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.

]]> http://gettinsnelsonlaw.com/767/a-post-from-the-field-do-i-need-to-update-my-fdd/feed 0 http://gettinsnelsonlaw.com/743/lessons-from-the-court-future-royalties-are-not-forever http://gettinsnelsonlaw.com/743/lessons-from-the-court-future-royalties-are-not-forever#comments Thu, 09 Feb 2012 22:19:39 +0000 Mary Beth http://gettinsnelsonlaw.com/?p=743

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.

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 in some industries.  In the franchise world,  Franchisors commonly require their franchisees to complete background checks on their employees.

So, what are the nightmares?   When completing background checks it is important to know and follow the laws.  There are laws governing the proper procedure for obtaining and using background checks.  Discrimination laws such as Americans with Disabilities Act (ADA), and gender/ racial discrimination laws form boundaries how background checks can be used.  The Fair Credit Reporting Act (FCRA)  governs the mechanics of background checks policies.  Information about FCRA requirements can be found  in our resource library by clicking here.

The Equal Employment Opportunity Commission (EEOC) has published Best Practices for Testing and Selection.  A paraphrasing of the best practices are listed below:

• Uniformly apply all background checks and other screening processes to all applicants.
• Specifically tailor background checks and other screening processes to the position offered.
• Complete a review of your background checks and other screening processes  to ensure that the processes are not unfairly disqualifying minorities and other protected persons.
• Review job descriptions regularly to ensure that the background checks and screening processes are specifically tailor to the duties.
• Educate your employees about the effective use of background checks and other screening processes.

In the Pepsi case the EEOC alleged that Pepsi’s background check practices were not tailored to effectively screen job duties.  Rather the background check screenings broadly and  disparagingly disqualified black and other racial minorities from available positions without a direct connection between applicants’ criminal background and the duties of the  positions.

LESSON FROM THE COURT:   When screening employees, watch who you ask, how you ask, and how you use it.

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 federal FTC rule and state laws require holding periods.  Yes, holding periods.  There are 2 holding periods, which must be observed when entering into a franchise agreement and the paying of any monies. 

The first holding period under the FTC rule requires that the franchisee may not sign the franchise agreement, enter into any binding agreements, or pay any money or consideration until the prospective franchisee has had the franchise disclosure document (FDD) for 14 calendar days.   

The second holding period requires that the franchisee must have all documents/agreements, which they must sign in to order acquire the franchise, in their possession with all blanks filled-in 7 calendar days before signing the agreements or paying any money.  Having the blanks filled-in means the territory identified, the parties to the agreement listed, the initial fee stated, and all other elements of the agreement completed.

The holding periods may rule concurrently.  For example, if the franchisor sends the franchise agreement with blanks filed-in at the same time that the FDD is given to the prospective franchisee, the 14 and the 7 day holding periods run concurrently, at the same time, and the franchisee may sign the franchise agreement when the 14 day holding period lapses. 

Careful how you count!  The day that the prospective franchisee receives the FDD or the agreement is day zero. You don’t begin counting until the next day.  And, you cannot sign on the last day of the holding period; you have to wait till the next day.  Say, for example, that the franchisee gets the FDD on the 1^st, then the 14 day holding period runs till the 15^th, and the franchisee can sign the franchise agreement on the 16^th. 

To make it even more complicated some states do not count in calendar days, but count in business days.  Some states require 10 business days rather than 14 calendar days and 5 business days rather than 7 calendar days.  It is all the same, except in the event of holidays.  In the event of a holiday, in states that count using business days, the holding period extends for an additional day. 

There is one more watch-out.  If the franchisor makes a change to the agreements, then the 7 day holding period resets.  The documents must be held for another 7 days.  This is only true if the franchisor makes the changes.  It does not apply if the franchisee requests the change and the franchisor just consents to the change as proposed by the franchisee. 

So, what happens if the holding periods are not properly observed?  If the holding periods are not observed, the franchisor could be responsible for reimbursing the franchisee for all the time and money paid and put in the franchise, not just initial franchise fees, but   all money invested in the startup of the franchised business. 

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 enforce non-competes?  The general rule is that enforcement of non-competes only extends to persons who sign the non-competes.  Under that premise, franchisors may require all officers, directors, and owners to sign a separate non-compete. 

