New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

Starting a franchise is an exciting process and undertaking.  So much so, that one major benefit of being a franchise lawyer is that I get to work with extremely focused clients who understand entrepreneurship and who, more often than not,  are extremely motivated to bring their business experiences to the "franchising table".  So, in partnering and working with our clients to develop their own franchise system, along the way, there are many business points that I learn.  Here are a few:

• Business Systems are Critical. Every successful business requires established systems and procedures that are focused on the consistent delivery of product or services.  Nothing should be left to chance so as a business owner and future franchisor consider what your systems are for (a) advertising and promoting your products or services, (b) communicating with prospective clients, (c) scheduling the performance of services or the delivery of product, and (d) consistently communicating and informing your clients and customers. 

• Understanding Your Client Base is Critical.  I am always impressed by how well our franchisor clients understand their customers.  When establishing a franchise one of our questionnaires relates to customer demographics and information.  Our clients readily answer this question by focusing on their "perfect customer and client" and they readily provide us with a detailed description.  So, if you are considering franchising, can you answer who your "perfect customer is" and are their key characteristics?  When establishing the location of franchised locations, this information is critical.

• Database Systems are Critical.  Many of our clients utilize database systems to maintain customer lists and to facilitate consistent email communications, promotions and mailings.  This makes sense and, quite frankly, is almost mandatory in todays business environment.  In addition to the delivery and sale of your products and services, as a franchisor, database systems will be critical to facilitating and maintaining communications with franchisees.  Following the lead of our clients, I personally utilize Infusionsoft to manage our client communications and franchise law publications.  What systems do you maintain?  How do you track and communicate with your customers?  How will your franchisees communicate with their customers?

So when it comes to franchising, understand the significance of your "business systems" and why it is critical that your FDD and Franchise Agreement account for these business systems and create a legal platform that will allow these systems to evolve and change over time.

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Proceeding with the ever increasing and costly regulation on business (a separate issue better suited for a publication on politics) the Federal Trade Commission (FTC) has issued "guidelines" respecting the use of environmental claims in advertising and marketing. Considering that many franchisors and other businesses rely on environmental claims in their advertising and packaging franchisors, franchise lawyers and all business owners need to be aware of these "guidelines".

So what are some of the basics that you need to know?

(a) Guidelines. Although identified as administrative "guidelines" as opposed to new enacted regulations it is clear that the FTC will be utilizing existing law and regulation to enforce its environmental labeling requirements.

(b) Ambiguity. The guidelines are indeed ambiguous and leave much to be interpreted. As such, implementation of environmental marking claims must be planned out with your franchise attorney and general counsel.

(c) Advertising Standards. There are many components to the FTC guidelines, but some of the base elements that you must be aware of include: 

Scientific Proof. When making claims like "100% ____ Free" or "Made from Recycled Materials" the FTC Guidelines require that you base these claims on scientific evidence. An example would be to have the product tested and to maintain records of the scientific company. Basically requiring you to test the product and to maintain records of the results.

Recycling Claims. The FTC guidelines require substantial qualification and evaluation of recycling claims. When claiming a product to be made from recycled materials, among other things, you must qualify the nature and volume of the recycled components. For example:

Unqualified claims of recycled content may be made if the entire product or package, excluding minor incidental components, is made from recycled material. For products or packages that are only partially made of recycled material, a recycled claim should be adequately qualified to avoid consumer deception about the amount, by weight, of recycled content in the finished product or package.

Environmental Attribute Claims. The FTC guidelines also focus on and seek to prevent what the FTC refers to as the "overstatement of environmental attribute". So product and packaging claims "should not be presented in a manner that overstates the environmental attribute or benefit expressly or by implication.

Not only is this a tough standard - i.e. one that deals with both express and "implied" marketing statement - but also one that is ambiguous. The FTC does, fortunately, offer some examples of misleading claims.

Example 1: offered by the FTC, provides some insight into application of these guidelines;

Example 2: A package is labeled "50% more recycled content than before". The manufacturer increased the recycled content of its package from 2 percent recycled material to 3 percent recycled material. Although the claim is technicoally true it is likely to convey the false impression that the advertiser has increased significantly the use of recyled material.

Prior to finalizing product labels, packaging and advertising materials it is important to evaluate the FTC guidelines. Franchisors, franchise lawyers and general counsel should establish a set program for identifying and evaluating environmental claims and establish written procedures as to each claim.

