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

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 available exemptions to the disclosure mandates of the Federal Franchise Rule.

One "grouping" of potential FDD disclosure exemptions relate to transactions involving sophisticated investors, insiders and large franchise investments. These "potential" exemptions, should be evaluated and considered under the following circumstances:

• "Large Franchise Investment". The "Large Franchise Investment" exemption applies to franchise transactions involving a franchisee initial investment  of at least $1 million exclusive of unimproved land and franchisor (including affiliates) financing.  Application of this exemption is dependent upon an analysis of the transaction, satisfaction of the dollar volume criteria and the requirement that the franchisee sign a disclosure acknowledging that the franchise sale was exempt from the Franchise Rule.

• "Large Franchisee Entities". The "Large Franchisee Exemption" applies to franchise sales transactions involving prospective franchisees that are corporate entities, possess a minimum net worth of $5 million and possess no less that 5 years of prior business experience.  By combining both net worth and prior business experience requirements, this exemption is intentionally limited corporate franchisees that possess a predicate level of sophistication.

• "Insiders of the Franchisor". The "Insider Exemption" applies to franchise sales to the owners, directors, and managers of the predecessor entity of the franchisor.  That is, this exemption applies to the officers, owners and managers of a business before it became a franchisor.  These prospective franchisees must possess at least two years experience in the franchisors business and, at the time of becoming a franchisee, have maintained their insider status.These "sophisticated investor" exemptions are an important tool for franchisors to consider and beware of One such exemption relates to “Large Franchisees”.

The foregoing "sophisticated investor" exemptions constitute a critical tool for franchisors to be aware of when planning certain non-traditional franchise sales transactions and when evaluating potential litigation strategy.  Application of the foregoing exemptions requires a fact specific analysis of factors and legal criteria - including applicable rules and regulations associated with each exemption) .  The key, however, is to be aware of this potential "tool". 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Trademarks comprise a fundamental component to all franchise systems.  So much so, that FDD "Item 13" is exclusively devoted to disclosures respecting the existence, registration, maintenance and defense of a franchisor's trademarks.  Franchisors that are serious about their "systems" must also also be serious about the protection of their trademarks.  

So, what are some of the factors and steps that serious franchisors (both start-up and established) understand about their trademarks?  Here are a few:

• Trademark Registration is Critical.  This point relates to start-up franchisors and comes down to a basic point: "don't sell a franchise until you register your primary trademarks with the United States Patent and Trademark Office ("USPTO")". Selling your first franchise without first securing USPTO registration will invite unnecessary "litigation risk" should your registration application be rejected or your mark challenged.

• USPTO Registration does Not Insure a Strong Trademark. The "legal value", strength and enforceability of your trademark will be influenced by a number of factors irrespective of your registration status.  Although USPTO registration is an important factor, by itself, it may not be enough.  Additional factors that you must consider and evaluate relate to the "legitimate" use of similar marks by third parties and whether or not your mark is comprised of "descriptive" terms.  Generally, registered trademarks that are comprised of descriptive terms  (i.e., such as "bakery", "store", "spa",   "rapid", and other terms that "describe" your goods or services)  will be afforded less protection than trademarks that are comprised of terms that are "arbitrary" (i.e., words that have no relation to the goods or services of your business).

• Periodic Evaluate your Marks and Registrations.  As systems and business develops, typically, so do trademarks. Over time, franchisors modify existing marks, develop new marks, expand usage of a particular mark (i.e. to a new business category) and, in certain instances, discontinue the use of a mark.   It is critical to insure that your trademark registrations remain current and reflect your "current" usage of your marks.  This "evaluation process" need not be complex nor expensive an open line of communication between management and franchise counsel.  

As your franchise develops and expands the value of your system, brand and owner equity will become more and more dependent on the strength and enforceability of your intellectual property assets.  Trademarks are a big part of your "IP" asset structure and they require serious attention. Strong trademarks are a big part of strong franchise systems.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Franchise systems have various life cycles and require time to mature and develop the necessary systems and infrastructure to expand. For franchisors, many times, the biggest strain on their franchise system relates to and is traced back to an overambitious rate of expansion. While there are many considerations, motivations and good reasons why your should be aggressive about unit growth, you must nevertheless proceed with extreme caution and evaluate whether or not your systems are capable of supporting your planned levels of expansion. Some factors to consider, include:

• The current location of your franchisees and whether or not expansion should be reserved and limited to designated geographic locations;

• The capacity and capability of your supply chain and whether or not you have lined up the necessary vendors to supply your franchisees and maintain the necessary levels of quality control;

• The capacity of your management and marketing team and your ability to maintain consistent levels of quality control, franchisee development and overall system development;

• Whether or not your internal in-house legal counsel or outside franchise attorneys have implemented clear quality control measures respecting the delivery of your FDD, the management of your franchise agreements and the constant assessment and protection of your trademarks and intellectual property.

Great franchise systems do not need to be large – they just need a coherent plan and sustainable plan for system growth and a management team committed to quality over quantity.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

I am a firm believer in the efficiencies and economies of scale that may result from operating multiple franchise units.  Provided that you are a dedicated business person and that you are operating within a solid franchise system, the advantage and benefit of operating multiple franchise locations may be substantial.  Of course, if things are not going well, owning and operating "multiple units" may serve to double or triple your difficulties.  If you are a prospective franchisee considering the potential investment in a multi-unit franchise opportunity (i.e., where you obtain the "right and obligation" to develop more than one franchise unit with a proscribed geographic territory) you must carefully consider and evaluate the advantages, if any, that will result from any potential “mult-unit opportunity”.

When evaluating a multi-unit franchise opportunity your starting point must involve a thorough analysis of the franchisors FDD and a clear analysis as to the substantive rights that you will be acquiring as compared to the additional "legal obligations" and expenses that you will be assuming. Factors that should be evaluated include:

• What is the amount of the development fee that you must pay to acquire the multi-unit development rights?

• Will you be afforded a discount to the franchisor’s fixed ”initial franchise fee”; If a discount exists will the discount allow you to recoup the additional initial development fees that you will be required to pay to the franchisor?

• Will you be afforded a protected territory that possesses sufficient demographics and territory size to permit your "profitable" development of the franchise units that you will be required to develop?

• Will you receive a reduced royalty structure as you develop additional franchise units, or, will you be paying the same royalty rates as single-unit franchisees?

• What are the minimum number of franchise units that you must develop?

• Is the development time-table sufficient for your development of the required number of franchised units;

I am a strong proponent of multi-unit franchising and believe that for the right franchisee, multi-unit franchising presents a significant opportunity. However, much will depend on the franchisor, the franchise opportunity and your ability to develop and manage multiple franchise units. If multi-unit franchising is something that you are considering, you must also recognize that there may be additional opportunities (when compared to the negotiation of a single unit franchise) to negotiate and refine the terms of your franchise agreements.

• Email This
• Print
• Comments
• Trackbacks
• Share Link