birmingham alabama - Duell

Sep 03

You Must Get it From the Company Store

By Addie Newsletter

For many franchising companies, the “Company Store” has been a profitable addition to their bottom line. Franchisees must either buy all or a select number of items from the “Company Store” or alternatively, Franchisees must buy from designated suppliers who in turn pay the Franchisor a rebate. For many Franchisees, it doesn’t matter that the Franchisor makes a handsome profit. The convenience of one stop shopping is all that matters. However for other Franchisees, the thought that they are being gouged (rightly or wrongly) by the Franchisor ultimately leads to litigation.

The litigating Franchisees contend that the required purchases constitute a violation of the Sherman Antitrust Act by coercing them to purchase goods or services from specified suppliers, thus restraining competition when they should be able to make purchases from sellers of their own choosing.

In today’s litigious environment, it is crucial for any Franchising Company selling products or services or requiring Franchisees to purchase from designated sources, to understand Federal, and just as importantly, State legal regulations before launching a required supplier program. Not only is a Franchisor subject to Federal antitrust laws, but some States have their own antitrust laws. Recently a State Attorney General sought to hold one of our Franchise Clients in violation of that State’s antitrust laws, a very serious charge. Fortunately, our Client had consulted with us prior to implementing their pricing program and was ready. The charge never materialized!

It is also not uncommon for States to have relationship laws which directly affect your Franchise Agreements. As a result, you must understand how to successfully structure. Franchisee programs from a legal perspective. For example, several States restrict a Franchisor’s ability to require its Franchisees to buy goods and services from the Franchisor or its designee as well as restricting rebates. A few States even prohibit sourcing restraints if goods of comparable quality are available elsewhere, or they place the burden on the Franchisor to show that restrictive purchasing arrangements are reasonably necessary.

Franchisors must also pay close attention to the disclosure requirements of the Amended FTC Franchise Rule. Now Franchisors are required to disclose supplier payments received by the Franchisor and the basis of payments made to the Franchisor from suppliers. In most cases, a Franchisor must disclose gross revenue from required Franchisee purchases.

CONCLUSION

With all these obstacles standing at the door, can it be said that the “Company Store” is still a good place to increase a Franchisor’s bottom line? Absolutely! But, the “Company Store” takes planning before it can be opened. It is essential that the legal requirements be understood in order to develop and properly structure the “Company Store” and the required purchase program before it is launched. Duell | Law is ready to help you. Plan ahead. Don’t be the next TV ad for the local Plaintiff’s lawyer which announces the multi-million dollar judgment against your Franchise Company.

If you are a franchisor who has any questions about developing a Company Store, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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May 01

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Disclaimer, Waiver and Integration Clauses

By Richard Duell lll Newsletter

Disclaimer, waiver and integration clauses are quite common provisions in franchise agreements, but the manner of how they are used and the way they are incorporated into the agreement determine their enforceability and consequently, their effectiveness.

Generally, when referring to a disclaimer we mean, the repudiation or renunciation of a claim or power vested in a person. A corollary provision to the disclaimer clause is the waiver, commonly thought of as the intentional or voluntary relinquishment of a known right. Disclaimer and waiver clauses are normally used in conjunction with an integration clause, which merges all prior understandings between the parties and all contemporaneous agreements into the franchise agreement as a final expression of the parties’ intent.

When not properly incorporated into your franchise agreements, these clauses can open up a can of worms by allowing franchisees to look at other ancillary documents for their interpretation of what the franchise agreement is meant to say. Rather than protecting the Franchisor, these clauses can be a sledge hammer for the franchisee to use against you. As the Franchisor, you do not want any opening for your franchisees to use against you. The language in your franchise agreement must be specific and negate any potential opening for your franchisees.

Whether your disclaimer, waiver and integration clauses are enforceable in court usually starts with the state’s public policy. As you might expect, public policy does not normally favor permitting a Franchisor to contract out of obligations, but good news – courts do recognize the legal implications of a contract, even in the face of statutory anti-waiver provisions, because they are reluctant to ignore the intentions of the parties which are evidenced by the written contract. When courts do give effect to disclaimer, waiver and integration provisions in the face of allegations like fraud, they do so based upon the initial finding that the franchisee could not have relied on the supposed misrepresentation because of the express language of the contract itself.

CONCLUSION

So, are disclaimer, waiver and integration clauses effective? The answer lies in how they are drafted and incorporated into your franchise agreement, as well as how each state accepts them. Are disclaimer, waiver and integration clauses and provisions important? Absolutely, they can be critical if you are sued by a franchisee. Without incorporating such provisions correctly in your franchise agreement you have nothing in writing to refute a franchisee’s allegations.

If you are a franchisor who has any questions about disclaimer, waiver and integration clauses, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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Nov 03

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A Paradigm for National Accounts

By Richard Duell lll Newsletter

Technically a National Account or National Customer is one with two or more locations and structured decision making power within an organization. However, most everyone tends to associate a National Account as that of a client or customer that has locations throughout the country. Irregardless of the true definition, few Franchisees have the resources to negotiate national contracts or the ability to provide and deliver the services and products which the national client demands. Consequently, most National Accounts will not deal with a multiplicity of Franchisees but, instead will only negotiate with a single contracting source, the Franchisor. New Franchisors have had the benefit of watching the market place grow and have reserved the right to deal with National Accounts in their franchise agreements. More established franchise companies, on the other hand, have older contracts which convey “exclusive territories” with no right reserved for Franchisors to deal with the exclusive territory. National Accounts, however, want a single contracting source that can promise uniform service throughout the country and national discount prices. Under our old way of looking at the Franchisor-Franchisee relationship, we would approach the problem and attempt to resolve it by the Franchisor securing the national contract and attempting to retain all of the benefits flowing from the contract. This old way of thinking had its legal impediments and often led to litigation between Franchisor and Franchisee. In today’s marketplace, why not create a new paradigm, with both the Franchisor and Franchisee participating in the revenue stream. Unheard of you say, but what better way to strengthen the franchise system and create a win-win for your company and your Franchisees. Franchisees can significantly increase their revenue because they will have access to National Accounts and as a Franchisor your royalties will increase because your Franchisees sales will increase.