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For the successful business owner and entrepreneur the thought of “franchising your business” is something that requires serious consideration and a good deal of “scrutiny.” There are many legal and business factors to scrutinize and there are many sources of information that you should be evaluating (see, our franchise library). However, one great source of information includes existing franchisors and the successes, failures and lessons that they have learned.

In a recent franchise article on Business News Daily, Pierre Panos, the founder and CEO of Fresh to Order, explains what he learned about “franchising his business.” So here is what Mr. Panos has to say about the do’s and don’ts based on his own experience:

Do’s:

• Ensure your unit economics work for you before franchising;
• Make sure the concept is fully developed before you start franchising (minor tweaks in the future will be okay but major changes are not);
• Ensure you get a well respected business and franchise attorney familiar with franchising to prepare your Franchise Disclosure Document (FDD) and related paperwork – if not one unhappy franchisee could ruin the entire system;
• Have all your training manuals and operations procedures perfected before; and
• Start a franchise association early – franchisees are your partners, not your employees.

Don’ts:

• Don’t grow too quickly from a small base of stores to avoid losing control of your brand standards;
• Don’t grow all over the country or world before you can support stores effectively – grow around your home base first;
• Be very selective when accepting franchisees into your system;
• Don’t outgrow your support structure; and
• Don’t run out of cash – be fully capitalized when your business is in growth mode.

As a franchise lawyer I am a big proponent of establishing a franchise system focused on “controlled growth” and Mr. Panos’ advice to treat franchisees as “partners.” There is a lot to be evaluated in Mr. Panos’ advice and many questions that you should be evaluating. So, what will your unit economics look like? What do you need to do to insure that your FDD and Franchise Agreement are developed to support future growth? What is your plan to turn franchisees into partners and raving fans?

For additional information about setting up a franchise, we recommend this article:
How to Franchise Your Business

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As with any other method of practicing medicine in the United States, a health care franchise is subject to a multitude of complicated federal and state health care fraud and abuse statutes, regulations, case law and administrative opinions. The concept of “franchising” a health care business is a novel approach to the practice of medicine and must undergo a systematic review and evaluation of the proposed (a) franchise system, (b) business and compensation arrangements, (c) franchise disclosure documents and (d) compliance programs.

The most common regulatory and compliance issues affecting health care franchises concern the corporate practice of medicine, prohibited self-referrals and prohibited remunerations.   The failure to comply with the foregoing regulations and statutes can result in civil and/or criminal prosecution against both the franchisor and franchisees.

In certain instances the proposed franchise’s business systems and financial arrangements can fall within applicable safe harbors and/or exceptions, or can be narrowly tailored to effectuate compliance with applicable regulations and statutes. In any case, the proposed franchise will require a thorough evaluation and the preparation of strict guidelines and materials for both franchisor and franchisees to follow.

If you are considering franchising a health care business, or would like to conduct a comprehensive review of your existing health care franchise, please contact Ms. Ilana Sable, Esq. to evaluate the options available to you.

For additional health care law articles by Ilana Sable, Esq. visit the Health Care Compliance Watch blog.

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For franchisors, there are two realities when it comes to the enforcement of your franchise agreements: "Reality 1" being the rights expressly and plainly stated in your franchise agreements and "Reality 2" being how, in a court room and in litigation, a court may interpret (and even supplement) these rights. For many franchisors - from a business perspective - reality 1 and reality 2 may be very different. That is, many times court are inclined to interpret a franchise agreement in a manor that imposes additional rights and obligations on a franchisor. One such "additional right" - that is a right that cannot be found in your franchise agreement but may be imposed by a court - is an implied covenant of good faith and fair dealing. This "implied covenant" is typically asserted by franchisees in an effort to superimpose additional contract rights in a franchise agreement.

In a recent legal decision - Yamin v. Moe's Southwest Grill, et al. (2011 NY Slip Op 4803) - the New York State Appellate Division evaluated issues involving area development rights, a franchisors site selection discretion and the application of implied covenants of "good faith and fair dealing". Since the franchise agreement included a Georgia State choice of law provision, the court evaluated Georgia's version of the contract law "implied covenant of good faith and fair dealing" - a standard similar to many other states. The courts decision did not involve novel issues and is not ground breaking, but, it was extremely well reasoned and provides some instructive points for franchisors and franchise counsel about commonly imposed covenants of good faith and fair dealing.

