Gettins & Nelson, LLC

A Post from the Field: It’s Time to Update Your SBA Registration!

Mary Beth — Thu, 17 May 2012 16:30:29 +0000

Just like Franchise Disclosure Documents (FDD) and state registrations, a franchise’s SBA registration must be updated annually. The update process includes submission of current disclosure documents, agreements and completion of an online questionnaire. The initial SBA registration is $2,500 currently, and the renewal registration is about ¼ of the initial registration cost.

The SBA Registry is a way for franchisors to get their franchise concept ‘pre-eligible’ for SBA funding. Of course, whether a SBA loan is approved will dependent largely on the resource of the prospective franchisee buyer. The SBA Registry, however, is the means of avoiding the inconsistencies and timely process of having regional SBA offices review the franchise concept for each transaction prior to approving an SBA loan.

In determining if a franchise can be on the SBA Registry, the SBA reviews the franchise agreement and other franchise contracts to ensure that sufficient auspicious of an independent business and other measures are contemplated within the franchise model. Such things as excess or undetermined fees; franchisor controls of over pricing, employee management, daily franchised business operations, and bank account or billing; and limitations on franchised business transferability among other things can render the franchise concept ineligible to be on the SBA Registry. Sometimes factors that could render a franchise ineligible to be on the SBA Registry can be altered or modified via an addendum ; thereby, allowing clear entry on the SBA Registry. For more information about SBA addendums, visit our resource library by clicking on this link: http://gettinsnelsonlaw.com/sba-addendums

Lessons from the Court Room: A Case of Racial Discrimination, or Not?

Mary Beth — Thu, 10 May 2012 01:37:09 +0000

Is it possible for a franchisor to be held liable for racial discrimination against a franchisee’s shareholders? In a case out of the 4th Circuit, the Court said NO. The case was Beasley v. Arcapita, Inc. Beasley, an African-American franchisee shareholder, alleged the franchisor committed racial discrimination by not allowing the franchise business to the sell pork. Under the court’s rationale, the franchise shareholders did not sign the franchise agreement personally and therefore the shareholder could not claim discrimination under the franchise agreement.

The court was not persuaded by the fact the shareholder signed a personal guaranty. The signing of a guaranty by the shareholder still did not render the shareholder a party to the franchise agreement. Without being a party to the franchise agreement, the shareholder could not sustain a claim against the franchisor for discrimination.

Racial discrimination cases are not unique in the franchise industry. The 4th Circuit has legal precedent for its decision. The U.S. Supreme Court in 2006 came to the same conclusion in Domino’s Pizza, Inc. v. McDonald. While the courts in both the 2006 and present day case denied franchisor liability, discrimination remains a hot bottom topic and should be held with utmost care. The courts have, with greater frequency, treated corporations and other business entities as individuals under the law.

In addition, looking at the case inversely, franchise agreements are not infrequently entered into by individuals and not business entities. In the case of an individual franchisee, couldn’t a discrimination case clearly be made against the franchisor? Further, some franchisor’s standard franchise agreements call for both the franchise business entity and the individual franchisee shareholder to sign the franchise agreement itself instead of the franchisee shareholders signing a separate personal guaranty. Again, wouldn’t an individual franchise shareholder signing of the franchise agreement itself open the door for franchisor discrimination claims?

Lesson from the court: Corporations are not people and thereby are not always afforded the same protections as individuals.

Lessons from the Court Room: You Don’t Have to Tell How Much It Made

Mary Beth — Fri, 04 May 2012 01:37:03 +0000

Business locations owned and operated by the franchisor are referred to as company owned locations. When and if the franchisor sells a company owned location, the franchisor has considerable information about the historical earnings of the location. Does the franchisor have an obligation to share the historical earnings information about a company owned location when selling it to a franchisee? How about if the actual financial information of the specific company owned location is much less than the financial earning representations contained in the franchise disclosure documents?

