AS THE WORLD TURNS

 It has been a while since I last posted. In fact, it was at the outset of the pandemic, that post was COVID-19 - Captain Obvious! The theme of that post was that franchise systems - franchisors and franchisees - need to cooperate to survive the pandemic. So how is it going?

One of my favorite law professors, who, after 40 years, I still stay in touch with, passed on this article from the Wall Street Journal: The Franchise Relationship That Powers Small Business Is Fraying. You can draw your own conclusion as to whether the headline is accurate... but everyone has to admit that all businesses are under strain at this time and, franchised businesses, are no exception. 

In my practice, I have seen a few potential buyers decide that "the time just isn't right." Perhaps, a solid decision. And, I am aware of a number of franchisor clients who have struggled through the worst of it and developed strategies to survive. My guess is that the restaurant business is most effected. You can share your experiences by commenting on this post. (Please use the normal comment button at the bottom of the post as the image below is just a picture)

Changing topics, I came across another Wall Street Journal article that caught my eye -- Big companies urge Biden, Congress to address climate change. 

How is this relevant to franchising? Well, like the virus, I believe ALL businesses should seriously work on Climate Change matters. What can you do in your system? While we contemplate what 2021 may bring, think about Climate Change -- waste reduction and recycling-sponsored sites come to mind. Is it time for a call to action in your organization?

I hope your business is striving or at least surviving in this time of challenge. Take some time to consider the contributions you can make to improve our future. It is truly a time for reflection.

Wishing all a happy and healthy holiday season!

COVID-19 - Captain Obvious!

If you are sitting at home (working?), you likely need no further reminders about the pandemic.... multiple law firms, accounting firms, banks, and sundry other businesses have provided "public service" announcements just to tell you they care. To be sure this is a transforming moment; the question is: will it be for better or worse? I am going with better but ...

The franchise industry is greatly effected and truly disrupted. Earlier this week, the ABA Forum on Franchising conducted a webinar: "Franchising in the Time of COVID-19: Managing Coronavirus-driven Disruption in Contracts, Supply Chains and More." It was informative and worth reviewing (you can review the materials here). Some topics were obvious and while others insightful.

So franchisors, franchisees, and franchise practitioners find ourselves in uncharted water. The most common refrain is "I have never witnessed anything like this in my lifetime!" When talking with colleagues in NYC, Chicago, and good-old Ohio, the word surreal typically surfaces ... empty cities, crowded grocery stores, closed parks, runs on toilet paper, and cancelled travel. (I was supposed to in Portugal this week) No clue on the toilet paper except perhaps it is used to fight off some of the BS coming from Washington as we ping-pong from one daily report to another.

Whether it is a dire harbinger of economic Armageddon or sound financial responsibility, I read in the Chicago Tribune that McDonald's just borrowed a billion dollars. (read it here)

The Forum presentation covered the most imperative topics (Chinese supply chain disruptions, Force Majeure, royalty waivers, importance of communication, and the like). But, looking back on it, not enough attention was paid to system cooperation. So here are some quick observations from Captain Obvious:

• Should franchisors provide affirmative help to franchisees? YES
• Should franchisees be proactive in communicating with each other and the system officers? YES
• Should franchisors consider royalty deferment or total abatement? YES
• Despite the concern about "joint employment liability," should franchisors offer guidance about the recent emergency employment regulations and employee financial aide passed by federal and state governments? YES
• Should franchisees look for ways to help franchisors? YES

Just like all of us practicing the new social guidelines, franchisees and franchisors (and those of us who support them) are in this together. Cooperate first, argue later.

Let's be careful out there! (Hill Street Blues)

New FDD Cover Pages on 2020 Horizon

The North American Securities Administrators Association (NASAA) represents state and provincial securities regulators in the United States, Canada and Mexico.

So what do these guys have to do with franchising?

Before the Federal Trade Commission (FTC) got in the franchise game, state securities regulators concerned themselves with franchise protections -- for instance, developing the old Uniform Franchise Offering Circular (UFOC). Today, NASAA still  plays a role in franchising, offering its guidance to the 14 registration states (click here registration states) and the FTC. As a practical matter, what is required in the registration states rules the roost, meaning Franchise Disclosure Documents (FDDs) typically incorporate what NASAA and the registration states require.

Starting on January 1, 2020, NASAA guidelines require the use of new Cover Pages (click here new Cover Pages). As a matter of franchise practice, all FDDs will then carry or require the new pages.

