Franchise Law

At last fall's Franchise Leadership & Development Conference in Atlanta, nearly 150 franchisees responded to a survey conducted by MulcahyLLP about their interface with outside counsel and legal issues. Here are some highlights of what those franchisors had to say. How does your law firm stack up?


Do you believe you are receiving more or less value for legal services over the past 5 years?


More than two in five (41.8%) responded that they're getting "much more" or "somewhat more" value from their law firms, while about one in three (31%) saw no change. Only 3 in 100 believe they're getting "somewhat less" value.


Approximately what percentage of your annual expenses on legal services are spent in these categories?

Compliance accounts for about one in every three dollars of franchisors' annual spending for legal services, with preventive counseling and transactional spending accounting for another 45%...

In January 2012, ICANN began accepting applications for new top-level domain names. We asked franchise attorney Keith Klein to provide additional information about this and relevant information for pursuing a customized top-level domain name. Klein is a partner at Bryan Cave LLP and is certified by the California Board of Legal Specialization as a specialist in franchise and distribution law.

Q: New top-level domain names are now for sale. What should franchisors know?
A: Currently, Internet domains consist of 22 generic top-level domains (gTLDs), such as .com, .org, .net, etc.; and more than 250 country code top-level domains (ccTLDs), such as uk, .mx, .jp, etc. Starting in January 2012, ICANN, the nonprofit organization that governs Internet domain names, began accepting applications for new gTLDs...

Many entrepreneurs and business owners embrace the idea of franchising their business and leap into the franchise model with great hopes and expectations. Yet the regulatory burdens and costs that accompany franchising sometimes come as a surprise and lead to a franchise plan cool-off. Sometimes holding off until the business is more established and has better access to capital is the right thing to do, but under the right circumstances the business may still achieve its goal of franchising while avoiding franchise disclosure and registration requirements.

Aspiring franchisors should ask themselves two questions: (1) Is my franchise program suitable as an add-on to an existing business?; and (2) Am I willing to limit myself to only franchisee candidates with experience in my business line? If the answer to both questions is “Yes,” the fractional franchise exemption may come to the rescue!

Of the different exemptions and exclusions available under federal and state disclosure laws and rules, the fractional franchise exemption rarely gets much attention...

Q&A with Bryan Cave attorney Keith Klein

Online marketing, social media, and social commerce have created an environment that places an increased burden on franchise marketing departments. The task of effectively managing a brand's image is now so daunting that it has spawned an entirely and relatively new sub-industry called reputation management. We asked franchise attorney Keith Klein to provide some advice. Klein is a partner at Bryan Cave LLP and is certified by the California Board of Legal Specialization as a specialist in franchise and distribution law.

Define "reputation management" and its relevance to franchising.Reputation management is Internet terminology for online brand management. It evolved as a result of the increasingly pervasive nature of consumer reviews about products and services through social media and customer review sites...

In the previous issue, I presented observations about defects I perceived in the U.S.'s system of franchise sales regulation. The essence of my position was that having duplicative regulation at the federal and state levels adds significant costs to the regulatory system--with little improvement in the regulatory environment.

In this column, I focus on another area of franchise regulation: franchise relationships. These include termination and non-renewal issues, and limitations imposed by franchisors on franchisees with respect to assignments of franchises, sourcing of products, and franchisee involvement in franchisee associations.

The history of franchise relationship abuse to some degree parallels the history of franchise sales abuse...

For many franchisors with a December 31st fiscal year, now is the time to start preparing to renew their franchise documentation. The FTC rules require that the franchise disclosure document (FDD) must be updated within 120 days of the expiration of a franchisor's fiscal year. Registration states, such as New York, have an identical requirement. As a franchisor prepares to do so, that process presents an opportunity to review and improve franchise documentation, particularly the franchise agreement.

Over the past year, developments in the law and in business, particularly the technology associated with doing business, require franchisors to consider significantly revising and enhancing their franchise agreements. Some of the more interesting concepts that should be considered include:

Like it or not, litigation comes to virtually all franchise systems. Take a moment to see how savvy you are on franchise litigation issues based on real-world cases.

