franchise law Archives - Duell

Sep 03

You Must Get it From the Company Store

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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Aug 02

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Saving Dollars By Using Intranets

By Richard Duell lll Newsletter

Does your staff spend a significant amount of time mailing or faxing new manual updates, newsletters, reports or a variety of other information to your franchise system? Are you apprehensive about sending confidential information over the Internet? If your answer to either question is yes, you should consider implementing a plan to establish an Intranet site. If you think your company is too small for its own Intranet site, then this article is definitely for you.

An Intranet site, as opposed to internet is a company internal site with limited access. By using encryption technology and limiting access to persons with passwords, the site is not available for public view like normal internet sites. With a secure Intranet site a franchise company can feel comfortable in sending franchisees information, such as:

Training documents, manuals, reports and other information normally copied or printed and sent through the mail;
Software upgrades for immediate use;
Newsletters;
Continued updating of approved vendor lists;
Changes in personnel directories, with the latest areas of responsibility;
Last minute vendor close outs;
And the list goes on and on.

It shouldn’t take too long to see that the above list just touches the surface of potential uses for an Intranet. In fact, not only can a Franchisor disseminate information over an Intranet site, but franchisees in the system can share ideas and experiences with other franchisees by using an Intranet bulletin board. Some Franchisors use their Intranet for franchisee reporting. By compiling the reported franchisee information over a period of time, Franchisors can analyze the reports and help franchisees strategically plan for the future or help them correct existing problems.

If a Franchisor’s Intranet site is set up to allow vendors limited access, franchisees can order supplies over the site from approved vendors with password access and guess what – your franchise company now has a new means to monitor franchisee orders and an additional tool to discover under reporting (See Franchisor Alert February 2016 “Do You Have Under Reporting Franchisees?” for other under reporting tools).

The potential uses for an Intranet site are unlimited and as a client with less than forty franchisees told me: “By eliminating many of our costly and inefficient methods of doing business, our site will pay for itself, but more importantly, our relationship with franchisees is at an all-time high. If I was starting my company again, I would have an Intranet site before I sold my first franchise.”

CONCLUSION

In Franchising it is important to never be satisfied with mediocrity. Intranets have proven to be successful in Franchising and can help provide value to your bottom-line.

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Jul 14

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Trade Dress: Is Your Franchise System In Vogue?

By Richard Duell lll 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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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.