Covenants of Good Faith and Fair Dealing. As a matter of basic contract law, courts commonly impose a "covenant of good faith and fair dealing" to contracts. When a franchise agreement affords a franchisor with discretion or right to impose an obligation on a franchisee or approve a franchisee action this "implied" covenant imposes an obligation on the franchisor to act in good faith which typically means that the franchisors decision (approval or non-approval) must be based on some consistent business standards.

An insightful point raised by the court in Yamin, is that the court may (in rare circumstances) disregard imposing this implied covenant "if" the franchise agreement expressly and clearly leaves the franchisor with "complete and absolute discretion". This is a tough standard to meet and ultimately the Yamin court did impose an implied covenant of good faith and fair dealing even though the site selection clause in the Marketing Development Agreement, expressly stated that the "franchisor may reject any proposed site for any reason in it's sole discretion". The court evaluated this seemingly absolute clause within the overall context of the agreement and cited to other agreement provisions - including one stating that the franchisor would "utilize its then current site selection policies and procedures" to evaluate a franchisees site selection - as one mitigating the franchisors "absolute discretion" and opening the door to the implied covenant of good faith and fair dealing.

Question: Is it really necessary to refer to a franchisors "then current site selection policies and procedures"? What value does that add to a franchise agreement?

Ultimately the franchisor prevailed on its motion for summary judgment and it did so for good reason: although the court imposed a covenant of good faith and fair dealing the court nevertheless held that the franchisor met this standard where the franchisor clearly documented the legitimate grounds by which it rejected the franchisees proposed site.   For franchisors it is important to document - as a part of your customary day-to-day business practices - the franchisee communications regarding site selection. These documented communications could very well serve as evidence that helps cut short unnecessary litigation.

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When it comes to "franchise litigation" and disputes between franchisors and franchisees almost, inevitably, the issue of injunctive relief  is raised.  Franchisors typically seek injunctions involving (a) the turn-over of the franchise location, (b) the de-identification of the franchise location, (c) specific performance requiring the franchisee to protect the franchisors marks, and/or (d) the enforcement of non-competition covenants where the franchisee establishes a competing business.  Franchisees typically seek injunctive relief focused on the franchisee's preservation of its franchise location, enforcement of protected territories and specific performance as to the franchisor's on-going obligation to support the franchisees business and to maintain access to proprietary products and services.

So, when faced with a franchise dispute in the State of New Jersey, franchisors, franchisees and their legal counsel need to be aware of the basic but thoroughly applied standard of  review that New Jersey courts apply to applications / motions for injunctive relief.  The most commonly cited and relied upon legal decision is the decision of the New Jersey Supreme Court in  Crowe v. DeGioia. Although the Crowe decision did not involve a business or franchise dispute  (worse - it involved a marital dispute) it, nevertheless, sets the standard for New Jersey injunctions.  Under the Crowe decision, franchisors and/or franchisees seeking injunctive relief must evaluate and be aware of the following legal proofs:

• Demonstration of "Irreparable Harm".  When seeking an injunction the moving party - whether franchisor or franchisee - must demonstrate that absent the award of a preliminary injunction that such party will suffer "irreparable harm".  Irreparable harm is typically equated with a harm for which a future "monetary award" cannot serve as proper or adequate compensation.  For franchisors, "irreparable harm" is typically alleged to occur where the franchisor's trademarks are in jeopardy or where the franchisors proprietary trade secrets are alleged to have been disclosed or violated by the franchisee.  For franchisee's irreparable harm, typically, comes in the form of franchisor violations (i.e., non-renewal and violation of protected territories) where the goodwill of the franchisees business is placed in jeopardy.

• "Likelihood of Success on the Merits".  The moving party must demonstrate that as to the causes of action set forth in the underlying complaint that the moving party possesses a "likelihood of success on the merits".  For franchisors it is common to rely on claims and causes of action alleging a franchisees violation of the detailed "franchisee obligations" set forth in the applicable franchise agreement.  Since franchise agreements, typically, favor a franchisor, franchisees seeking an injunction are, many times, forced to rely upon New Jersey's franchise relation statute - the New Jersey Franchise Practices Act.  That is a franchisee would argue that the franchisors threatened actions violate the mandates of the New Jersey Franchise Practices act and that injunctive relief is merited.