In summary, the pages add to the State Cover Sheets portion of the FDD. The new (or revised) pages are:

• How to Use This Franchise Disclosure Document
• What You Need to Know About Franchising Generally
• Special Risk(s) to Consider About This Franchise
• Revisions to the State Effective Dates page

All in all, the additions are positive, "buyer-oriented," and assist in understanding how to use these massive FDDs. The new Cover Pages call out the most basic questions a franchise-buyer may have and tells them where to find it. For instance, "How much can I earn?" directs the buyer to Item 19 along with the following commentary: "Item 19 may give you information about outlet sales costs, profits or losses. You should also try to obtain this information from others, like current and former franchisees. You can find their names and contact information in Item 20 or Exhibit [ ]."

Let's hope franchise-buyers take advantage of this new road map!

Marijuana - Pot - Franchising Update

This pot post has been simmering since I attended the American Bar Association's 42nd Annual  Forum on Franchising in Denver in mid-October. At the Forum, colleagues Mike Drumm and Caroline Bundy Flichter presented "FRANCHISING UNDER THE RADAR IN THE USA AND CANADA: HOW TO ENSURE YOUR CLIENT’S FRANCHISE DREAMS DON’T GO 'UP IN SMOKE.'” This is a pithy title for an overview of the sporadic legalization of "cannabis" in the US and Canada and the prospects for franchising a cannabis business.

That paper and session was quickly followed by the American Bar Association's Forum on Franchising's Franchise Law Journal article by Danielle Hunt and Vanessa Williams-Hall: "A TALE OF TWO COUNTRIES: DOES CANADA'S LEGALIZATION OF CANNABIS GIVE IT THE FIRST MOVER ADVANTAGE IN FRANCHISING?" (Summer 2019) (I would link to these papers but the ABA copyright policies prohibit publication without permission; perhaps the authors may be able to provide a copy for anyone interested)

Both articles cover the now well-known obstacles to franchising a marijuana business, especially in the US  -- for an overview of those issues search this blog for my earlier pot posts by searching "marijuana."

The continuing primary obstacle to move a marijuana franchise business forward in the US is that marijuana remains illegal at the federal level; while a number of states have legalized recreational and medical use.

My question to the presenters at the mid-October session was: are you aware of any pot businesses that have "franchised" across state lines? No, no one is aware that this has been attempted. This is confirmed in the article by Danielle Hunt and Vanessa Williams-Hall: Denver, Colorado-based ONE Cannabis has sold at least five retail outlet franchises in Colorado. Good reason exists for this one-state franchise system; no one wants to be prosecuted under federal law via the Commerce Clause of the U.S. Constitution and the federal Controlled Substances Act.

But, as the Hunt/Williams-Hall article points out, will US companies poised for cannabis franchising flee to Canada to expand their businesses? I suppose time will tell unless the US federal government changes its tune. Likely the calculated loss of precious tax dollars will turn the tide - something that Illinois's governor JB Pritzker seems to have focused on to attack Illinois's financial woes. (Recreational pot use will be legal in the Illini state on January 1, 2020)

I Love Whoppers ... I Hate Burger King

This is not the first time I have ranted on this topic -- in a previous post I vowed "no more Burger King." see Brand Enforcement Redux. That was 2015!

So four years later I am craving, you guessed it, a Whopper. What to do but visit a Burger King ... yes I broke my vow. I think I was brain-washed by all those "Impossible Burger " commercials. And no I do not want a fake Whopper.

I visit my local Burger King late in the lunch hour, eye the drive-thru line, remember the "Hiring Now" post on the brand sign, and opt for dine-in. I should have turned around right then. Glancing to my left, I see five hungry working men fixated on the post-checkout service line. Drooling for my Whopper and seeing the hunger in their eyes, I fight against my better instincts and step up to order.

A busy-manager-type takes my order as he negotiates bagging fries, shouting out pick-up orders, and exhorting the staff. Although doubtful, I figure how bad can it be? This is the self-deception one engages in when craving a Whopper. I order a Whopper with cheese, sandwich only, and cup for water. $6.10! I think wow the prices have really gone up since 2015. I look at my receipt to see if they charged me for water. Nope.

A few more unsuspecting customers wander into the service black hole, as me and the five work men await our lunches. And we wait. Of course, under the circumstances, I expect to wait a bit. But after five minutes and, from the looks on the faces of the working men that suggest a collective jump-the-counter-bull-rush, I start timing the wait.

My wait was 18 minutes! And, as I approach the counter with a "what-the-#%&#" look on my face, the manager-type looks at me and the order board and yells to the back "waiting on a DOUBLE WHOPPER WITH CHEESE." I hesitate, look at my receipt, and realize that DBL meant a double! I explain the error, fearful that any comment will cause further delay. Almost simultaneously a double Whopper with cheese lands on my tray and the manger offers a partial refund. With some quick mental gymnastics, a dollar is placed in my hand. At that point I would have taken a dime!

Whew, at least I didn't have to pay for water.

Need I say more Burger King? See you in 2023.