Sound complicated? Let’s look at the case. The case is 7-Eleven, Inc. vs. Spear. 7-Eleven terminated franchisee Spear for failure to meet minimum sales requirements. 7-Eleven sought an injunction to force Spear to de-identify the franchise location. Spear countered saying that 7-Eleven violated state disclosure laws. 7-Eleven provided Spear with a disclosure document that included information about franchisee earnings (financial performance representation) in the disclosure document, but 7-Eleven did not provide Spear with historical earning information about the specific location Spear purchased. 7-Eleven owned and operated the location prior to Spear buying the location. The location’s specific historical earning information not disclosed by 7-Eleven differed from the financial performance representation contained in the disclosure document provide to Spear.

Did 7-Eleven violate state law? No, the court held that 7-Eleven’s failure to provide specific earnings information about the location purchased by Spear did not violate state disclosure laws, because per the FTC rule, the disclosure document contained disclaimers about the financial performance representations included in the franchise disclosure document.

Lessons from the Court Room: Use, read, and honor disclaimers. If you don’t, the court just might.

A Post From the Field: Looking for Information about Other Franchise Models?

Mary Beth — Fri, 27 Apr 2012 00:17:37 +0000

A question that I hear a lot is: what are other franchise models doing? Franchisors looking to restructure their fees want to know what other franchise models are doing. Persons looking to buy a franchise want to know if this is common in the franchise industry or do all franchises require this?

Yes, you can go buy competitor’s franchise disclosure documents. They cost a few hundred dollars depending on the disclosure document you want to buy. However, there are some free alternatives.

Here are the links: http://www.freefranchisedocs.com/

http://www.corp.ca.gov/CalEASI/caleasi.asp

https://www.cards.commerce.state.mn.us/CARDS/security/search.do?method=showSearchParameters&searchType=new

CalEasi is maintained by the State of California and is an online data base of registered FDD (franchise disclosure documents) in the state of California. However, staffing constraints and franchise exemptions can result in not obtaining the information that you are seeking or obtaining dated information.

CARDS is the new website established by the state of Minnesota. Like California’s CaLEasi website, this is an electronic database of FDDs filed in the state. The website, however, only dates from 2010. So if you are looking for historical data, this not the site.

The free alternatives may not have all disclosure documents available or this year’s disclosure document, but they are free. So if your curiosity is not worth a couple hundred dollars or if you do not need the most up-to-date information, check out the above links before you spend your money.

Lesson From the Court: I did not do my diligence, but you negligently misrepresented the franchise!

Mary Beth — Thu, 19 Apr 2012 12:10:35 +0000

Federal and state laws prohibit franchisors from making improper financial performance representations when selling franchises. State statutes and common laws prevent franchisors from making misrepresentations when selling franchises. What are improper financial performance representations? What constitutes a misrepresentation?

In a case out of Minnesota looking at Florida law (Hockey Enterprises, Inc. Plaintiff, v. Dean Talafous, and Brian McKinneya), a franchisee claims that a franchisor committed fraud in making the following statements:

• Revenue and Expense Projection template, listed annual revenue estimates of $437,000 and an annual profit estimate of $139,600, even though the template said in bold font: “Disclaimer. This is a projection template and does not guarantee the results projected on this worksheet…….” The franchisor’s representatives said the revenues and expenses listed on the template were accurate and easily achievable.

• The franchisor assured franchisee that he could operate a successful franchise, even though he had no experience in the industry, if the franchisee just partnered or hired someone with a strong industry background.

• The franchisor said that he would receive a profitable and proven business model and the Franchisor would provide him with the tools he needed to run a successful franchise.

• The franchisor told him that the Franchisor was expanding in North America and that the expansion would increase brand recognition.

• The franchise did not have to be near a certain location to be successful.

How often do franchisors, when selling a franchise, talk about their intention to expand nationally, give franchisee a template business plan, boost about their system, meet with prospects with no core industry experience, give feedback about the site for the franchise business? Is the franchisor committing a fraud when he does these things?