1. A California hotel franchisee has repeatedly breached the franchise agreement and receives numerous cure notices. A final cure notice is sent out and the franchisee does not cure. The franchisor files suit, but then learns that it sent its final cure notice to the wrong address. Is the franchisor:

I begin this column by stating where I am going with this piece. I am going to put franchise sales legislation and regulation under the microscope, and ask the penetrating question of whether it is, or is not, necessary. (Similar questions should be asked about franchise relationship legislation, but I will leave that for a future column.)

First, a quick history lesson. Franchise legislation is celebrating its 40th anniversary this year. Back in 1970, neither the federal government nor any state had laws that governed franchise sales generally. The California Franchise Investment Law, enacted that year, was the prototype for franchise sales regulation. (Twenty-four states also have statutes governing the sale of business opportunities, which by definition frequently are broad enough to cover franchises, but that, too, is a subject for discussion on another day...

Creative financing strategies to open (and re-open) franchise locations

In the race to boost sales in a tight economy, franchisors are offering many different kinds of financial incentives to attract potential franchisees and to help their existing franchisees survive and expand. Last month, the authors provided an overview of today's economic environment, along with details on what Chick-fil-A, Saladworks, and Friendly's are doing to help franchisees obtain the funding they need. This month, they describe the programs under way at five more franchisors.

Don Fox, CEO of Firehouse Subs, says that when they created Capital 94 (an affiliated financing company), it was with the intent of supplementing the financing needs of the best franchisees in their system...

Creative financing strategies to open (and re-open) franchise locations

All franchisors are considering how to maintain or increase market share in the new normal. Nobody can deny that the Great Recession has created more and better real estate opportunities for those who can afford to exploit them, as well as a surplus of qualified operators, composed increasingly of women and minorities, without assets to operate. The number of opportunities appears to grossly overshadow any one franchisor's resources in terms of cash, personnel, and credit.

These circumstances often are precisely the motivation to pursue franchising as a method of expansion in the first place. The difference now is that prospects generally need a lot more assets and cash to qualify and fund the initial investment...

Editor's Note: Gift cards can be an important component of customer loyalty programs. Used properly, they are effective in attracting customers, which drives sales and brand awareness, which drives franchise sales and development. New federal rules governing the use of gift cards took effect late last month. Franchisors whose systems use gift cards should be sure that all of their franchisees are aware of and comply with the new laws. Haynes and Boone attorneys Jan Gilbert and Suzie Loonam Trigg explain.

Last year when President Obama signed the Credit Card Act of 2009 (the Act") into law, the nation's attention largely focused on those provisions of the law that aim to change the way credit card companies do business with consumers...

The Demise of the Attorney-Client Relationship

As I write this piece, it is a nostalgic moment for me: 37 years of practicing law, and all with the same firm. In today's environment, inertia in law firm employment is a rare thing. If I knew then what I know today, would I have gone into private practice?

When I left academia for the world of business in 1973, the environment was very different: law firms were not gigantic; specialization had not yet taken hold to the extent it has today (although it was clearly on the horizon); the opportunity to work at a large firm provided the chance for mentorship; house counsel positions were relatively few, didn't pay well; and in-house counsel, even general counsel, did not receive the respect given to lawyers in the large firms...

One of the significant consequences of the Internet's development is that we can gather opinions from a diverse group with minimal effort. I did so recently through a posting on the American Bar Association Forum on Franchising listserv. It read in part:
"Why do some franchisees not follow the franchise system--Too often I hear the question raised as to why a franchisee will pay for a franchise and either immediately or along the way stop following the franchisor's requirements and suggestions?"
Within days, I had received more than a dozen responses with opinions on this question, which has puzzled me for years. Many of the opinions were far from surprising, especially from those I know have a predilection to be franchisor- or franchisee-biased...