SBA Overview and Key Considerations

Once again I have invited Bryan Jasin to be a guest contributor on this SBA topic -  Bryan leads the Franchise Specialty Banking Group at The Huntington National Bank in Columbus, Ohio and serves on the Membership Committee for the International Franchise Association. 

The Small Business Administration manages a lending program to promote business ownership and entrepreneurship in the U.S.  Think of the program as the government sets the rules to make a loan and if that loan goes bad, then the government will provide a guarantee for some of the debt.  This encourages banks to lend into businesses where there may not be historical cash flow, sufficient collateral, or other considerations with the transaction.  My goal today is to provide a high-level view of the three core programs and some key considerations.

The SBA Express Program:  This program is for loan requests up to $350,000 and offers a borrower a faster loan process with fewer collateral and loan requirements.  The SBA does not require full collateral coverage in this program, but any individual bank may require full coverage.  Most borrowers use this program to start a small business, expand a current operation, acquire a business or purchase a piece of real estate or equipment.  The program offers a 50% guarantee on any loan loss to the bank after all collection efforts have been exhausted.

The 7(a) Program:  This program is generally for loan requests from $350,000 to $5,000,000 and generally used for a startup business loans, business acquisition loans and real estate purchase loans.  Maximum terms generally cap out at 10 years or up to 25 years if real estate is involved.  The SBA requires a minimum 10% equity into the transaction, but banks often may require more based on the loan structure, industry, and use of proceeds. This program offers a 75% guarantee. 

The 504 Program:  This program is generally a real estate acquisition and development loan program.  The program requires a 10% equity injection from the borrower, a bank loan up to 50% of the real estate value, then a 40% secondary loan from a corresponding community development corporation (CDC) that is in a second lien position and then often sold to the investor market.  The primary 50% loan cannot exceed $5,000,000 so often this program is used for larger real estate purchases.  The maximum term and amortization is 25 years.  

Key Program insights to remember:

• The maximum exposure to any one borrower is $5,000,000.
• There are “credit elsewhere” tests to ensure the loans go to borrowers who need the support – if a bank can qualify the loan conventionally, it cannot go to the SBA program.
• Most loans over $350,000 require the bank to fully collateralize the loan which means the bank often will take all available personal collateral such as equity in your primary residence or other available collateral

As a former SBA leader once told me, “the SBA program does not make a bad loan a good one, but a good loan a great one!”
Happy Lending!
Bryan Jasin 

Thank you Bryan.

Buying an Existing Franchise

This topic was called to mind because, at the the moment, I am representing two franchise buyers who are looking to acquire existing, established franchises. This is not my first rodeo in this arena. But, these recent clients reminded me of the complexities involved.

At first thought, you might think purchasing an existing franchise location would be simpler than starting from scratch. Well there are pluses and minuses. 

In a straight-up franchise purchase from a franchise company there are only two parties typically involved from the outset: the buyer and the franchise company. Sure, franchise purchases are complicated and should not be pursued without competent legal and accounting assistance. However, you are essentially starting with a clean slate; and you have time to assemble the complimentary pieces (training, leases, vendors, etc.).

When you buy an existing franchise, the players multiply: the selling-franchisee, the selling franchisee's lawyer and accountant, the current landlord, sales brokers, current customers, in-place vendors, lenders, the franchisor, and you, the buyer ... and hopefully your lawyer! More parties = more complications. Coordinating all these people and pieces usually falls on the buyer's shoulders.

As a result, the transaction process is multi-staged, and contingencies abound. Most of these deals are asset-based, meaning the buyer is acquiring the selling franchisee's existing assets, inclusive of the franchise rights. The first step is usually a Letter of Intent (LOI). This outlines the general terms and offering price but typically is not a binding contract. That follows in the form of an Asset Purchase Agreement, providing much more detail and conditions than stated in the LOI.

Assuming an Asset Purchase Agreement (APA) is executed, the fun begins! The APA should, among many other things, indicate that the deal is contingent on approval of the franchisor, the landlord, any lender. Each one of these buckets has its own hoops to jump through. For instance, the franchise company will want to qualify the buyer in the midst of everything else going on and the lender will want to vet the franchise company and the business offered for sale. Landlords want to qualify the new tenant! And you need to review and accept the franchise agreement, the lease, and any loan terms.

So where is the payoff Jim, the pluses? Although it may be less complicated to start from scratch, an existing franchise has existing customers or, at least, should have. Established customers mean instant revenue. The trade-off is that purchasing an existing franchise will generally be more expensive than developing from scratch, since you are acquiring the established goodwill along with the other assets.

A lot more could be written on this but you get the picture! Be careful out there!