• Maintenance of the "Status Quo".  The purpose of a preliminary injunction and/or temporary restraints is to maintain the "status quo" pending the ultimate resolution of each parties legal rights in the litigation.  Accordingly, injunctive relief proper only where the moving party seeks to preserve and maintain its rights in a condition that is the same as when the litigation began.  From a franchisee perspective the proper scope of an injunction should be to preserve the status of the franchisor / franchisee relationship and the on-going operations of the franchisees business.  As to this standard, franchisors are, typically, afforded more latitude due to the express terms of the franchise agreement.  For Franchisor's preserving the "status quo" is typically viewed from the point in time after termination of the franchisees rights.

In all instances it is critical for franchisors and franchisees to recognize that "injunctive relief" is an equitable remedy and is subject to the jurisdiction of New Jersey's Chancery Courts. Applications for injunctive relief (and opposition thereto) must be supported and backed-up by detailed factual certifications and affidavits. Applications for injunctive relief serve a critical tactical and substantive role in New Jersey franchise litigation.

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When  evaluating the purchase of a franchise, prospective franchisees, frequently, question the purpose of a franchise fee and question: "what do I get in exchange for paying the franchise fee".  The following are some important factors that prospective franchisees should know about "franchise fees":

• A franchise fee is a one-time fee charged to franchisees when purchasing a franchise;

• Franchise fees are, typically, paid at the time of signing the franchise agreement;

• Franchise fees are, typically, non-refundable.  So, after signing your franchise agreement and paying the franchise fee if you later change your mind, chances are, that your fee will not be refunded;

• Franchise fees, almost always, do not entitle you to  assets or future services.  Franchise fees serve as the "price of admission" for joining the franchise system and "obtaining the rights" to become a franchisee;

• Franchise fees are typically non-negotiable.  However fee fee variations do occur when purchasing multi-unit opportunities.

• Franchise fees are legitimate fees (assuming that you have selected the right franchisor) designed to compensate the franchisor for the goodwill and systems that, presumably, the franchisor has developed and refined.

When evaluating a franchise opportunity consider that a franchise fee represents a legitimate expenditure designed to provide you with access to the franchisor's business systems, training and licensed marks.  The value of a franchise investment should not be judged based on the dollar amount of the franchise fee but rather the quality of the franchise system. Factors more important than the "amount of  the franchise fee" include: (a) the franchisors track record, (b) satisfaction of existing franchisees, (c) the quality of the franchisors training program, and (d) customer recognition of the franchisors goods or services. 

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In the State of New Jersey any determination as to the existence or non-existence of a franchise relationship requires a a factual evaluation of the legal rights and obligations between the parties.

What Constitutes a Franchise in New Jersey?

The parameters and factors to be evaluated are defined and proscribed by the New Jersey Franchise Practices Act, N.J.S.A. 56:10-3(a), which defines a "franchise" and "franchise relationship" as one  requiring:

a written agreement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trademark, service mark, or related characteristics, an in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement or otherwise.

Based on New Jersey's definition of a franchise, franchise relationships in the State of New Jersey are characterized by (a) a written agreement, (b) a trademark license, and (c) a community of interest in the marketing of goods or services.  Factors (a) and (b) are relatively self-explanatory.  As to factor (c), a "community of interest", typically exists, where the presumptive "franchisor" / party granting the trademark license, maintains control to direct and/or influence the potential franchisees marketing and business activities.  

Why Should you Care?

If your business relationship qualifies as a franchise your legal obligations and rights will exist subject to the mandates of, among other things, the New Jersey Franchise Practices Act.  That is, your relationship as "franchisor and franchisee" will not only be governed by the terms of your written agreement but also by the statutory requirements set forth in the New Jersey Franchise Practices Act.  Examples of some statutory mandates that will be imposed on your business relationship include restrictions limiting a "franchisors" ability to terminate a franchise without "good cause" and restrictions prohibiting a franchisor from imposing  unreasonable performance requirements on its franchisees.

If you are a manufacturer or distributor with "licensed" retail outlets you must be on guard that your distribution /  licensing agreement - depending on its terms - may impose and subject your business to franchise regulation and restrictions.  if you are an independent "distributor / licensee" who sells or distributes product or services - if you qualify as a franchisee  - you may have more legal protections than you realize. 

