if not most) of employees’ online posts relating to their employers cannot be construed as “concerted activities for the purpose of mutual aid or protection.” Nevertheless, the NLRB has authority to stop an employer from maintaining a “work rule” that if that rule “would reasonably tend to” discourage employees from communicating with other employees “for the purpose of mutual aid or protection.” If the “social media policy” does not clearly restrict protected activities, such as by forbidding employees to “friend” each other on Facebook or to write posts about wages, hours or working conditions, then the policy only violates the NLRA if: “(1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights.”

In several cases, the NLRB has found that an employer’s social media policy has in fact been applied to restrict the exercise of Section 7 rights, and required the employer to reinstate employees terminated due to their Facebook postings and subsequent responses by Facebook friends. For example, after an employee of a collections agency was transferred to a different position that would substantially limit her earning capacity, she posted on her Facebook page that her employer had “messed up” (using expletives) and that she was “done with being a good employee.” The employee was Facebook friends with approximately 10 current and former coworkers, including her direct supervisor. An extensive exchange ensued among the coworkers regarding the employer’s management methods and preference for cheap labor, culminating with one of the former employees calling for a class action among the disaffected workers.

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

In other recent cases brought before it, the NLRB has concluded that, while the complaining former employee was not unlawfully discharged due to his or her online postings, the employer’s policy itself violated the NLRA and needed to be modified. In response to this, the NLRB recently issued a report summarizing its decisions specifically on acceptable social media policies, and perhaps most importantly, has in essence provided a sample policy that it has deemed to be lawful. The policy, as amended by Wal-Mart after the initiation of an NLRB complaint regarding its prior policy, focuses fairly narrowly on refraining from posts that “include discriminatory remarks, harassment and threats of violence” or are “meant to intentionally harm someone’s reputation.” While the policy forbids dissemination of the company’s confidential information, it provides a sufficient specific definition of “trade secrets” to put employees on notice that the policy (probably) does not include internal reports or procedures specifically touching on conditions of employment. Perhaps most importantly, the policy expressly acknowledges that employees may post work-related complaints and criticism, even while discounting the possibility that such posts are likely to result in changes that the employee seeks.

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

Franchisor Could Be Liable Under Workers’ Compensation Act

April 20th, 2012

David Cahn

An appeals court has held that Doctor’s Associates, Inc., the franchisor of Subway® sandwich shops, could be liable for the payment of workers’ compensation benefits for the injured employee of a franchisee under the Kentucky Workers’ Compensation Act because the franchisee could fit the Act’s definition of a “subcontractor” and Doctors Associates could be considered a “prime contractor”.  Uninsured Employers’ Fund v. Brown, et al., Case No. 2010-CA-000283-WC (Ct. App. Ky., Sept. 3, 2010).

The court sent the case back to the lower courts to allow for: (1) presentation of additional proof regarding the nature of the franchisor’s business and whether the work that the franchisee performed was a regular or recurrent part of the franchisor’s business; and (2) additional findings of fact after presentation of that evidence.

In late 2011, the Kentucky Supreme Court reversed the decision to remand the case for further fact-finding and ended it in favor of Doctors Associates, Inc. (“DAI”). However, that court expressly held that franchisors are not immune from scrutiny as a “statutory employer” of franchisees’ employees under Kentucky’s workers’ compensation law. Since Maryland and other states have similar workers’ compensation laws, this principle of law applies to offering a franchise in Maryland or elsewhere. Doctors Associates, Inc. v. Uninsured Employers’ Fund (KY Nov. 23, 2011).

An employee of one of the franchisor’s Kentucky franchisees had sustained injuries while working at the restaurant. The franchisee carried no workers’ compensation insurance at the time. Accordingly, the employee’s medical and disability expenses were paid by the Uninsured Employers Fund which sought indemnity from the franchisor, under a provision of the Act requiring contractors to pay compensation to an injured employee of a subcontractor if the subcontractor did not carry workers’ compensation insurance.

The ALJ concluded that he could not impose liability for workers’ compensation benefits upon the franchisor for the franchisee’s injured employee for a number of reasons. First, the franchisor was a “commercial franchisor”, a category of business not specifically covered by the statute.  Second, a contractor-subcontractor relationship existed under the statute only where the contractor paid the subcontractor to perform work. Because the franchisee was paying the franchisor, the franchisee could not be the franchisor’s subcontractor.

The Court Says, “It’s Always an Issue of Fact”

The appellate court reversed the decision because there is no blanket exemption from the worker’s compensation system of “commercial franchisors.”  In jurisdictions outside of Kentucky, courts resolved whether franchisors were liable for workers’ compensation benefits based on the specific facts of the cases, rather than by general rules of exemption, the court observed. A natural tension existed between the types of franchisor controls inherent in franchising and the types of control over day-to-day operations that courts traditionally evaluated to determine whether an employment relationship existed.  The factual issue to be determined in the context of a franchise is whether the alleged subcontractor has performed work of a kind which is a regular or recurrent part of the work of the trade, business, occupation, or profession of [the contractor],”.