Franchise Purchase Financing

To keep me from ranting about the Antonio Brown saga, I have invited Bryan Jasin to be a guest contributor to The Franchise Contrarian today. Bryan leads the Franchise Specialty Banking Group at The Huntington National Bank in Columbus, Ohio and serves on the Membership Committee for the International Franchise Association. On Antonio Brown, I must say one thing: Antonio, you have given me one more reason to hate the New England Patriots!

With that, Bryan take it away:

As a lender in the franchise industry, I have been party to thousands of deals.  I will not claim to have seen it all, but I have seen my fair share, then some.  At Huntington, we’ve seen the traditional start up with husband and wife manning the new venture, the seasoned multi-unit operator opening their 10^th or 15^th location, as well as silent partners looking for returns with an industry operator.  Sometimes we have seen new businesses grow year over year and then some businesses that never get off the ground. 

The volume of deals have provided a number of insights.  In working on transactions both big and small, there is comfort zone in the process.  Whether it is a million-dollar loan or a multi-million-dollar deal, the lender and franchise buyer must establish a trusting, supportive relationship. Trust breeds comfort.  I always try to remember that when working with a new franchisee, this is the biggest financial investment they are ever going to make. With any investment decision, you want to ensure you work with partners that have been through the loan process.   

What should you look for?  Work with a bank that has experience in your industry and a loan structure based on your experience.  A large ground up construction financing request may play well in one institution and poorly in others.  Are you looking for capital to start your venture? Not every bank has the risk appetite to lend into projected revenues and startups.

So vet your lender just as you would your new franchisor! 

Often your franchisor has relationships with banks that have experience underwriting loans for your brand.  Because the bank probably has closed many loans for other franchisees, the loan process should be efficient and not too difficult. I also encourage you to see how your franchise peers structured their loans to get started or grow.  You can learn who is good, who is not, and some good insights into loan fees and interest rates. 

Lastly, ask lots of questions throughout the process.   Your due diligence can kill a bad deal for you or make a good deal great. 

Thanks Bryan! You can reach Bryan at 614-331-8478 or Bryan.P.Jasin@huntington.com

When is the Best Time to Engage a Franchise Attorney?

Franchise Buyers: Is there a right time to engage a franchise attorney?

Based on my experience, some people wait too long to engage a franchise attorney (Well, at least most of those folks still hire counsel before they buy). I suspect that those who do delay are concerned about incurring legal fees before they select the "right" franchise. That may not always be the case.

I cannot speak for all lawyers who represent franchise buyers but my belief is that most franchise lawyers are happy to conduct a preliminary call BEFORE you are locked into a specific system. Helping buyers, by providing general, early guidance, creates a fair amount of credibility; in essence, reinforcing the idea that you have contacted the right lawyer. Screening the lawyer may be as important as screening the franchise system.

So how can this early connection help? First, counsel may simply outline the best way to work together going forward. That is, offering general guidelines as to when counsel can become effectively involved, offering the chance to ask questions along the way, and steering the potential buyer to resources to build their own "searching skills." Also, by simply directing a franchise buyer to look for the most important items in a Franchise Disclosure Document. A franchise buyer can also determine the fees that will charged once the clock is turned on. All in all, it makes you a more intelligent buyer!

On the resources, for instance, I provide potential buyers with a copy of my e-Book, How to Buy a Franchise. There are many other resources online and in print. Buyers should take advantage of these resources. My website provides a Resource section, that leads to many online guides, including information from the Federal Trade Commission, various franchisee associations, and franchise consultants.

Finally, the franchise attorney you contact may have prior experience in the category you vetting (i.e., daycare centers, home care, fast food, etc.) and may be able to offer early warning signs or guide you to a reliable franchise company.

So make the call, get on the right track, and take advantage of the resources.

Want to Own an NFL Franchise?

A few years ago my daughter invited me to play Fantasy Football with her college friends. I scoffed at the thought...and did not sign up. But my wife did! Because she had a conflict on draft day, she asked me sit in and make the picks. Since the draft is web-based and I questioned my computer skills, I protested. But being a dutiful husband I complied...with my daughter's help.

From that first day I was hooked! And, my wife let me "assist" that first season. I was forced to get my own franchise the second year.

Unless you are a billionaire, this is the closest you will come to "owning" an NFL franchise.

The NFL season is right around the corner and there are many ways to play - ESPN Fantasy Football, Yahoo Fantasy Football, and NFL Fantasy. All are free but your league may voluntarily request "entry fees" to fund year-end prize money.

My league uses ESPN Fantasy Football and it is amazingly thorough, user-friendly, and informative.

If you are already an NFL fan, fantasy football will take you to another level. You don't pick a team, you pick offensive players and a defense to form a team. If you are a "franchising fan," jump on board too - there is branding (name your team), uniforms, strategic planning each week, trademarks, personnel management, and so much more.

Take a break from the office and get your own NFL franchise! Go Eagles!

Why I Love Mediation and You Should Too!