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 An obvious topic of interest to any franchisor is how much money can be made by operating its business. A smart franchisor will recognize its suppliers as an important source of revenue that can contribute directly to the franchisor’s bottom line. Recently, I discussed the law applicable to supplier payments with Kenneth A. Goss, Esq., Senior Counsel for a leading franchise system. The following is Mr. Goss' guest post on this important topic:

Franchisors can, and often do, enjoy the fruits of an effective supply program by receiving payments from suppliers based on the goods and services purchased by the franchise system. Payments from suppliers, which can be a significant source of revenue for a franchisor, are generally regarded by regulators and the courts as an established franchise industry practice based on the contractual rights each franchisor reserves in its franchise agreement. However, franchisors should be mindful that plaintiffs’ counsel in franchise litigation cases often look to exploit any weakness in a supplier payment program arguing that the franchisor has unfairly benefited from payments at the franchisees’ expense. The lesson to take away is that a well-structured supply program can ensure that a franchisor obtains maximum revenue from suppliers while minimizing the potential risk from franchisee claims.

Franchisors realize revenue from suppliers in many ways. Federal regulations recognize that payments from suppliers include all revenue and other material consideration, whether direct or indirect, that franchisors receive from suppliers based on purchases by franchisees. Direct payments may take the form of an ongoing rebate, an ongoing marketing allowance or an up-front contract signing bonus. Additionally, franchisors may receive indirect payments, for example, when a supplier sells a certain good or service to units owned by the franchisor at a lower price than the supplier sells the same good or service to units owned by franchisees. In the case of an indirect payment, the franchisor is deemed to have received the cash value of the discount or other benefit to the franchisor. Simply put, a payment from a supplier is the value the franchisor receives for allowing a supplier to participate in the franchise system’s restrictive sourcing program.

Federal trade commission regulations governing the offer and sale of franchises are concerned primarily with imposing upon franchisors the obligation to disclose payments from suppliers in the franchisor’s disclosure document. Specifically, federal regulations state that each franchise disclosure document should disclose whether the franchisor or any of its affiliates have the right to receive payments from suppliers and, if so, require franchisors to further disclose: (a) the precise basis by which the franchisor or its affiliate derives such revenue; and (b) the total revenue, either as a flat dollar amount or percentage of the franchisor’s total revenue, that the franchisor and its affiliates receive from the purchase and lease of required products and services by franchisees. Franchisors must also disclose the identity of suppliers that contribute to the franchisor’s advertising fund in each case where the franchisor collects payments from a supplier for that purpose. As long as a franchisor complies with its disclosure obligations under federal regulations, the franchisor is largely free to enter into whatever payment relationships with a supplier it wants.

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For both franchisors and prospective franchisees alike, issues concerning "earnings claims", or the lack thereof, merit serious consideration and evaluation:

For Franchisors:

The decision making process starts with an initial determination as to whether or not the franchisor will include an earnings claims in its their FDD (Item 19).  The typical advantage to including an earning claim representation is to assist with franchise sales and, in certain circumstances, to limit future litigation exposure.  If a franchisor elects to include an earnings claim then the next level of inquiry resorts to assembling, documenting and properly structuring the information contained in Item 19.  If the franchisor elects to "not" include an earnings claim (a decision made by many franchisors) then the franchisor's primary task will require the establishment and enforcement of a compliance program designed to prevent  the inadvertent (or intentional) disclosure of "earnings" related information to prospective franchisees.

For Franchisees:

The evaluation of a franchisor's Item 19 earnings claims - or the lack thereof - represents a critical due diligence task for prospective franchisees.   If Item 19 disclosures are included, franchisees must evaluate the earnings information disclosed and whether or not such "claims" provide insight into the potential "profitability" of a franchise unit.  If earnings claims are "not" included then franchisees must be certain that they do not rely on any oral "earnings" statements or representations made the franchisors sales staff - that is franchisors are not permitted to make earnings claims or representations unless they are contained in writing in FDD Item 19.

Some basic - but critical - information to be aware of when considering "earnings claims":

• Not Required by Law.  Earnings claims are "not" required by law.  However, if a franchisor, in connection with the offer or sale of a franchise, wishes to disclose an earnings claim or any earnings based information, such information must be disclosed in Item 19 of the franchisor's FDD.

