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Trade Dress: Is Your Franchise System In Vogue?

By Newsletter

As a growing Franchisor, you constantly endeavor to make your company distinguishable from its competition. From the very beginning when you had the idea to launch your business, you no doubt struggled to find just the right name. Then after the name, you went through the legal process to register and protect that name and associated logo. In conjunction with finding the right name, you worked hard and spent many long hours to develop those secret recipes or methodology of operations and processes which formed the core of your trade secrets that set you apart from your competition. Unfortunately, many Franchisors fail to spend the same amount of time and effort in developing or protecting their company’s trade dress

Your trade dress is the overall appearance of the business. The items that make the business or product distinguishable and recognizable to the customer. When you drive down the street and see the golden arches at a fast food restaurant, is there any doubt about the name of the Franchisor? The golden arches symbolize the entire franchise system. Ask any kid.  They know what the arches mean when they are hungry. The golden arches constitute a major part of the Franchisor’s trade dress and are a very valuable asset. A company’s trade dress builds reputation and goodwill which in turn, becomes synonymous with the Franchisor’s name. But as you become successful in building greater market share through your trade dress, your competitors will seek to copy you and capitalize on that good will and reputation.

Fortunately, there is good news for Franchisors seeking to protect their trade dress. By employing Section 43(a) of the Lanham Act, a Franchisor carries a “big stick” to beat back its competitors. Under the Lanham Act, not only can a Franchisor obtain damages against the infringer, but the Franchisor can also obtain an injunction and destruction of the “copy-cat” materials. Additionally, the Act also enables a Franchisor to obtain attorney fees against the offender. And a Franchisor has the option of initiating the case in either federal or state court.

The most notable trade dress case decided under the Lanham Act was Taco Cabana v. Two Pesos. In this case, the U.S. Supreme Court upheld the Circuit Court’s finding that the defendant had appropriated the Plaintiff’s general appearance by copying the exterior of the restaurant, the identifying signage, interior kitchen floor plan, décor, servers’ uniforms and several other features of the restaurant. The court found that the above items created a “total image”. The total image constituted the Plaintiff’s trade dress and distinguished its products and services from competitors. 

CONCLUSION

Once your trade dress is developed, make sure it is used consistently by all franchisees. When used on a consistent basis, trade dress becomes a major asset of your franchise company and merits no less protection than that of your trademark and trade secrets.

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Exit Strategies for Franchisees Part Two

By Newsletter

Economically it is good business to have a program in place to help franchisees exit the system without having to resort to litigation or arbitration. An exit plan allows you the Franchisor to control the process and bring in a new energetic franchisee who can follow your franchise system, pay royalties, become successful and be a shining example for future prospects.

As a Franchisor, you are already set up to take in new leads, so why not use some of those leads for obtaining that super star replacement franchisee. Wouldn’t it be a great turnaround to go from having a non-performing or non-compliant franchisee to have a new franchisee who is much more motivated and desirous of pleasing you, the Franchisor? Some Franchisors even have programs in place which provide credits toward future royalties or a credit toward the purchase price to employees of franchisor interested in owning a franchise. It’s a great incentive to attract good corporate employees to work for your Franchise company when they can later become successful franchisees.

From the Franchisee’s point of view, it makes sense to present their franchise in the best possible light to facilitate the sale of their business to a third party. Because the Franchisor has controlled the process, the Franchisor has created a win-win for both the Franchisor and the franchisee.

Another form of exit strategy which ultimately reaches the sale of the franchise is the Cure Agreement. This agreement can be as simple as:

  1. An acknowledgement by the franchisee that there is a breach of the Franchise Agreement; and
  2. A plan describing how the breach will be cured; and
  3. The consequences of failing to follow the plan and cure the breach.

The use of a Cure Agreement if structured correctly can be a powerful tool for the Franchisor. The details of what the defaulting franchisee must do should be fully set out. Further, if done correctly the Franchisor in many states can incorporate release language, eliminating a franchisee’s claims (if any) against the Franchisor. Also there is no lag time. If the franchisee fails to cure the breach (particularly a monetary breach) the exit plan to remove the franchisee is in place and implemented immediately. The Cure Agreement is definitely a weapon that should be in a Franchisor’s arsenal.

As a Franchisor, it is imperative that you develop strategies to deal with franchisees that don’t perform or worse, refuse to abide by your agreement. With the proper plan in place you can avoid the cost of arbitration or litigation and move quickly to prevent any collateral damage with other franchisees.

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Exit Strategies for Franchisees Before You Terminate

By Newsletter

There are times when it is more prudent to have an exit strategy in place than to employ the financial and manpower resources of your franchise company necessary for a franchisee termination. This is true from an economical standpoint as well as a legal one. Not only do many states have specific statutes dealing with termination spelling out what can and cannot be done but, believe it or not, some states require a franchisor to compensate the franchisee upon termination.