The majority of franchise agreements that I come across or create these days have a mediation clause. For those of you who have no clue what I'm talking about, when a dispute arises, the disagreeing parties have only a few options: do nothing, file a lawsuit, go to arbitration, or sit down and try to work it out a/k/a MEDIATION.

This is not the first time I have addressed this important topic and you can find earlier posts here. And, full disclosure: I serve as a mediator when selected by the parties or their counsel.

But, here is why I love mediation and you should too! To help your clients or your company resolve disputes before spending a fortune.

Litigation and arbitration can burn up a very large sum of money. Remember it is a battle. The courtroom or the arbitration room is the battleground and counsel are the warriors. Let's not get too carried away here but some of these disputes run from tens of thousands of dollars to over hundreds of thousands of dollars.

Mediation is a process that allows parties to work together, usually with the help of a trained and experienced mediator (often a lawyer but not universally), to settle a dispute before an action is filed and sometimes after. Mediators come in all types (ex. commercial law, domestic disputes) and styles (ex. objective neutrals, aggressive, evaluative). But the hallmark of an effective mediator is keeping the parties engaged, keeping them talking and negotiating. Also, an astute mediator may offer "creative" solutions that the parties did not consider.

So counsel, if you have a long-standing client, wouldn't you want to save them time and money? Wouldn't it be the best advice you can provide under the circumstance? Besides, litigation or arbitration is always on the table but why not think of it as a last resort?

Company officials or franchisees, not only could you save those precious funds, but you may find a solution that preserves the relationship. The earlier you seek resolution, the more latitude you have.

Of course some disputes cannot be resolved through mediation but, even when there is a small chance of resolution, it seems like a wise investment.

And, as any commercial lawyer knows, whether a litigator or transactional lawyer, serving our clients' needs is our top priority.

Liquidated Damages - Friend or Foe? (Part Two)

In Part One of this topic, we discussed what Liquidated Damages are, how they may be a "penalty," and the potential risks involved in a franchise setting when there is no cap on damages upon an early termination.

This part, as promised, addresses why some franchise companies may want to use Liquidated Damages to their advantage and why franchisees may want to negotiate for a Liquidated Damages clause (even though it may sound counter-intuitive). Post-termination damages in franchise matters is complex and we will just scratch the surface here. (More detail can be found in this 2016 ABA Forum on Franchising's Annual Meeting article  - Show Me the Money! Maximizing Monetary Recovery in Franchise Cases - authored by Bethany Applebee (Subway's General Counsel) and me).

First, the idea of "legal damages" is to make an injured party whole without injecting speculation into the equation. When a franchise company seeks a wholesale remedy of "lost future royalties" for an extended term (let's say 5 years or more), it may be getting more than necessary. That is, many franchise systems seek to replace a terminated franchisee as soon as possible - akin to replacing a terminated tenant on a lease. And, as is the case with a lease, a franchisor has a duty to mitigate its damages by finding a replacement. The real measure of damages is the period of time it takes to find a replacement; so how do you calculate this in advance without some speculation.

Some excellent franchise-lawyers (Rupert M. Barkoff (recently passed away) and Christopher P. Bussert), posited this in their 2009 article: Can a Franchisor Recover Lost Future Royalties? The Debate Goes On, 12 The Franchise Lawyer 2 (Spring 2009):

In fact, when informally asked what "should" be a "fair" settlement of a lost future royalties dispute, many attorneys suggest that two or three years would be an appropriate level of compensation. These opinions may be anecdotal in nature, but they do demonstrate to some level what is considered reasonable in the franchise community on this issue. In addition, when franchise agreements provide for liquidated damages if the franchisee improperly terminates, two to three years of royalties is often offered (and upheld by courts) as a reasonable compromise.

The Barkoff-Bussert thinking was based on a reasonable time to replace a terminated franchisee. Not only is this a fair approach, on the franchisor-side, it eliminates arguments about speculation, lack of mitigation, and other defenses a terminated franchisee may raise. Thus, franchise companies may want to consider this shortcut to damage calculations... and as a means of keeping franchisees from seeking bankruptcy protection.

And, if a franchise company does not build a Liquidated Damages clause into its franchise agreement, should a franchisee negotiate for one? In states where courts have or may award damages for the FULL remaining term, it seems logical for franchisees to pursue this stop-gap clause. To determine if it is wise for a franchisee to negotiate for a Liquidated Damages clause, seek out an experienced franchise-lawyer in your area, preferably a member of the American Bar Association's Forum on Franchising.

Liquidated Damages - Friend or Foe? (Part One)

This topic has only been mentioned tangentially in this blog some time ago -- Franchisees - Damages Warning: Lost Future Royalties (see the last paragraph of that post)

In my experience, Liquidated Damages are most commonly found in construction contracts, where damages can be imposed for delays in completion or other material breaches. But we jump the gun. What are Liquidated Damages and what the heck do they have to do with franchising?

