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Advertising Without Crossing The Line

By 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.


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.

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Being Proactive Can Save Attorney Fees

By Newsletter

Early in my legal career, I was contacted by a Florida franchising company that had been sued by 12 different franchisees, all represented by the same attorney. After invoking the arbitration provisions of the franchise agreement and dividing the franchisees into separate arbitrations, rather than one lawsuit with 12 plaintiffs pooling their resources, I received neatly organized packages for each arbitration from the president of the Florida franchise company.  In each franchisee package was a summary of claims made by the franchisee, along with documents supporting my client’s position. In addition, my franchise client had one packet containing general information about his company and everything it had done (seminars, newsletters, workshops, etc.) to fulfill the company’s contractual obligations for all franchises.

In my naiveté, I did not realize that my first arbitrations were a utopian experience with a company that was extremely well organized and willing to devote the necessary time to succeed.  My wake-up call came not long afterwards when another franchising company had an arbitration filed against it by a master franchisee in Maryland. Beside the garden variety of law-suit claims, my client was also sued for failing to fulfill its franchise contract by not devoting the resources to make the franchise concept a success.  To my chagrin, the franchisor client provided little assistance in accumulating information to counter the allegations of the master franchisee.  It was only after much prod-ding of the franchisor that I was able to gather enough information to mount a successful defense of the claims filed against my client. It took me months of time consuming work going from one department to the next, finding a piece of the puzzle here and there before I was able to gather the same information that was made available by my first franchise client.  Can you guess which client paid thousands of dollars in unnecessary legal fees?

The first client was pleased with the success of the process and with the fees charged.  The second client was pleased with the successful outcome but not with the charges to reach the success.

Whether it is running a successful efficient franchise company or avoiding the tremendous cost of litigation, a Franchisor can save attorney fees by deciding to become proactive in the legal process.  Start by developing a legal plan designed to avoid unforeseen costs.  That plan would normally involve a Compliance Program which addresses the following areas: 1.) Review of your Operations Manual; 2.) Monitoring all advertising to ensure compliance with federal and state laws – including registering the advertisement before issuance in registration states; 3.) Preview of your Website and pamphlets for compliance with state laws; 4.) Knowing when to call your attorney for advice on your relationship with franchisees and whether you are complying with each state’s relationship laws. 5.) Annual review with our office to update all legal documents at the end of the year for compliance with new laws, regulations and recent case decisions.

As a franchisor, you must build a solid foundation and without a legal plan in place, your foundation is resting on quicksand.  My job as a franchise attorney is to be as productive as possible and provide value to my clients.  I would prefer to help you by being proactive rather than reactive to the latest emergency.  You truly receive the best value from an experienced franchise attorney when you lay the foundation with a good solid legal plan.

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A Practical Look at Arbitration vs. Litigation in Franchising

By Newsletter

Ask Franchisors whether they prefer arbitration or litigation and you will get quite an array of viewpoints. Occasionally, opinions are based upon experience, but more often than not, mere perception.

Because each franchisor’s business is unique, what works for one company may not work for another. In order to make an informed decision on whether to use litigation or arbitration, a franchisor must understand the advantages and disadvantages of each forum. To do this, a franchisor needs the benefit of legal counsel with a knowledge about franchising.  Additionally, legal counsel must know how your business actually functions. All too often when I review a new client’s franchising program, the client never had any meaningful input about the decision on whether to use arbitration or litigation. There was never a discussion on the advantages or disadvantages of each format, particularly when considering how each format relates to that client’s unique business.

The choice of litigation may be beneficial for one client and detrimental to another.  There aren’t any “cookie cutter” molds to facilitate your decision. There are however, some relevant questions to answer in guiding your decision.

Paramount to any decision should be the cost of each approach. Litigation often involves expensive discovery consisting of motions ad infinitum and depositions that rob a growing franchisor of its most precious resource – key people.

On the other hand, arbitration may be extremely expensive. When looking at arbitration filing fees and the cost per day of each arbitrator hearing a dispute, the price can quickly rise to thousands of dollars.

This disadvantage may, however, work as an advantage for some franchisors.

Cost for a franchisee to initiate arbitration can be a deterrent to a franchisee’s aggressiveness. It is amazing, but many litigious franchisees will think twice about initiating arbitration when they are advised about its costs and are unable to find an attorney to represent them on a contingency fee basis.

An important area to consider in a franchisor’s decision on whether to use litigation or arbitration is whether a franchisor has any avenue of appeal if it does not believe the decision follows legal precedent. Litigation is structured and a judge must follow the law and, if not, there are appellate courts to ensure compliance with the law. Unfortunately in arbitration, appellate review is very limited. We sometimes find arbitrators who believe their function is to provide equity, and in doing so, they tend to compromise. With limited appellate review, there may be no viable avenue for a franchisor to appeal the arbitration decision. This would appear to be a definite strike against arbitration, but it must also be weighed in conjunction with a survey finding that the average and median jury verdicts against franchisors were dramatically higher (almost seven times) than the awards judges and arbitrators rendered against franchisors.

Whether to utilize arbitration or litigation requires a thorough knowledge of the advantages and disadvantages of both concepts. As a franchisor, be diligent in learning all the pluses and minuses of each process. Don’t fall into the trap of one size fits all.

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