2015 Top Posts - Happy Holidays!

First, I want to wish you and your families Season's Greetings and Happy Holidays!

Next, THANK YOU for your loyal readership - since the January 2015 start of this blog, you contributed to over 6,100 views of the articles posted on this blog. I consider that a HUGE success! I hope the information was interesting and helpful.

Here are the top posts for 2015:

What is the best franchise to buy?

309 Views

Franchising Marijuana - Part Two
305 Views

Franchising Marijuana - Part One
297 Views

Franchising Marijuana - Part Three - Trademarks
200 Views

Janitorial Franchises - Is it just a Job?
188 Views

Thanks again, have a great Holiday and a successful New Year - see you next year!

Are You Prepared?

This post may strike some of you as off-topic for a franchise blog but after seeing Jon Hyman's post on the Ohio Employer's Law Blog last week - Are you prepared for an active shooter at your workplace? - I thought the information was important to pass along to the franchise community.

Jon's post was in reaction to the San Bernardino terrorist attack and probably the Paris attacks. Very sad on all accounts. But, the post passed on the Department of Homeland Security's Guide on How to Respond to an Active Shooter. Really? Has this truly become necessary? Unfortunately yes!

Now I do not subscribe to Ben Carson's suggestion that people should collectively charge shooters - although we may want to and while some people have the courage to do so, it seems quite unrealistic when automatic weapons are discharging rounds at lighting speed. But having a plan at a school, place of business or place of employment is a good idea.

So perhaps the Department of Homeland Security's Guide may save a few lives. Give it a read and pass along to your friends and franchise family.

Hopefully, we will not see an incident in any of our franchise businesses but it is possible, unfortunately. Be smart and be prepared!

Arbitration ... the good, the bad and the ugly?

Much has been written about arbitration ... and in the franchise world we discuss it quite frequently at conferences and in law journals ... and put it into play when disputes arise.

But most recently, Bruce Schaeffer at Franchise Valuations, pointed out in The Franchise Valuations Reporter (November 2015) that the New York Times published a 3-part series: Part 1 (Stacking the Deck of Justice), Part 2 (Privatization of the Justice System) and Part 3 (Religious Arbitration). To quote from the The Franchise Valuations Reporter, "According to [the] 3-part series ..., arbitration has become primarily an old boys' network and a tool to keep confidential the misdeeds of the more powerful.  The series reveals the many abuses in the process although not really focusing on commercial arbitration between businesses."

Although the Times series does not focus on the commercial world (it concentrates on consumer purchasing matters, such as cellphones, credit cards, cable companies and, to some degree, employment matters), many of the "bad" aspects of arbitration discussed in the series are seen in franchise arbitration agreements. Now when we say "bad" that is from the franchisee-aspect of the franchise equation. What may be "bad" for franchisees is usually "good" for franchisors ... after all they do write the provisions! And, the legal pendulum has swung decidedly in favor of enforcing arbitration agreements. (See the Times series)

When representing franchisees and franchisors, we lawyers struggle over the best dispute mechanism for our clients. Should we go to court? Mediation? Arbitration? Sometimes what seems to be a good idea on paper, backfires in reality. But, like the Part 1-title of the Times series, if we get to draft the Franchise Agreement, truth be known, we do try to stack the deck. This does not mean that the cards are always dealt to the franchise company's advantage, but chances are they will be.

On the franchisee-side, if you have to live with arbitration, make the most of it. Take advantage of the seemingly faster process and select counsel who is familiar with the process and can maximize the experience while reducing the costs typically associated with the judicial process.

Some of the advantages written in favor of franchise companies include:

• the location of the arbitration hearing will likely be in the company's home court
• class action arbitration or multi-party arbitration will not be permitted
• there will be no jury deciding the matter
• rights of appeal are very limited
• pre-arbitration discovery may be limited
• shared or full-cost of arbitrator's fees and administrative fees
• claims for injunctive relief may be limited or non-existent

Potential franchisees need to understand the risks and limitation associated with arbitration. Franchisors should not go too far in striking a procedural imbalance or they risk having courts declare the arbitration requirement unconscionable and unenforceable.

The ugly we will save for another day -- but when franchise disputes arise and the swords are crossed, almost everyone loses one way or another. Mediation anyone?

Uber - Lyft - Regulatory Scramble?