Simply stated, Liquidated Damages is the amount of money that both parties in a contract agree upon if a breach of contract occurs or legal action arises as a result of a contract breach. That is, if there is a breach by one party, instead of arguing about the potential actual damages that may result, the parties agree in advance at the time of the contract is signed  that the damages will be predetermined. Sounds simple enough ...

But, Liquidated Damages has a checkered past and, if applied in a punitive or excessive manner, can be challenged as an unenforceable "penalty," even though the parties "agreed" in advance. Therein lies the rub: agreed? Oftentimes Liquidated Damage provisions are imposed by one party and, when that occurs, the "penalty" argument ensues. Although there is more legal nuance to how Liquidated Damages work, let's turn to how Liquidated Damages are used in franchising.

The post mentioned above Franchisees - Damages Warning: Lost Future Royalties summarizes the hazards that can ensue when a franchise agreement is terminated by a franchisee prematurely (i.e. before the full contractual term is fulfilled) and the franchise company seeks damages in the form of "lost future royalties" and other lost fees the company expected. If there is no Liquidated Damages clause, some franchise companies believe they are entitled to the lost royalties and fees for the entire remaining balance of the contract term (think: a 20-year term with 10 years left to go). This can be a hefty amount! And some courts have granted these types of damages. Very bad for franchisees.

Of course, the higher the amount sought, the greater the likelihood that a franchisee will fight or perhaps seek the shelter of a bankruptcy court. This increases the franchise company's legal fees and may leave the company holding an empty bag. Very bad for a franchise company.

So there are risks on both sides.

Stayed tuned for Part Two of this post where we will discuss how some companies may use Liquidated Damages to their advantage and why franchisees may want to negotiate for a Liquidated Damages clause (even though this may sound counter-intuitive).

Marijuana - Pot - Cannabis ...the Bud Turns

Some of the MOST popular posts on this blog have concerned franchising and marijuana. (See "Franchising Marijuana" Part One, Part Two, Part Three and Part Four)

Franchise lawyers have been nipping around issues concerning the ultimate franchising of cannabis-related businesses. With the passage of more and more state laws legalizing medical and recreational pot, franchising and marijuana is a hot topic. (Illinois is a recent entrant)

In 2016, an article appeared in the American Bar Association's Franchise Law Journal that I mentioned in this blog: Franchising a Marijuana Business: It's not Quite Mission Impossible. Shannon McCarthy (a partner with Miller Nash Graham & Dunn, LLP in Seattle, Washington) and Dawn Newton (a partner with Donahue Fitzgerald, LLP in Oakland, California) provided a comprehensive treatment of the legal issues and challenges.

This month, Rochelle "Shelley" Spandorf  added to the legal literature with "Cannabis Entrepreneurs: Know the Perils of 'Accidental Franchising."  

Shelley is a franchise-colleague of mine from the American Bar Association’s Forum on Franchising. She is a partner in the Los Angeles office of Davis Wright Tremaine. A certified specialist in franchise and distribution law in California, she has dedicated her legal practice to representing primarily franchisors, suppliers and other brand owners expand through trademark licensing. She is the first woman to chair the American Bar Association’s Forum on Franchising, the nation’s preeminent association of franchise attorneys, and has twice chaired the Franchise Law Committee of the California Lawyers Association.

In other words, Shelley knows what she is talking about! Her article shines a bright spotlight on the subject and it is worth a read. Thanks Shelley!

Franchise Purchasers Entitled to Written Substantiation

Hey Franchise Purchasers here's a tip for you.

The Franchise Disclosure Document contains 23 items of information for your benefit and should be provided to you by all franchisors before a sale is consummated.

One important item is Item 19 (Financial Performance Representation) -- under the FTC Rule -- Item 19 "permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document." (See my prior post for more more background on Item 19 - Franchise Disclosure Document - Dissected - Part Four)

But the tip concerns some "hidden" information you are entitled to receive upon request.

If a franchise company makes a Financial Performance Representation in Item 19 (this used to be called an Earnings Claim) you are entitled to know more: a franchise company must have "written substantiation for the representation at the time the representation is made." The trick is though that the substantiation will be made available only upon reasonable request."  The FTC Compliance Guide notes that written substantiation means that the franchise company must have "supporting data underlying any representation..."

Now in my experience many franchise purchasers are reluctant to ask for this! You should ask for everything you are entitled to receive when making this large of a financial investment. Also, on a few occasions, when I do convince a purchaser to ask for the written substantiation, some franchise companies indicate that they DO NOT have the information. This is a violation of the FTC Rule and a major red flag. Would you buy a franchise from a company that does not comply with the law?

