Tag: International Franchise Association

ABA Forum on Franchising’s “Wizard” proposals do not address arbitration issue

December 30th, 2013

At the October 2013 American Bar Association Forum on Franchising Convention, the keynote program was entitled “If I had a Wizards’s Wand” and concerned what each of the four presenters would change about franchising and the law, if they could. Rochelle “Shelley” Spandorf’s proposals as part of that program are summarized by reporter Janet Sparks in this BlueMauMau.com article . While Ms. Spandorf’s proposed changes are wonderful as far as they go (if not magical), unfortunately she did not clearly address one of the most important dispute resolution issues in the U.S. legal system, including franchising; the use of mandatory pre-dispute arbitration clauses to blunt weaker parties’ access to civil justice.

Aspects of Shelley’s proposals that seem particularly commendable are requiring all new franchisors to have some base of experience, creating a uniform national regisry of franchise sales registration, mandating the provision of a financial performance representation, and freeing states’ attorney generals to puruse enforcement rather than adminiistering a registration system. Moreover, while such legislation might appear to be substantially more burdensome to franchisors than the current legal regime of franchise sales regulation, the reality is that, even in the so-called “non-registration states” most franchisees do have the ability to pursue private civil actions for material violations of the FTC Franchise Rule; for example, see Final Cut, LLC v. Sharkey, 2012 Conn Super. LEXIS 98, 2012 WL 310752 (Conn. Superior Ct., Jan. 3, 2012) (franchisee prevails under Connecticut Unfair Trade Practices Act in claims that franchise sales were made in material violation of the FTC Franchise Rule).

However, on the issue of dispute resolution, it is unclear whether the proposal that U.S. federal courts have “exclusive jurisdiction” over U.S. franchise law claims would mean that franchisors could not require arbitration instead of court proceedings. This is particularly important with regard to the ability of franchisees to pursue group or class actions. Through many Supreme Court decisions authored by conservative justices, as well as legislation passed by Republican Congressional majorities, plaintiffs seeking class certification face a rigorous burden in U.S. courts. As many an attorney can attest, there are myriad difficulties (both ethical and practical) in representing substantial groups of franchisees pursuing common claims. However, in appropriate circumstances where common questions of fact predominate, particularly on liability, use of a group or class action is the most efficient (and sometimes the ony practical) way for parties who have suffered grievous financial losses to seek a remedy. Supreme Court decisions have made it extremely easy for parties to bar class or group actions by inserting an arbitration clause in their form contracts and refusing to remove them.

While reforms freeing state attorneys’ general to focus on claims enforcement might help improve failed franchisees’ access to justice, experience shows that attorney generals tend to focus on relief for large number of consumers rather than smaller numbers of small business owners. Unless a federal franchise law contains an express exemption from the Federal Arbitration Act for disputes between franchisors and franchisees, its benefits for franchisees may prove to be illusory.

Hashim and Walker Provide Valuable Insight on Franchise Agreement and Relationship Priorities

May 20th, 2013

David Cahn

David Cahn

In the opening General Session of the International Franchise Association (“IFA”) Legal Symposium on May 6, 2013, Aziz Hashim, President & CEO of NRD Holdings, LLC (Multi-Unit Franchisee of Popeye’s, Checkers, and Domino’s Pizza) & the IFA’s current Secretary, and Kenneth L. Walker, formerly IFA Chairman and the Chairman of the Board of Driven Brands, Inc. (franchisor of Meineke Car Care businesses), commented on franchise agreements and franchise relationship management in an interview-style program moderated by Joel Buckberg. Their comments, which are summarized below, demonstrate both the promise and the challenges inherent in franchising.

Franchise Agreement “Turn-offs”: Hashim’s “bad marks” when evaluating franchise agreements all relate to the security of the franchisee’s equity investment in the business, and are:
1. Franchisor’s right to a liquidated damages award following termination for any reason;
2. Unlimited personal guarantees required by the franchisee’s owners, particularly after an approved sale of the owner’s interest in the franchisee;
3. Franchisor’s right to require the buyer of a location to sign the franchisor’s then-current form of franchise agreement, which might have higher fees or weakened territorial rights;
4. Franchisor’s right to require “periodic” remodeling, without limitations on the frequency, timing or cost of the facility changes.

Walker did not list any concerns with franchise agreements, which is not surprising given his background as a franchisor executive. However, he did emphasize that one of his biggest “turnoffs” when he was CEO (from 1996 until 2012) was having the first contact in a negotiation coming from a franchisee’s lawyer rather than the franchisee executive himself. He was much more likely to negotiate an issue with a franchisee who first approached him directly, even if the final agreement might be worked through by each party’s counsel.