Thanks to my American Bar Association-Forum on Franchising colleagues (via our List-Serv), I was treated to a robust discussion last week about whether Uber (the ride-sharing concept) is a "franchise." Its competitor, Lyft, was also mentioned. Interesting ... but the consensus was that they are not, due to the technical definition of a "franchise" under federal and state laws; reportedly, the drivers pay no initial fee to Uber or Lyft.

 But, the discussion comment that struck a cord came from Attorney Kat Tidd of Dallas Texas: "I think the definition of franchising is going to be truly challenged by technology." And, I think Kat is right.

In fact, in my second post on this blog (you probably missed it), I addressed technology's impact on franchising - Is Franchising Under Attack? And, I even mentioned Uber! Revisiting this topic is worthwhile.

Uber and Lyft and some other "sharing" concepts seem to have fallen into a regulatory void. That is, it seems difficult to classify what they are.

Not only has the "franchise" question been raised but, even more vigorously, the question of whether these systems are EMPLOYERS of their driver-partners rather than the "independent contractors" that Uber and Lyft call them. Suits have been commenced over this IC-classification because ICs do not enjoy all the protections of an employee (tax withholding, workers comp, unemployment benefits, etc.). But, this would not be the first group of ICs to challenge the status.

And, coming back to franchising, do "share-drivers" need the protections of the franchise and business opportunity laws? In other words, is there a lot of financial risk that the "share-drivers" face when entering into the Uber-Lyft relationships? Maybe, maybe not. (They do need to invest in a car, gas and insurance) Further, are there other public policy issues that regulators should be concerned about? Maybe they should not be regulated? Maybe they should be.

I am pretty good at raising the issues ... but lousy at answering them. But we can count on one thing: as new technologies emerge, new business models will follow.

Caution Franchisors: Hoisted by One's Own Petard?

Franchisors: Watch out what you ask for!

A recent Ohio case, Buffalo Wings & Rings LLC v. M3 Restaurant Group, LLC, 2015-Ohio-3843, offers a lesson in being "hoisted by one's own petard." (If you struggle with literary idioms click here or converted to modern American translation: screwing yourself.)

The franchise agreement in this case, as many do now, contained a Limitations of Claims clause that said all claims would be barred unless an action is started "within one year from the date of Franchisee or Franchisor knew or should have known of the facts giving rise to such claims." The crafty franchisor did enter exceptions (all in its favor), including claims for injunctive relief - you can read the decision to get the full list (see pp. 4-5).

In 2011, the franchisee outlined a number of complaints and proposed termination of the relationship. No response came from the franchisor. About 18 months later the franchisor filed suit "alleging claims for breach of contract, breach of guaranty, quantum meruit, and money owed on an account."

Without getting too bogged down in the nuances of the Limitation of Claims provision and its exceptions, the trial and appellate courts held that the franchisor did not start the action within the one year period and none of the exceptions applied. The decision is based on what amounts to poor draftsmanship and, to some degree, over-reaching by the franchisor.

So while many franchisors may seek every advantage in their agreements, they are advised to be cautious about going too far, or if they do, to make certain the language is clear. Which leads to another idiom: Live by the sword, die by the sword! (a biblical one at that!)

Be careful out there.

Social Franchising - Do Franchise Laws Impede Progress to Do Good?

Thanks to an old friend and former client, Tony Wells, I was introduced to the notion of "social franchising" this week. (Tony and his wife Dana operate the Wells Foundation - click here) Social franchising is related to "social entrepreneurship," which is loosely defined as applying business techniques and approaches to solve social problems and concerns. This may mean developing a product or service that serves the greater good rather than pure capitalistic interests, i.e. making a profit. It can also mean developing a business model that generates revenue to sustain a not-for-profit, charitable organization with all proceeds devoted to the charitable mission.

Well, in short measure, I learned that there is great interest in using the "franchise model" to advance the concept of "social entrepreneurship," In fact, the International Franchise Association has established the IFA Social Sector Franchising Task Force (find here), chaired by Michael Seid, founder and managing director of Michael H. Seid & Associates. As noted on the Task Force's website: The mission statement of the Social Sector Task Force is: “To Enhance The Quality Of Life In Underserved Populations – One Opportunity At A Time.”