Considering the legal and economical consequences which flow from termination, it seems only logical to develop exit strategies to wean out the dissident franchisees and make room for those franchisees that are helping you build a successful franchise system.

So what should franchisors look for when determining potentially dissident franchisees? Without question the first clue is whether a franchisee is communicating with you. If a franchisee is not communicating with you, it doesn’t matter what kind of wonderful programs you have in place. Your franchise system will not work unilaterally.

There are several ways to keep the lines of communication open with franchisees. One method is to make sure your field personnel are aware of potential problems and have them meet face-to-face with the franchisee to discuss the problem(s). Only when you know what the problem is can you attempt to effect a practical solution through your exit strategies for franchisees.

If your field personnel cannot open the lines of communication, it may be prudent to have an executive pick up the phone and make contact. If you perceive a serious problem you may want to invite the franchisee for a visit. You may have to buy a plane ticket but it’s certainly less expensive than spending valuable executive time and money defending a lawsuit.

Occasionally a franchisor and franchisee need a third party to open the line of communication. Mediation sometimes works to get a franchisor and franchisee together and vent whatever animosity there may be while at the same time causing each side to get back to the problem.

A sometimes better method of encouraging communication is by using your franchise counsel. Recently, a franchise client forwarded a rather threatening letter from a franchisee’s counsel. Based upon the attorney’s letter, I realized he could not have reviewed his client’s franchise agreement. After picking up the phone and going over several key provisions of the franchise agreement, franchisee’s counsel realized his client’s vulnerable position and the expense his client would incur. Based upon our phone conversation, the line of communication opened and we were able to work out an exit strategy for the franchisee. But before an exit strategy could even be discussed, we had to communicate.

There are many great exit strategies for franchisees that work extremely well once you have found the root of a franchisee’s problem. Next month we will continue to build our arsenal of additional exit strategies for franchisees before termination.

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Promotional Contests: Winners or Losers?

By Newsletter

Traditionally, consumer promotions featuring games of chance, lotteries and sweepstakes have generated new sales and given Franchisors increased brand name recognition. In fact, an article in The Wall Street Journal noted sweepstake sites were a growing segment of the Internet. Sounds like a winner doesn’t it? It can be a winner if your company follows the rules.

Almost every state has codified a set of rules to regulate promotional contests. At the federal level, various agencies are empowered to initiate enforcement actions where prize, chance and consideration are inherent in the contest.  Internationally, our neighbors to the north in Canada prohibit any pure game of chance. In Latin America countries like Mexico, Brazil, Argentina, Venezuela and Columbia, promotional contests require prior governmental approval. This is also true of many European and Asian countries.

In a world filled with complex governmental regulations and judicial decisions, which vary from one area to the next, is there a “bright-line rule” to guide us? Fortunately, the answer is yes. As a general rule, to fall within a regulated activity the promotion must encompass each of the following: 1) a prize; or 2) chance, with mandatory consideration. A prize usually connotes anything of value awarded to the contestant. The value only has to be minimal. Thus, even discount coupons awarded may be sufficient to fulfill the definition. Chance refers to some random means of determination.  Perhaps the most striking example of this random determination is the Reader’s Digest and Publisher’s Clearing Sweepstakes. Consideration may be the most unsettled area of the “bright-line rule” because one would normally believe it had to be in a monetary form, for example, the purchase  of  a  product. This  approach  is actually followed in the majority of states. But there are several states that have taken the approach that the consideration may also be non-monetary. In these states the mere completion of an informational questionnaire may trigger the state’s definition of consideration.

To ensue compliance with our “bright-line rule,” creative marketers have skillfully crafted contests which focus on eliminating either chance or mandatory consideration. By making the contest a game of skill, the contestant is judged on their ability to perform an act. For instance, a contest involving “trivia” judges a contestant on their ability to correctly answer questions, thus the element of chance is eliminated. The second method commonly used is the elimination of mandatory consideration. By offering consumers a choice, the criteria of “mandatory” is eliminated. We all have seen this approach in the Pepsi and Coca-Cola games of chance or in any number of franchised fast food restaurant games. The customer is provided a game card when they make a purchase, but the contest also allows anyone to send off for a free card without any purchase. Thus, there is an alternative means of entering the promotional contest without any required purchase – no mandatory consideration.

CONCLUSION

Promotional contests can be a big winner for your franchise company and your franchisees if you have properly planned in advance. Begin your plan by making sure franchise legal counsel is a part of your planning team. A well-laid plan will make your company a winner rather than the next defendant in a lawsuit.

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