However, as the saying goes, with every rule there is an exception.  An exception can be found in the case of Jackson Hewitt, Inc. v. H.E.A.T. Enterprises, LLC.  Jackson Hewitt is in the business of tax preparation.  H.E.A.T. Enterprises, LLC is a former Jackson Hewitt franchisee.  As part of the Jackson Hewitt franchise agreement, H.E.A.T. Enterprises, LLC signed a non-compete.  H.E.A.T. Enterprises committed not to compete with Jackson Hewitt during the term of the franchise agreement and the restricted period after franchise agreement terminated.  Jackson Hewitt secured an injunction against H.E.A.T. Enterprises, LLC to enforce the non-compete. 

Arguing that they were not bound under the non-compete, the owners/operators of H.E.A.T. Enterprises continued preparing taxes in competition with Jackson Hewitt through other companies, which they owned and controlled.   Jackson Hewitt successfully cried foul.  The court extended the non-compete to the owners of H.E.A.T. Enterprises even though the owners/operators did not sign the non-compete. 

The court found resoundingly “yes” (in the words of the court), the owners of the franchise can be bound under the non-compete, because the owners are “successors in interest” and there was a “substantial continuity of identity” between the franchisee and the owners’ other companies.  Since the owners/operators were active in the franchise business, received revenues from the franchise business, and were the franchisee designated managers for H.E.A.T. Enterprises, the court determined that the owners/operators were essentially H.E.A.T. Enterprises and bound under the non-compete. 

Lesson from the court:  You cannot do indirectly what you cannot do directly and once in awhile, sometimes, maybe you will be personally bound by the actions of a company you own, perhaps in the case of a non-compete.

]]> http://gettinsnelsonlaw.com/688/lessons-from-the-court-how-can-i-be-bound-by-a-non-compete-i-did-not-sign-it/feed 0 http://gettinsnelsonlaw.com/679/%e2%80%98tis-the-season-for-diet-programs-gym-memberships-taxes-and%e2%80%a6%e2%80%a6fdd-updates http://gettinsnelsonlaw.com/679/%e2%80%98tis-the-season-for-diet-programs-gym-memberships-taxes-and%e2%80%a6%e2%80%a6fdd-updates#comments Thu, 12 Jan 2012 10:59:32 +0000 Mary Beth http://gettinsnelsonlaw.com/?p=679

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 days from the close of their fiscal year. This mandate to update comes from both the Federal FTC Rule and State law.

If the FDD is not updated within the required time frame, Franchisors are prohibited from selling franchises until the FDD is updated. This period of inability to sell is commonly referred to in the franchising industry as going dark. Going dark can result in prospective franchise deals being delayed and even worse lost, because of the time required to compile and update the FDD.

DON’T GO DARK. Here are some steps to prepare and get your FDD updated timely.

1. Do the Math. One of the biggest tasks in updating the FDD is compiling the numbers. Determine how much of your revenue were derived from franchisee purchases. Determine how the advertising fund dollars were used. Call your accountant and get a start on your audited financials.

2. Reminisce about the Year Gone By. Another big component of the updating is listing information about the previous year. Make a list the franchise outlets including the number of outlets that transferred, opened, and closed. Consider any litigation in the previous year. Visit your vendor/supplier arrangements. Identify any waivers or discounts of fees or franchisee obligations.

3. Jot down your New Year Resolutions. Make a list of outlets you plan to open in the upcoming year. Discuss plans for the upcoming year. Prevent having to make changes to your updated FDD by including your New Year initiative into your FDD now.

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 a cartel, the purpose of which was to raise, fix, and stabilize the prices of TFT-LCDs.”  TFT-LCD panels appear in many common technology devices such as televisions, laptop computers, and mobile phones.  The IN RE: TFT-LCD case spans 23 states, 2 classes of Plaintiffs (both direct and indirect consumers), 42 defendants, and claims in federal and state law. 

While the settlement amount is “post-worthy” enough in itself,  the case carries several other aspects worth discussing.   First, indirect consumers are a class of their own in this case.  Indirect consumers are consumers that did not purchase the TFT-LCD products from the maker, but rather from a distributor, wholesaler, or retailer.  Second, the case alleges claims under federal laws, but the case also alleges a myriad of state law claims ranging from antitrust to unjust enrichment.  The differing state statutes each carry similar and unique prohibitions and actionable elements. 