Further, I was informed by one of my franchise-lawyer colleagues, Donna Christopherson (who is a member of the Task Force) and by my old friend Tony that the social franchise model has been used in Europe and Africa but not so much in the U.S. Indeed, there is the European Social Franchising Network (click here) that indicates that the purpose of this type of franchise is "a social goal, such as the employment of disabled people, the democratisation of the economy or tackling climate change. As such the social franchise has a social purpose and is often owned by its social franchise members but it is also a business that makes profits. Without these profits, it could not survive and grow and meet its social aims."

So what's holding us up in the U.S.? Maybe nothing ...but in my learning process I was informed (by my brilliant colleagues on the ABA Forum on Franchising List-Serv) that state franchise laws and regulations, requiring disclosure documents and other qualifications, may apply to not-for-profits. The FTC staff, in a series of informal advisory opinions, has given legitimately organized not-for-profits a pass because it does not view these types of franchises as "commercial relationships." But, there does not seem to be any guidance from state franchise examiners that the same standard would be applied and there is concern that a federal case, Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., 646 F.3d 983 (7th Cir. May 31, 2011), points to the application of state franchise laws to not-for-profit organizations.

This post is already too long ... but is it time for the adoption of an exemption from the FTC Rule and the state franchise and business opportunity laws to allow those who want to do good to do even more good?

NLRB Decision - Joint Employers - Not Franchise Case

If you just skim the surface, you may be led to believe that the National Labor Relations Board just issued a decision determining that franchisORS are "joint employers" of their franchisEES' employees. But this is not the case. The case involved employees of a temporary staffing company that supplied "rented" workers to Browning-Ferris Industries of California, Inc. and whether Browning-Ferris (which is not a franchisor) can be deemed a joint employer of those employees.

Here is the 50-page decision and dissent - CLICK HERE. Other than a reference in a footnote to the "International Franchise Association," the word "franchise" does not appear in the main decision (the first 21 pages) and the majority makes clear (in footnotes to the dissent) that the case does not involve franchises. The word "franchise" does appear in the dissent ...but more on this later.

Here are the basic facts: BFI owns and operates the Newby Island recycling facility, which receives approximately 1,200 tons per day of mixed materials, mixed waste, and mixed recyclables. BFI, the user firm, contracts with Leadpoint, the supplier firm, to provide the workers who manually sort the material. The relationship between BFI and Leadpoint is governed by a temporary labor services agreement. The issue is, for collective bargaining purposes, should BFI be considered a joint employer - in essence, as stated in the decision: "...the Union asserts that absent a change in the joint-employer standard, a putative employer, like BFI, that is a necessary party to meaningful collective bargaining will continue to insulate itself by the 'calculated restructuring of employment and insertion of a contractor to insulate itself from the basic legal obligation to recognize and bargain with the employees’ representative.'” By a 3-2 decision, the Board determined that BFI is a joint employer for collective bargaining purposes.

Now, back to the dissent, the word "franchise" and the footnotes. As my ABA Forum on Franchising colleagues pointed out in our Forum List-Serv yesterday:

• There is some faint hope for franchising.  Footnote 94 mentions the Patterson v. Domino's decision and says "That decision also addressed the particularized features of franchisor/franchisee relationships, none of which are present here."  A franchise is (hopefully) clearly distinguishable from the relationship before the Board which involved a staffing agency providing employees to work on the premises of the purported joint employer.  The Dissent in its discussion of the threat to franchising also notes that the General Counsel in his amicus brief argued that the Board "should continue to exempt franchisors from joint employer status to the extent that their indirect control over employee working conditions is related to their legitimate interest in protecting the quality of their product or brand."  

•  FN 120 is even more to the point: "The dissent is simply wrong when it insists that today’s decision “fundamentally alters the law” with regard to the employment relationships that may arise under various legal relationships between different entities: “lessor-lessee, parent-subsidiary, contractor-subcontractor, franchisor-franchisee, predecessor-successor, creditor-debtor, and contractor-consumer.” None of those situations are before us today, and we decline the dissent’s implicit invitation to address the facts in every hypothetical situation in which the Board might be called on to make a joint-employer determination. As we have made clear, the common law test requires us to review, in each case, all of the relevant control factors that are present determining the terms of employment. In this case we are specifically concerned with only two employers: BFI and Leadpoint.

'Nuff said.