Use of Marketing Funds: Walker expressed a preference for wide franchisor discretion in deciding how to use franchisee contributions, as long as the uses were devoted to growing franchisees’ businesses. Hashim agreed, but with the caveat that franchisees had to be actively engaged and consulted as to the franchisor’s proposed uses of the monies. Hashim objected to use of such funds to cover part of franchisor’s executive salaries (such as for a Chief Marketing Officer) or to conduct product development analysis. He supported flexible uses such as contributing towards the remodeling and rebranding of franchisee restaurants. Walker agreed that franchisee engagement and “buy-in” is critical, on the basis that it is better to have a somewhat flawed marketing plan that is widely executed than an outstanding plan that the franchisees refuse to implement.

Territorial Rights: With regard to franchisees’ territory protections, Walker argued that if the brand as a whole is losing market share to competitors with its existing network of locations, then it should be able to “backfill” with additional franchises. Hashim seemed to agree, as long as the plan protected franchisees who were properly executing the system and meeting expected revenue targets.
Supply Chain Controls: Hashim argued that franchisors should not require purchases of commonly available supplies or ingredients from more expensive sources, if the franchisees can obtain the same items less expensively through other means. He said that at a minimum, there should be clear disclosure to prospective franchisees of how the franchisor makes money from the supply chain.

Facility Remodeling and “Upgrades”: The panelists agreed that it is critical for franchisors to efficiently monitor the quality of goods and services being provided and to discipline franchisees who are not meeting such standards. However, Hashim argued that franchisors need to “make the business case” as to how facility updates or remodeling are going to benefit the profitability and value of the franchisees’ businesses rather than just drive revenue growth. He also believes that “smart franchisors” help fund the costs of facility updates to obtain rapid adoption by most franchisees.
Transfer: Walker emphasized the need to make sure that approval of a transfer is unlikely to harm the viability of a location. Hashim said that it is critical that the franchisor’s rules for obtaining approval are clear, objective and disclosed to active franchisees, and if the criteria are changed the franchisor should be able to explain why change is necessary. Hashim recommends this simple test: “If you would sell this person a new franchise, then you should approve a transfer to that same person.”

Training and Operations Support: Walker believes that in-person, live training and conventions continue to have value in fostering a team spirit among franchisees and an exchange of best practices information, as compared to Internet “webinars” or recorded trainings. Hashim expressed frustration that the ratio of franchisor field staff or “business consultants” to franchisees has been decreasing over time, and the experience level of those consultants has been decreasing. He said that periodic visits by qualified field representatives play in important role in franchisee satisfaction and success.
Termination and Damages: Despite his broad disapproval of personal guarantees and liquidated damages, Hashim agreed with Walker that, if a franchisee is not in financial distress but simply wants to quit the franchise to stop paying royalties, then it is appropriate to require that franchisee to pay termination compensation to the franchisor.

Concluding Comments: Hashim made the following noteworthy comments to franchisors:
1. Recognize that you are not bestowing franchise rights, but rather recruiting important business partners;
2. Don’t make your franchise agreement so harsh that it scares of good prospective franchisees, since quality franchisees drive a brand’s success;
3. Poll your best franchisees to find out their thoughts about the brand and franchisor staff;
4. Mystery shop your franchise salespeople, to find out what they are saying (and failing to say) to prospects; and
5. Employ a true ombudsman to address franchisee complaints and concerns before they mushroom into disputes.

In many ways this program showed the best that the IFA has to offer, since it brought together franchisor and franchisee perspectives for the purpose of furthering industry best practices. It also highlighted Aziz Hashim as a rising leader in franchising who bears watching in the future.

Using Online Social Media to Promote and Protect your Business

December 2nd, 2009

by David Cahn

With the recent boom in popularity of social networking websites, more and more companies are looking to these forums for ways to promote their business. Sites like LinkedIn, Twitter, Facebook and Yelp! are rapidly becoming the go-to resources for establishing and maintaining relationships, finding referrals, and conducting competitive recognizance. Blogs and consumer forums also are becoming more and more popular for sharing customer experiences – both good and bad – with a virtually unlimited audience.

I recently attended an International Franchise Association regional program near Washington, D.C., during which Paula Valentine, Senior Director of E-Commerce for Choice Hotels, presented an interesting summary of the uses of social networking by Choice Hotels and other businesses with a national presence. Ms. Valentine emphasized that expanding your Internet presence beyond the traditional website and online business listings can serve to: (i) reach current and potential customers on a more personal level; (ii) better enable you to track customer reviews and complaints; and (iii) help you to monitor the actions of your competitors.

