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:
Social media. It is imperative that franchisors implement a social media policy to closely monitor and control the use of Twitter, Facebook, LinkedIn, and other platforms being used more frequently in business. The franchisor's brand and intellectual property need to be protected, and the standard clauses intended to address the use of proprietary information and names in conventional advertising will not come close to covering the velocity of information exchanged through these new media.
Insurance. Clauses should be scrutinized to be certain that franchisees are required to maintain employment practices insurance, protecting against acts of employees (such as sexual harassment) in an increasingly litigious workplace, as well as other supplemental coverage such as business interruption insurance. A franchisor must also know when premiums are due and have the right to pay for coverage and charge for reimbursement.
Remedies and protections. The agreement should be reviewed in the light of worst-case scenarios. What will the franchisor be able to do to protect itself in the event a franchisee utterly fails in its obligations? For instance, a franchisor may want to have a security interest in the franchisee's assets, including furniture, fixtures, and equipment. The franchisor may also want to ensure that it has a collateral assignment of the franchisee's lease already in place and approved by the landlord, so that a franchisor can step in and operate the unit to protect its reputation, brand, and investment, if necessary.
Territorial exclusivity. Franchisors must ensure that the franchise agreement is crystal clear as to the territorial rights granted to franchisees. For instance, does the agreement expressly provide that the franchisee is granted only the limited right to develop a franchise within a prescribed area and that the franchisor reserves for itself (or others) the right, without regard for territorial grants, to develop other revenue streams through non-traditional locations? These non-traditional locations may include campuses, malls, sports arenas, airports, and the like. Does the franchisor expressly reserve the right to sell into the franchisee's territory through the Internet, mail order sales, or other alternative distribution channels?
Definitions. So many franchise agreements either fail to define terms or define them in a confusing manner, which creates ambiguities that can be the cause of controversies. Important concepts that must have specific definitions include the principals and owners of franchisee, the affiliates of franchisee and franchisor, the franchised business, approved products, suppliers, vendors, territory, trademarks, assets, and fees, all of which must be defined in terms of exact meaning and how they correlate to the agreement. In other words, the agreement must be read to be certain that all meanings are consistently applied throughout. This is essential.
Addendums and changes in practice. Has the system deviated in practice from something that was once required in the original franchise agreement? Many times these practices become accepted throughout the system, but are never corrected in the franchise agreement. The franchisor should examine the system as it operates on the ground and make certain that all aspects of the franchise agreement are being adhered to. If not, the practice should be examined and a determination should be made as to whether the system should be brought back in line with the franchise agreement's original guidelines, or, instead, if the franchise agreement should be revised to accommodate the new reality.
Obviously, the above is just the tip of the proverbial iceberg. Any franchisor reviewing their franchise agreement with knowledgeable franchise counsel will find areas that require refinement, removal, or enhancement. The end result is a modernized agreement that keeps up with the reality of managing a franchise system in a constantly evolving marketplace.
Terrence M. Dunn is a founding partner at the New York-based law firm Einbinder & Dunn. He can be reached at 212-391-9500.
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