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

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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