Franchisors: if you make an Item 19 Financial Performance Representation, be sure to inform franchise prospects that they are entitled to receive the "written substantiation for the representation at the time the representation is made" and make certain you are prepared to produce it.

Unintended Consequences - Joint Employment Revisited

The Contrarian is BACK! Sorry for the long absence but life intervenes and my posts require some motivation i.e. something interesting!

Well some of my franchise colleagues have delivered! In a recent article in the American Bar Association's Franchise Law Journal, "Drawing Lines in Franchisor Support--Is It Necessary and Where Are the Lines to Draw in Today's Joint-Employment Environment?," some of franchising's leading lights (Joyce Mazero, Karen Boring Satterlee, Eric H. Karp, Leonard H. MacPhee, Jess A. Dance & William W. Sentell), discuss the unintended consequences from the joint-employer debacle. 

(For some background check out these prior posts: NLRB Decision and Joint Employer Controversy...Trumped? There are updates generally available but we don't have the room here)

Most striking about the article is the reporting from a survey the authors and the International Franchise Association conducted. The results show that a "substantial majority of brands... report reducing or eliminating certain services." What does this have to do with joint employment? Well franchisors are trying to avoid being tagged as the "joint employer" of its franchisees' employees. So the reduction or elimination of  franchisor guidance and services that deal with "employees" is one way to say "Hey, we don't have anything to do with franchisees' employees, that's the franchisees' job!"

Now for the result of the survey (quoting from the article):

• Eighty-six percent of the franchisors and fifty-three percent of the franchisees indicated that training provided to franchisee employees had been reduced or eliminated.

• Sixty-six percent of the franchisors and sixty-seven percent of the franchisees indicated that the franchisor had reduced or eliminated providing operations and performance standard recommendations.

• Eighty percent of the franchisors and fifty-three percent of the franchisees indicated that franchisor-supplied advice/guidance regarding staffing and scheduling had been reduced or eliminated.

• Forty-six percent of the franchisors and fifty percent of the franchisees indicated that franchisor-supplied advice/guidance regarding personnel manuals and human resources had been reduced or eliminated.

• Seventy-three percent of the franchisors and sixty-seven percent of the franchisees indicated that franchisor-supplied advice/guidance regarding compensation to employees had been reduced or eliminated.

• Thirty-three percent of the franchisors and sixty percent of the franchisees indicated that franchisor-supplied advice/guidance regarding employee benefit programs had been reduced or eliminated.

• Fifty-three percent of the franchisors and forty-three percent of the franchisees indicated that franchisor-supplied advice/guidance regarding employee standards/performance or assessments had been reduced or eliminated.

Wow, the "joint employer" advocates caused some changes in the franchise world...but not the ones they intended!

Don't Forget about SBA Franchise Registry

The Franchise Registry is an important tool for franchisees and franchisors - eligibility information is available here with a click.

As noted on the Franchise Registry site (powered by FranData): "The Franchise Registry lists franchise systems whose franchisees enjoy the benefits of a streamlined review process for U.S. Small Business Administration (SBA) financing. Loan applications for franchises on the Franchise Registry can be reviewed and processed faster and more efficiently by the SBA and its lenders because the respective franchise agreements do not need to be reviewed in each individual franchisee situation." 

And, for current FDDs and Franchise Agreements it is important to remember that a new Addendum to Franchise Agreements is available. Initially, the new Addendum (one-size fits all) was made mandatory by the Small Business Administration (SBA) but a recent change allows franchisors to use their previously-approved 2015 or 2016 SBA Addendum. You can find the updated policy here. It is important however to let FranData know which option you will use so lenders can be alerted to the choice.

After reviewing the new Addendum and comparing it to some of my clients' previously-approved 2015 or 2016 SBA Addenda, the Addendum seems far simpler with little-to-no downside. But, each franchise system needs to review this choice with franchise counsel.

Good luck with your SBA financing!

Goodbye 2016! Bonus Included for You

Well 2016 was certainly an interesting year ... most of my comments would likely cause some controversy (isn't that what a contrarian lives for?) but I will refrain and say only that 2017 could be even MORE interesting! And, it would be even better if I improve in Fantasy Football and the Eagles have a winning season.

Thank you readers ... for some unexplained reason visits to this blog have increased dramatically over the last few months (have I been discovered?) -- this month alone there were over 7,100 views and all-time visits just topped 19,000! Again thank you.

Some quick news: my ABA Forum on Franchising colleague and VERY good friend, Ken Milner, just reported a "Holiday Present for Franchisors in PA" via the ABA Forum List-Serv. This is another chink in the "joint-employer" stance. The Pennsylvania Supreme Court let a lower court's decision stand that held that a franchisor was NOT a joint employer of an employee of a Saladworks' franchisee, at least in regard to being liable for workers compensation payments. (lower court decision: Saladworks, LLC, et al v. WCAB (Gaudioso), et al, No. 1789 C.D. 2014, decided October 6, 2015) Thanks Ken! As noted in my last post (Joint Employer Controversy ... Trumped?) , perhaps 2017 will see the demise of this ill-begotten theory (at least in the franchise context).