In the world of franchising, the cautions regarding antitrust issues and price setting have always been keen.  Franchisors may supply, recommend, or authorize products, services, and equipment to franchisees.  Franchisors may provide suggestive pricing or consultation regarding consumer pricing.  With recent developments in  case law, the concerns of antitrust and price setting have subsided.   However, the IN RE: TFT-LCD (FLAT PANEL) ANTITRUST LITIGATION case is a reminder of the liability involved in antitrust and price fixing claims. 

LESSONS FROM THE COURT:  You can fix an authorized vendor list or fix a list of suggested retail prices, but don’t conspire to fix prices or competition.  Allow for approved vendors and alternative pricing.

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 revenues greater than $500,000; health care providers, law firms, and childcare centers with revenues greater than $250,000; and nursing homes, visiting nurse associations, and shopping centers with revenues over $100,000. 

Failure to post the notice could result in the filing of employee complaints for unfair labor practices.

Per the notice and the rule’s announcement, the NLRB “believes that many employees protected by the NLRA are unaware of their rights under the statute.  The intended effects of this action are to increase knowledge of the NLRA among employees, to better enable the exercise of rights under the statute, an to promote statutory compliance by employers and unions. 

In an environment of recent ballot issues over workers’ rights and challenges over collective bargaining by government workers, firefighters, police officers, and teachers the NLRB’s new notice requirement is mired with objection. 

Incident to a lawsuit filed by the National Association of Manufacturers (NAM), the NLRB has voluntarily postponed the mandatory employer notice posting until April 30, 2012.  The lawsuit by the NAM questions the NLRB, saying the notice is a “new unfair labor practice,” “the NLRB does not have authority to require the posting,” and the notice opens the door to improper employee complaints. 

NEWS BULLETIN:  Employers duty to comply with the NLRB notice requirement is delayed until April 30, 2012.  Stay posted for further developments. 

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 issue confronted in the arbitration case of Wild and H&R Block Tax Services.  Wild, a 30 year franchisee of H&R Block, refused to adopt the software required by H&R Block saying, ‘The software fees were too high and the software compromised customer privacy by allowing franchisor access to consumer data.’ 

The panel of arbitrators rejected Wild’s arguments saying, ‘The franchisor had a legitimate interest in establishing a uniform procedure ……… Indeed, the franchisor arguably had a duty to insist on uniformity and the right to insist on monitoring every franchisee’s compliance with the uniform procedures it established.’ The arbitration panel unequivocally declared that franchisee’s failure to adopt the brand required software was a material breach of the franchise agreement, which justified termination of a more than 30 year old franchise. 

Lessons from the Court Room: In the world of franchising, ‘It’s mine and you can’t see it’ or ‘You charge too much’ rarely wins over ‘uniformity’ including when it come to software.

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 hired Noah Kravitz as a product reviewer and video blogger.  As part of his employment with PhoneDog, Noah Kravitz wrote and produced video content, which was then transmitted on PhoneDog’s website and disseminated through a twitter account, @PhoneDog_Noah.  The twitter feed, @PhoneDog_Noah, was a great success.  It garnered approximately 17,000 followers.  Followers were getting the twit feed and going to PhoneDog’s website.

Business was good, but then Noah Kravitz quit his employment with PhoneDog.  He did freelance for awhile and then took a job with TechnoBuffalo, a competitor of PhoneDog.  And guess, what…….  He took the twitter account and all the 17,000 followers with him.  Post his resignation, Noah Kratvitz retained the pass code for the twitter.  He simply changed the twitter account name to @noahkravitz.

Upset about losing business and its competitor getting access to the twitter account and the more than 17,000 followers, PhoneDog sued Noah Kravitz claiming misuse of trade secrets, stealing, and interfering with PhoneDog’s business.  Noah Kravitz moved to have the suit dismissed saying, “Twitter follower information is public, I did not steal it, and it is a not secret; therefore it cannot be a trade secret.”  The court declined to dismiss PhoneDog’s suit.  The case will move forward to determine if the twitter account information is in fact a trade secret capable of being stolen by employees. 

Lesson from the court:  After an employee leaves, remember to change the pass codes on your social media accounts or your social media may truly become social……