Most prospective franchisees want financial performance information as part of their due diligence process when deciding whether or not to purchase a particular franchise. Prospective franchisees are understandably hesitant to invest thousands of dollars if they have no idea what kind of financial performance exists at the outlet or unit level. Financial performance information can be a powerful selling tool for franchisors because this information responds to a prospective franchisee's compelling need for information concerning the possible financial results of their investment.

Neither state nor federal law requires that a franchisor provide financial information to prospects. Except under two limited circumstances, if a franchisor is going to provide a prospect with any type of financial performance information, this information must be included in Item 19 of the Franchise Disclosure Document (FDD)...

1. Should I make a financial performance representation (FPR)?
Yes! Any type of representation, oral, written, or visual, that suggests or implies a specific level or range of actual or potential sales, income, gross or net profits qualifies as an FPR. You can't make an FPR unless it is in your franchise disclosure document (FDD). Between 20 and 30 percent of all franchisors make an FPR, which means some of your competitors share their numbers with your prospects. What impression do you leave if you don't share yours? If you have solid numbers, consider making an historical-based FPR. If you do, the law allows you to make specific written representations outside the FDD about a particular location or highlighting specific variables (e...

Franchisors and Franchisees Can Access Current Legal Articles in Print, eNewsletter and Online

SAN JOSE, Calif., April 26, 2010 - Franchise Update Media Group (FUMG) the leading industry resource for franchise development, today announced the launch of Franchise Law News, providing franchisors with a consistent source of quality legal information about the franchise industry. The print edition and eNewsletter are distributed quarterly, and online access is available anytime at www.FranchiseLawNews.com.

"We launched Franchise Law News to fill a void," said Gary Gardner, CEO of FUMG. "Until now, there has been no single, consistent source of legal information that specifically addresses the issues franchisors and franchisees face...

It's been more than 40 years since I took my one and only psychology course. I can't say the course changed my life or showed me the light. It didn't. In fact, the only thing I really remember from it is that there are six interpretations of any two-party conversation: how Party A and Party B each perceives what they said and what they heard (that makes four); and two more, which are what I might label the truth (what Party A actually did say to Party B, and vice versa). The point, of course, is that what we think we said is not necessarily what the other party thinks they heard--and further, that what we think we said may not have been what we actually said.

Perhaps this seems an odd topic for a lawyer to be curmudgeoning on, especially in a column about franchise law...

Franchisor guidance should improve system-wide results
One of the most helpful services franchisors can provide to their franchisees is accounting direction and services. I am often astonished at how little guidance so many franchisors provide in this area. How will franchisees know if they are truly making money and operating effectively if they don't keep good books and receive information to help them run their businesses more effectively?

The fault here does not lie solely with the franchisors. Historically, and even today, many franchisees have been cautious about allowing franchisors inside the tent of their financial records. It is often said, in jest, that franchisees keep three sets of books: one for themselves, one for their franchisors, and one for the IRS...

Prepare for Your 2010 RenewalsThe franchise registration states require an updating of your FDD annually. This requirement necessitates the filing of a renewal application (including the revised FDD, current audited financial statements, and supplemental documents) with each registration state in which you plan to continue selling franchises.

Some states (Maryland, Michigan, North Dakota, Virginia, Washington, and Wisconsin) grant a franchise registration for a one-year period. Therefore, the renewal applications must be filed prior to the end of that one-year period if you are to continue your registration. Other states (California, Hawaii, Illinois, Minnesota, New York, Rhode Island, and South Dakota) require a renewal application (some states call it an "Annual Report") to be filed within a certain number of days after the end of your fiscal year (generally 120 days; California is 89 days)...

I was shocked recently while attending a workshop covering franchisee recruitment (formerly known as "franchise sales") by the participants' responses to the following situation:

Assume that the franchisor says nothing in his Franchise Disclosure Document's Item 19 as to financial performance. Instead, the franchisor suggests that prospective franchisee prepare a business plan that would include a projection of revenues and costs for the proposed franchise.

The prospect follows this request. In reviewing the prospect's submission, the franchisor sees that the projected revenue level is way out of line. It may be far too optimistic, or perhaps too low. As for expenses, they are also far off, and, in addition, perhaps incomplete...