And here is a "Holiday Present" for you -- this year I had the privilege of working with Bethany Appleby (Wiggin & Dana, LLP) in presenting our paper at the ABA Forum on Franchising's Annual Meeting in November - Show Me the Money! Maximizing Monetary Recovery in Franchise Cases. If you are interested in that sort of thing -- here's a copy for you. 

Wishing you a Successful 2017!

Joint Employer Controversy ... Trumped?

Wow ... I admit to falling off the blog wagon of late! No real excuse except ABA Forum on Franchising burn-out (as author/presenter), college football, pro football, and, oh yeah, a number of client-litigation matters!

First, thank you for visiting this blog ... there have been over 14,000 visits since starting this effort in January 2015 and over 4,000 visits last month - maybe I should post LESS frequently!

Many of my posts are stimulated by new franchise cases, striking client-experiences, and hot franchise topics. I think my "stimulation" has been dampened by the Trump-election and the litigation matters mentioned above (they become obsessions!) But let's talk Trump and the joint-employer controversy for a moment ...

I have posted on the joint-employer issue a few times (here and here) and have advocated to "relax" ... let the courts sort it out. In the meantime, franchisors have gone into protective-mode, changing their procedures, agreements, and manuals. Now even the Small Business Administration has gotten into the act - issuing a new mandatory Addendum to Franchise Agreements for franchisors seeking SBA financing for franchisees via the Franchise Registry that includes the following provision: EMPLOYMENT - Franchisor will not directly control (hire, fire or schedule) Franchisee’s employees. (tip of the hat to Edith Wiseman with FRANdata for passing it along) WOW, this certainly smacks of one government-agency feuding with other government-agencies (NLRB and DOL).

So what does this have to do with Trump? Since the election, a number of my ABA Forum on Franchising's colleagues have been commenting on the Forum List-Serv that Trump's election may derail the efforts to hold franchisors jointly liable for their franchisees’ employment law violations; noting that the NLRB will likely become Republican controlled and the leadership at DOL is destined to change as well. By the by, the joint-employer session at this year's Forum's Annual Meeting had one of the largest attendances. (Authors: Joe Fittante, Justin Klein, and Karen Marchiano, with "pinch-hitter" Shelly Spandorf).

So stay tuned ... Trump's election may have a silver-lining for some segments of our world.
PS - Ohio lost its favorite son last week - "Godspeed John Glenn."

Recent Decision - Lost Future Royalties Denied

Tip of the hat to Bruce Schaffer at Franchise Valuations for reporting on this case in his "The Franchise Valuation Reporter." Bruce is colleague from the American Bar Association's Forum on Franchising who focuses his expertise on valuation and damages, cyber crime, expert testimony, and tax nexus.

Our topic for this post is Lost Future Royalties - this has been the subject of my earlier posts: Franchisees - Damages Warning: Lost Future Royalties and Franchise Valuation through Damage Analysis.

The case is Mister Softee, Inc., Mister Softee Sales and Manufacturing, LLC, and Spabo Ice Cream Corp. v. Reza Amanollahi, 2016 WL 5745105D. New Jersey. Civ. No. 2:14-CV-01687(KM)(JBC) - As noted, the case involved a claim for lost future royalties and the decision followed the well-known but controversial decision in Postal Instant Press v. Sealy, 43 Cal. App. 4th 1704 (1996).  Postal Instant Press v. Sealy and cases that adhere to its rationale, hold that a franchisee cannot be liable for lost future royalties when the franchisor ELECTED to terminate the relationship even though the franchisee's act (ex, failure to pay royalties) gives rise to the termination.

After reviewing New York case law, the judge in Mister Softee concluded that summary judgment would be denied on Mister Softee's claim for lost future royalties: "Here, Mister Softee decided to terminate Amano's Franchise Agreements because Amano moved his trucks out of the Manida Street Depot and stopped making payments under the Truck Notes. Mister Softee faced a choice: terminate the Agreements, or remain within the Agreements and sue for the ongoing unpaid royalties. It chose the former."

So mark one up for FRANCHISEES on this controversial topic! (even though Mister Softee brings back many childhood memories while growing up in south Jersey) Thanks Bruce!

If you are planning to attend the American Bar Association's Annual Forum on Franchising in Miami on November 2-4 don't forget to drop into Show Me the Money! Maximizing Monetary Recovery in Franchise Cases, where I will join Bethany Appleby (Wiggin & Dana, LLP) for an informative session.