The resolution of whether the franchisee was performing work for the franchisor under the meaning of the Act required the finder of fact to put aside the fact that the franchisee purchased a franchise from the franchisor, and instead look to the nature of the lasting relationship that was created between the franchisor and franchisee thereafter, the court decided. If the franchisor essentially contracted with the franchisee to perform a function that was a regular and recurrent part of its business, then the arrangement between the franchisor and franchisee was that of contractor and subcontractor and subject to the Act.

Thus, if selling sandwiches to the public was a regular and recurrent part of Doctor’s Associates, Inc.’s business, then the franchisee was unquestionably performing work that Doctor’s Associates, Inc. otherwise would have had to perform for itself and with its own employees, and the franchisee would fit within the Act’s definition of “subcontractor.”

Concurrence Goes Further on Franchisor’s Liability

A concurring option also raised the issue of whether a franchisor that failed to enforce the franchise agreement requirement that the franchisee maintain adequate insurance and name the franchisor as an additional insured, thereby becomes liable to third parties due to the franchisee’s failure to have such insurance.  This could open the door to even great legal liability in franchising in Maryland and other states.

Supreme Court reverses due to deference given to Workers Compensation Board

The Kentucky Supreme Court agreed that the ALJ erred in finding that franchisors are immune as a matter of law from being a statutory employer of franchisee’s employees. However, the Supreme Court nevertheless ended the case for the following reason: “The [Uninsured Employers’ Fund] is the claimant bearing the burden of proof to show that DAI is a contractor subject to up-the-ladder liability. The ALJ and the Board found that DAI was in the business of franchising, not the business of selling sandwiches. So the franchisee did not perform a regular or recurrent part of DAI’s business. Substantial evidence supported this finding, and we find that the evidence does not compel a finding for the UEF.”

Conclusion

This court decision demonstrates the importance of franchisors vigorously enforcing its contract provisions regarding insurance coverage, as well as other contract provisions that, if not complied with by the franchisee, may lead to liability to franchisee’s employees and customers.  It also supports the notion that entrepreneurs beginning a franchising program should not offer franchises through a company that also operates the business being franchised, but instead create a new company used solely for franchising activities. It is important for companies offering franchises in Maryland to consult with an attorney and minimize this risk.

Franchising and its Growth Alternatives

January 19th, 2012

David Cahn

Compliance costs and ongoing challenges of obtaining financing for new businesses have led many companies seeking growth to search for alternatives to franchising. These efforts, while quite understandable, have legal and practical implications. To understand whether they are worth the effort involved, it is important to analyze the nature of your business and its growth objectives by attempting to answer these types of questions:

1. Does your business primarily involve the sales of products you supply, the sale of products to be created by others using your methods, or the provision of services?

2. Does your business benefit from close association with a related enterprise? Examples are energy auditing, which is complementary to mechanical and renovation contractors, and the selling of fractional interests in real estate as part of a real estate brokerage business.

3. Will your business incur substantial upfront costs in the opening of new locations, either directly in the purchase of materials and inventory or indirectly in the time spent by staff in supporting the new operator?

4. Are your business methods a more compelling business asset than your brand name?

5. To what degree is poor service quality in one location likely to jeopardize the ongoing fortunes in other locations?

6. What is your ability to finance growth through profits from existing operations?

7. What is your appetite for risk in growth? Company-owned locations can be more profitable than franchises, but also substantially riskier for many reasons, including employment risk (for a recent example, see this National Labor Relations Board decision).

Your answers to these questions and others will help lead to the desired method of growth and, in turn, the steps required to comply with applicable laws and that safeguard your company’s interests. The answer could be granting a franchise for someone else to develop and own a truly new, independent business, i.e., licensing someone else to operate using your brand, under methods you prescribe and in exchange for fees paid to you. Alternatively, you might recruit local representatives who have successful related businesses to sell your product or service as a relatively small part of their ongoing operations. You might use profits from existing operations to finance part of the costs of opening new locations, while recruiting “local talent” who will finance the other part of the cost and operate those locations (as “partners”). Or perhaps you will offer stock in your company and recruit talented salespeople or managers who will make no cash investment, but who also will have more limited ability to control and profit from local operations over time.

Each such solution (and there may be more than one) requires different legal services and provide different challenges. As growth counselors, the attorneys of Whiteford Taylor & Preston L.L.P. have the skills to assist with any of these endeavors. Contact David L. Cahn to discuss your growth strategy.