Also, as many businesses expand and buy out smaller vendors what better way to provide an answer to the age old Franchisee question of, “what have you done for me lately.” The answer could now be – look at your bottom line.

CONCLUSION

As the paradigm of traditional franchising changes, Franchisees can win by participating in National Account programs and Franchisors can also win by watching their bottom line grow from the increased royalty revenues generated by their Franchisees participation in the National Account programs.

If you are a franchisor who has any questions about National Accounts and/or National Customers, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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Oct 14

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Qualifying And Selecting Franchisees

By Richard Duell lll Newsletter

One of the most important decisions you will make when franchising is finding the right Franchisee. To be successful as a Franchisor you must have successful Franchisees. The essential question then becomes how to select good Franchisees.

Step One: Determining criteria for a successful Franchisee.

What leads so many start-up franchise company’s to a path of litigation is the mindset that they must sell to the first warm body that calls inquiring about their franchise.

I remember the lesson I learned from one of my first franchise cases. The Franchisor required the Franchisee to be heavily involved in selling and converting leads. When I deposed the dissident Franchisee, he had no previous sales experience, had no experience hiring sales people and hated cold calls or selling face to face. Obviously the Franchisor had not done their homework. The chances of the Franchisee ever being successful were slim. Therefore, determine your criteria for a successful Franchisee from the very start.

Step Two: Qualifying prospective Franchisees. Key to successfully qualifying prospective Franchisees is building a chart containing each ingredient that makes up a successful Franchisee.

If you are an entrepreneur who founded the franchise company, you undoubtedly can look back on your experiences of what it took to make your prototype successful. But just as importantly, do you know what traits are needed to succeed as a Franchisee? Is the Franchisee value driven? What was his or her previous business experience? Was the Franchisee successful in that business? What kind of net worth does the prospect have to launch the franchise? Obviously a prospective Franchisee cannot be successful if he or she has to have 100% financing to open the doors to do business. It takes awhile before a Franchisee can net any money out of the business. As a result, it is critical that you determine a prospect’s work ethic. No matter how you try to glamorize franchising, it still takes good old fashioned hard work to be successful.

After developing the profile of what you believe the requirements are for a prospect to be successful, work with your key personnel to create protocols in your company for finding the type of prospect you know should be successful. I say “should”, because we all know what can go afoul sometimes does go afoul, no matter what safeguards we put in place.

Once you have established the profile for a prospect, you are ready for the final test. Successful Franchisors I have observed go one step beyond developing the template for an ideal Franchisee.

The Final Step: The interview process. Focus on whether the prospect is the type of person you want representing your company. What are their goals and objectives and perhaps as importantly, will the individual you choose actually follow your franchise system? There are any number of industry tests available to assist you, but you want to make sure the prospect is a team player and not someone who after two or three months in the system will want to do things their way. What a waste of resources when you fail to properly qualify an individual who should never have been in a franchise system to start with. Usually the end result is termination and/or litigation.

CONCLUSION

The criteria you establish should be designed to produce the best possible candidate to represent your company. Don’t ever forget that all your hard work to build the company’s name can go up in smoke with one bad Franchisee, so choose wisely.

If you are a franchisor who has any questions about qualifying and selecting franchisees, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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Jun 05

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Advertising Without Crossing The Line

By Richard Duell lll Newsletter

Advertising is no doubt one of the most important components, if not the most important component, of a Franchise company’s success. It is also, however, one of the largest areas of litigation in franchising.

In today’s litigious environment, a plaintiff’s attorney representing a disgruntled franchisee searches for every mistake made by a franchisor. The ad your company places soliciting prospective franchisees can be the “crack in the door” that the litigator waits to slide through. So how can your company protect itself from the clutches of a plaintiff’s attorney waiting to attack? First and foremost, make sure you have reviewed the law of each state affected by the ad. Did your company properly register the ad before it was published? Surprisingly, a number of states require registration of ads before they appear to the public. These states maintain a listing of all ads properly registered by franchisors. An example of what can go wrong when you fail to register occurred in New York when a Franchisor advertised for franchisees using the New York Times. The Franchisor was not located in New York nor registered to sell franchises in New York. Normally the ad being placed in the New York Times would not have caused a registration problem because the majority of circulation was outside the State of New York. But the Franchisor made the mistake of also placing the ad in the New York Times Metro edition which has a majority of its circulation inside New York. As a result, the Franchisor was exposed to both civil and criminal liability under the New York Franchise Sales Act. Unfortunately, this is just one example of not having a proper compliance program for the advertising/marketing department.

A second important area that a franchisor should include in its advertising compliance program is the review of all ads to see if each ad is factually consistent with the franchisor’s Franchise Disclosure Document (“FDD”). It is only natural that a franchisor wants each prospective franchisee to think that their franchise is the “opportunity of a lifetime” and that it will provide “financial security” or that the franchise is one that a prospect has always “dreamed of owning.” The issue is not whether a franchisor “feels” the information is consistent, BUT whether the ad provides an opportunity for the litigator to show any inconsistency with FDD information provided his/her client. If there is a possible inconsistency, the franchisor has a legal problem.

CONCLUSION

If you want to be safe, include a legal review of your advertisements before they are published to ensure they have not “crossed the line” and exposed your company to civil and criminal liability.