A Post from the Field: Do I Need to Update my FDD?

by Mary Beth on February 17, 2012

Last month I did a post about prepping for the annual Franchise Disclosure Document (FDD) update. That is great kick-off to talk about when a FDD must be updated. Here are some basic questions and answers about FDD updates.

When I need to update the FDD?

The FDD must be updated on 2 occasions. An update to the FDD must be made: 120 days within the end of the fiscal year and 60 days following the occurrence of material change to the FDD.

What is a material changes to the FDD?

A material change to the FDD is when there is a change to any of the information contained in the FDD what would affect whether a prospective franchisee would buy or not buy a franchise. Some of the examples of material changes included: a change in initial fees, royalty fees, or the loss or addition management staff. If you are unsure what a material change is, ask us.

What happens if the FDD is not updated timely, can I sell franchises?

No. If the FDD is not updated timely, the franchisor must stop selling franchises until the FDD is updated.

If a material change is made to the FDD, do I have to register the FDD with the registrations states?

Yes. If a material change is made to the FDD an amendment registration must be made with the registration states.

When the FDD is updated, do I have to give prospective franchisees the new updated FDD?

Yes. Even if the prospective franchisees received the old FDD, the prospective franchise should be disclosed with the new updated FDD and 14 days should lapse before the signing of the franchise or other agreements or the payment of any funds.

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Lessons from the Court: Future Royalties are not Forever

by Mary Beth on February 9, 2012

Franchising is a time based commitment.  The franchisor and franchisee enter into a franchise agreement with a term of  5, 10, 12, or 20 years.   What happens if the franchise agreement is cut short?  Cut short by the default of the franchisee.  Relying on basic contract law, Franchisors may seek recovery of future royalties fees.   Future royalty fees are fees that the franchisor would have received if the franchisee did not default and the franchise agreement was not terminated.

Let’s play that out.  If a franchisee defaults in year 3 of a 12 year  franchise agreement and the agreement was terminated, the franchisor could ask the franchisee to pay royalty fees for the remaining 9 years of the franchise agreement?  Even though the franchise agreement terminated? And, the franchisee is not in business?   Wow!  That is the case of  Days Inn Worldwide, Inc., Plaintiff v. Investment Properties of Brooklyn Center, LLC. 

Investment Properties of Brooklyn Center, LLC (Investment Properties) signed a 12 year franchise agreement with Days Inn.  Investment Properties, the franchisee, defaulted when it failed  2 Days Inn quality inspections in 2006.  The franchise agreement was terminated in 2007.  Days Inn sued Investment Properties for unpaid royalty fees and 9 years of future royalty fees.  Investment Properties sold the business to a third party, which did not operate the business as a Days Inn.

Days Inn wanted Investment Properties to pay 9 years of royalty fees even though Investment Properties was no longer in business.  The court said no. Quoting the case of RSB Lab. Serv. Inc. v. BSI Corp. “Lost profits are one measure of compensatory damages that may be recoverable in a breach of contract action, if they can be established with a reasonable degree of certainty.” Days Inn’s demand for Investment properties to pay 9 years of future royalties with no consideration for future economic conditions, local demand for hotel accommodations, operating expense,s and the ability to re-franchise the location or territory was unreasonable and uncertain.  The court looked to how long it would take Days Inn to re-franchise Property Investment’s location or territory.  Days Inn had a duty to mitigate (minimize its loss).  Finding that it took an average of 2 years to re-franchise the location, the court awarded only 2 years of future damages.

LESSON FROM THE COURT:  FUTURE DAMAGES ARE NOT FOREVER.  THE FUTURE IS UNCERTAIN AND ONE MUST MITIGATE ONE’S OWN LOSSES.

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Lessson from the Court: I have an arrest record, but I CAN do the job.

February 2, 2012

This  week it was announced that Pepsi Beverages has agreed to pay $3.1 million to resolve racial discrimination claims steaming from their employee background check practices.  The Pepsi settlement is a great intro to a discussion about background checks.  As the settlement shows, background checks can be a huge legal nightmare.   Despite the legal nightmares, the practice of doing background checks is widespread and even required [...]

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A Post from the Field: Wait! Don’t Sign that Franchise Agreement Yet!

January 26, 2012

Whether I am working with someone looking to buy a franchise or a franchisor looking to sell a franchise, there is a feeling of immediacy to getting the franchise agreement signed.  The franchisee is excited about starting his/her business and the franchisor is excited about having a new franchisee on board.  But hold it.   The [...]

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Lessons from the Court: How Can I be Bound by a Non-Compete, I DID NOT SIGN IT…..

January 19, 2012

The signing of non-competes in the world of business is almost standard protocol.  Employers ask employees to sign non-competes.  In the sale of businesses, buyers ask sellers to sign non-competes.  And, Franchising is no exception.  Almost universally, Franchisors require Franchisees to sign a non-compete when acquiring a franchise.  But, how far will courts go to [...]

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‘Tis the Season for Diet Programs, Gym Memberships, Taxes and……FDD Updates

January 12, 2012

Retailers are moving Christmas ornaments to the clearance aisle and yoga mats to the front of the store. Television channels are airing Weight Watcher® commercials featuring Charles Barkley. Accountants are all a bustle preparing for tax season. And YES, franchise attorneys, including myself are getting ready, too. Franchisors are required to update their (FDD) 120 [...]

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Lessons from the Court: $355 Million. Price-fixing can be expensive.

January 6, 2012

On December 29, 2011, it was announced that 6 makers of TFT-LCDs panels  agreed to enter into a $355 million settlement with consumers to resolve antitrust, price-fixing, and other claims.  The case is IN RE: TFT-LCD (FLAT PANEL) ANTITRUST LITIGATION.  As articulated on counsel’s website ”from at least January 1, 1996 through December 11, 2006, Plaintiffs allege that defendants operated [...]

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NEWS FOR YOUR BUSINESS: Employer Union Notice Delayed, Again….

December 29, 2011

In December of 2010, the Federal National Labor Relations Board (NLRB) enacted a rule requiring employers to post notice to their employees outlining their right to collectively bargain, unionize,  and strike. A excerpt from the required notice is below:    The notice requirement extends to most private sector employers including retailers, non-retailers, and suppliers with [...]

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Lessons from the Court Room: Use our Software or Forfeit your Franchise

December 22, 2011

Software Discord:  As part of franchise brand standards, franchisors stipulate system-wide software and franchisees take issue: ‘The software fees are too high; if I use the software, the franchisor has access to my consumer information; there are better alternatives.’  But what happens when a franchisee refuses to adopt the franchise brand software?  That was the [...]

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Lessons from the Court Room: He quit and took his twitter followers with him!

December 15, 2011

Social Media is the engine of today’s marketing.  Whether FaceBook, LinkedIn, Yelp or Twitter, companies are enmesh using social media to drive business.  That is exactly the case of PhoneDog.  PhoneDog is in the business of reviewing the latest mobile products and offering users the resources to compare prices and shop from various providers.  PhoneDog [...]

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