Personal Connections

                When used in a professional manner, social networking sites can be valuable tools for reaching potential customers, and maintaining relationships with existing customers. Ms. Valentine noted the following examples of legitimate and professional uses of social networking forums:

  • Posting business profiles on LinkedIn, Facebook, Yelp! and other true social networks to create a personality for your company and to promote your brand identity;
  • “Tweeting” about innovations, developments and accolades;
  • Offering discounts or specials to Facebook “fans” and Twitter “followers”;
  • Searching social media websites for posts about your company;
  • Posting courteous responses to posts about your company; and
  • Maintaining a blog to post information relevant to your potential customer base.

Ms. Valentine stated that franchisors can also use Facebook as a cheaper alternative to the traditional franchisee intranet, and to promote interaction and feedback between and among franchisees and the franchisor’s support team. Likewise, franchisees can use social networking profiles to promote their businesses and give local updates, subject of course the limits imposed by their franchisors on online advertising and use of the franchisors’ trademarks.

                Of course, all franchisees’ and employees’ use of social networking media should be carefully monitored to ensure the quality, accuracy and legality of each public statement. Remember, you are using the Internet because it allows information to spread quickly in a recorded audiovisual format—you do not want this to be used against you. Also, if you use Facebook to facilitate franchisee interaction, be sure to place limits on the types of topics discussed to avoid unintended disclosure of your confidential information.

Tracking Customer Opinions

                Ms. Valentine also discussed how social networking websites can provide an easy and non-confrontational means for customers to share their opinions about a company’s product or service. By tracking relevant consumer websites and searching social media for references to its brand, products or services, a company can gain valuable insight into its public perception. In addition, Ms. Valentine stated that direct responses to posts – and even to the posters themselves – can go a long way toward building consumer confidence and lasting customer relationships.

Competitive Recognizance

                Finally, Ms. Valentine noted how social media can also be used to conduct competitive recognizance on a variety of levels. Businesses can track their competitors’ uses of social media to make sure they are not falling behind the curve. They can also track customer complaints against competitors to look for trends and preferences among the body of relevant consumers.

                Tracking competitors’ use of social media can also be used to make sure that your trademarks and copyrights are not being misappropriated or infringed. While there are certain competitive rights of “fair use”, enjoining unlawful misuse of your intellectual property is important – and can be essential – to protecting your legal rights. False and damaging posts may also be actionable under the law of defamation or as false advertising, and taking legal action to have such content deleted or rectified can also be essential to protecting the image and value of your brand.

                A calculated and concerted social media campaign can be an invaluable tool for your business. Social media provide virtually limitless possibilities for promoting and protecting the interests of your company. By effectively using online social networking tools, you can take steps to ensure that your company maintains a reputation of quality and remains prominently on the front lines in the bid for your customers’ business.

Health Care Dominates IFA Public Affairs Conference

September 16th, 2009

On September 15 I attended the International Franchise Association’s 10th Annual Public Affairs Conference in Washington, D.C., and was privileged to be selected as a team captain for the group of IFA members from Maryland who attended meetings at the offices of our U.S. Senators and Representatives.  I was pleased to be able to arrange for one of Maryland’s Senators, Benjamin L. Cardin, to participate in our meeting for about 25 minutes.  Senator Cardin provided us with tremendous insight into the ongoing Congressional debate on health insurance reform and his personal views on the subject, which I interpreted to be supportive of a more moderate reform along the lines supported by Senator Baucus. 

We also discussed the continuing challenge for new franchisees to obtain start-up loans, despite efforts to make the SBA loan guarantee more accessible.  While Senator Cardin could not make any commitments as to what Congress can do to solve the problem, he is holding a program in October with bankers and small business people to try to keep the spotlight on the problem and push for improvement.

Before we went to Capitol Hill we heard from several speakers, including members of Congress and the keynote, commentator George Will.  The health insurance reform debate dominated both the remarks of the speakers and the question and answer portion, and the overwhelming tone of comments was in favor of free market solutions and against aggressive federal intervention. 

My personal view on the topic is that legislation should be passed to require all Americans to purchase some sort of health insurance with relatively low deductibles and co-pays.  However, for the health insurance market to work well for small businesses and individuals, health insurance exchanges and cooperatives need to be able to exist beyond state lines.  The Baucus legislation needs to be changed to either set up a commission to establish a pre-emptive system of minimum benefit mandates and exclusions, or to establish multi-state regions for insurance cooperatives that would establish pre-emptive REGIONAL minimum benefit mandates and exclusions.   For states with less than 10 million people this is necessar to gather sufficient buying power to force competition in premiums. 

 What are your thoughts?

David L. Cahn

Managing Member, Franchise & Business Law Group