• Not Prohibited by Law.  In many franchise sales settings franchisees are advised (typically by a franchisors sales agent) that "by law" the franchisor "is not permitted to make an "earnings claim" .  The intended implication of such statement, sometimes, is for the prospective franchisee to assume that "the earnings are great and that the franchisor would be glad to disclose them but cant because of the franchise laws".  Prospective franchisees need to know that this is not the case and that a franchisor's decision as to whether or not to include an Item 19 earnings claim is an optional decision.  For many legitimate reasons many franchisors elect to "not "include earnings claims representations, however, this decision is optional.

• Must have a Reasonable Basis.  When drafting and preparing an earnings claim, franchisor's and their legal counsel must ensure that the franchisor possesses a "reasonable basis" for the earnings claim.  Faced with this ambiguous legal standard, franchisors must ensure that the earnings claim is based on representative and current information that is documented in writing. Factors that should be included in this disclosure include the basis for the earnings claim, whether or not the claim is based on actual franchisee data and variations within the data pool.  

When it comes to "earnings claims" that are many more factors to consider.  When drafting Item 19 disclosures, sometimes, the process is more art than science.  However when approached properly and diligently, earnings claims will serve as an important information and legal tool benefitting both franchisors and franchisees.

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Franchisors of retail stores should become familiar with federal consumer protection laws and the consumer protection laws of each state in which the franchisor has retail operations. Recently, when discussing this issue with Kenneth A. Goss, Esq., Senior Counsel for a leading franchisor of retail businesses, Mr. Goss mentioned a development in California’s law. The following is Mr. Goss' guest post on this important topic:

California’s highest court recently expanded the Song-Beverly Credit Card Act of 1971 (the “Act”) to prohibit brick and mortar outlets in California from asking customers for zip codes in connection with credit card transactions. Franchisors with units in California should be aware of this expanded application of the Act and consider whether any changes are needed to system standards to keep franchisees in California operating within the bounds of the law.

By way of background, the Act (codified at Cal.Civ.Code § 1747 et seq.) prohibits retailers from asking customers who pay by credit card for personal identification information. The Act defines the term “personal identification information” to mean information concerning the cardholder that is not set forth on the credit card, including the cardholder's address and telephone number. According to the Act, a retailer could violate the law, for example, simply by asking a customer for his or her address at the point of sale. A retailer could also violate the Act by having space for a customer to provide personal identification information on a credit card transaction form. In any case, a violation of the Act could cost a retailer up to $1,000 in penalties per transaction plus other liabilities.

On February 10, 2011, the California Supreme Court ruled that a zip code alone can constitute personal identification information within the meaning of the Act in the case of Pineda v. Williams-Sonoma Stores, Inc. (2011 WL 44692), which overturned an earlier Court of Appeal decision. The issue in Pineda arose when a cashier at a Williams-Sonoma store asked the customer/plaintiff, Jessica Pineda, for her zip code at the time Ms. Pineda was making a purchase with her credit card. Williams-Sonoma recorded Ms. Pineda’s credit card number, her name and zip code in a database and subsequently used that information to determine Ms. Pineda’s address. Williams-Sonoma obtained Ms. Pineda’s address for the purpose of marketing products to Ms. Pineda and possibly also selling her information to other businesses. The California Supreme Court held that the act of asking for and recording Ms. Pineda’s zip code violated the Act because “the word ‘address’ in the [Act] should be construed as encompassing not only a complete address, but also its components.” The Court’s reasoning included that the legislature intended for the Act “to provide robust consumer protections by prohibiting retailers from soliciting and recording information about the cardholder that is unnecessary to the credit card transaction.” In light of the Pineda decision, franchise systems should be wary of their California units collecting information in connection with a credit card transaction.

The good news for retailers is that there continues to be important exceptions to the application of the Act. For example, the Act provides for exceptions in certain circumstances to (a) the collection of information for purposes incidental to the credit card transaction, such as when the retailer asks for an address to fulfill a delivery obligation; (b) the collection of personal identification information in connection with a credit card transaction if the retailer is contractually obligated to the card issuer to provide personal identification information in order to complete the credit card transaction; and (c) a retailer requiring a customer to provide reasonable forms of positive identification, provided that no information on the identification is written or recorded. Moreover, the Act has been held by a federal court not to apply to a consumer's credit card transaction in connection with purchases online because of the unique fraud concerns associated with online transactions. (See Saulic v. Symantec Corp., 596 F.Supp.2d 1323 (2009)). These exceptions simply mean that a franchisor should pay close attention to the practices of its California units because not all instances of a retailer asking for information is a violation of the Act.

Franchisors and their counsel should consider the expanded application of the Act as part of the franchisor’s analysis of consumer protection requirements in connection with developing uniform system standards to keep franchisees operating within the bounds of the law.
 

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As franchise counsel, like many of my colleagues and clients, maintaining an updated and current database of state specific franchise laws, registration requirements and regulatory entities is a critical task that we continuously work on and improve.  After recently launching our internal client accessed database - and receiving some extremely positive feed back -  we thought that starting a "public" database of "state specific franchise links and information" would be a helpful resource for our readers and the franchise community.   At the very least, it could serve as a time-saver.

So, we are pleased to announce that we have added the "State Franchise Resources Map" to our site. The map is somewhat interactive: By "Clicking" on a particular state you will be linked/taken (willingly, of course) to our resource page for the selected state.  Presently, our state specific resources include: (i) registration status, (ii) relevant franchise laws, (iii) applicable regulatory agencies, and (iv) useful links. Click here to access the State Franchise Resources Map.

The resources available for each particular state varies and, presently, our launch is at its "beta" stage. We intend to further refine and supplement our state specific information and we would appreciate any comments, criticisms or input that you may have.

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In 2010 two trends have become abundantly clear: With the ever accelerating "shift" in the United States economy a substantial number of successful business owners and qualified individuals have and continue to consider and explore"franchising" as an avenue for growth and income stability.  That is, (1)  successful business owners are considering the prospects and benefits of "franchising their business and becoming a franchisor" and (2) certain exceptionally qualified individuals are evaluating the prospect of "buying a franchise and becoming a franchisee"  as a potential opportunity for income stability and growth.

The interesting thing about these "trends" is that they do not relate to and are not evidenced by franchise system development or franchise unit sales (in fact these "metrics" are, markedly, down with declining growth levels) but, rather, the "intensity levels" by which certain "exceptionally qualified" individuals and business owners have and continue to - for the first time - seriously consider the "franchising business model" .  Faced with economic declines and economic uncertainty comes, what I believe to be, an exceptional "filtering process" and opportunity whereby a select number of exceptional prospective franchisees and franchisors will be presented with the economic incentive to create successful franchise relationships and, quite possibly, help redefine the franchisor/ franchisee relationship.

So, for both prospective franchisors and franchisees, my advice for 2012 is to evaluate opportunities thoroughly, understand that franchising is not right for everyone (in fact it is not right for "most" business owners and individuals), and, recognize that for a select few - who get it right - with our current state of economic uncertainty also exists a substantial opportunity for growth through franchising. However this "opportunity" requires precise planning and commitment - do not rush into the purchase of a franchise or the development of a franchise system.   

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As franchise counsel I am a strong proponent of “disclosure” – the more of it, the better. Quality disclosures contained in your FDD serve a critical role in mitigating future litigation risk and expense. So, when it comes to FDD disclosure exemptions, we typically proceed with extreme caution. Nevertheless, in the appropriate circumstance, franchisors should consider or at least be aware of potential tools available to them when it comes to potential disclosure exemptions to the Federal Franchise Rule.

One such exemption relates to “Large Franchisees”. The “Large Franchisee Exemption” was incorporated into the federal franchise rule to alleviate and lessen disclosure requirements when dealing with “sophisticated” franchisees. The criteria established by the federal rule are related to “high net-worth” franchisees and certain qualified insiders. The “large franchisee exemption” may be applicable – subject to qualification – to the following individuals / entities / institutions:

• Franchise sales involving ongoing entities such as airports, hospitals and universities with at least $5 million net worth and five years of prior business experience;

• Franchise sales where the initial investment is at least $1 million exclusive of unimproved land and franchisor financing; and

• Franchise sales with “insider” franchise purchases involving owners or officers of the franchise sytem, or managers with at least two years’ management experience in the franchise system.

Before adopting and relying on a disclosure exemption, careful analysis should be given to (a) satisfaction of federal and state law, and (b) a cost-benefit analysis as to the extra burden and cost that disclosure would require.  From a litigation standpoint legal counsel for franchisors must be aware of these disclosure exemptions as potential defenses in litigation involving alleged disclosure violations.

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