The court, in a summary judgment, said that the franchisor’s actions did not rise to the level of fraudulent misrepresentation, but franchisor’s actions could amount to negligent misrepresentation. Basically, the franchisor did not intentionally mean to misrepresent the franchise, but the franchisor could have unintentionally misrepresented the franchise. And, the franchisee would have to prove it in order to prevail in the case.

The court’s findings were in the face of the standard disclaimers in the franchise agreement, which said the franchisee did not rely on any information not contained in the FDD or franchise agreement. The court’s findings were in the face of a franchisee questionnaire in which the franchisee checked a box and attested that he did not rely on the comments of the franchisor sellers in purchasing the franchise.

LESSON FROM THE COURT: Even the most standard of practices, can be misrepresentations if they do not rise to the level of an improper financial performance representation or fraud.

A Post from the Field: Can I sell a franchise post April 30th?

Mary Beth — Fri, 13 Apr 2012 01:55:55 +0000

Under the Federal Trade Commission’s (FTC) rule, Franchisors must update their franchise disclosure document (FDD) within 120 days from the close of the fiscal year. This update requirement is commonly referred to as the FDD annual update and includes such things as insertion of the previous year’s audit financials, updating of the listing of current franchisee, and numerous other items.

In parity with FTC rule’s annual update requirement, a little more than a dozen states require that the FDD be registered with the state prior to selling or offering franchise in that state. Commonly state registrations are effective for a one year period. In some states, the effective period for the registration runs parallel with the FTC’s 120 day annual update requirement, but in other states the effective period for the registration runs from the state of effectiveness. For example, in Illinois every franchise registration expires on April 30th, irrespective of when the franchise registration was filed. However, in Virginia, franchise registrations are effective for one calendar year from the date on which they become effective. So, if a Virginia state registration became effective on June 23, 2011, the Virginia state registration will expire on June 23, 2012.

The question becomes: if your state registration is still effective, can you still sell within the state prior to June 23, 2012, under the prior year’s FDD. The answer is No. This would be a breach of the FTC rule. And you cannot disclose franchisees or use the updated FDD within the state until it is registered. So, in order to sell or offer franchisees within the state, you must register the updated FDD with the state prior to selling franchises.

What if I do not intend to sell or offer franchises, do I still have to register with the state? The answer is No. If you are not offering or selling franchises within the state, you do not have to file or renew your franchise registration. However, if you choose not to renew an existing franchise registration, you will be subject to initial franchise fees, if and when you decide to register in the future. Initial franchise registration fees can be double or hundreds of dollars more than the franchise registration renewal fee.

Also, consider renewal and transfer situations. Whenever a franchisee signs a franchise agreement, the franchisee should be disclosed with the FDD even though they may not be per se a “new” franchisee.

It is a Logo. It is a Copyright. No, it’s a Trademark.

Mary Beth — Thu, 22 Mar 2012 10:48:31 +0000

You come up with an idea. You give it a name. It is your invention. You have created a work of art. You want to protect it from being stolen by others, but what is it? Is it a patent, copyright, service mark, or trademark? This is a question I get frequently and understandingly. It is confusing. The answer is it could be all 3 or perhaps only 1 of the 3.

A patent is an invention.

A copyright is an original piece of authorship.

A trademark is a word, name, symbol, or sound used in the sale of products.

A service mark is a word, name, symbol, or sound used in the sale of services.

Think big. An invention could be a new or improved process, a new or improved machine or way to manufacture something. It could be a new or improved design. Authorship could be a picture, drawing, song, manuscript, or how-to manual.

We are inundated with trademarks and service marks. It is how we recognize the brands we buy. It is the phase.

It is the YOU GOT MAIL voice from AOL. It is the design on Levi jean pockets.

How can one product be all 3? The United States Patent and Trademark Office (USPT0) uses the example of a machine. For fun let’s say it is a music synthesizer. You invented a design improvement to the traditional synthesizer. You write the description of the synthesizer. You write music to play on the synthesizer. You call the synthesizer SynX generation. You draw a logo with a gold microphone with the word SynX on the handle of it.

The design improvement is a patent. The description of the synthesizer, logo, and music are copyrights. The logo and name SynX generation are trademarks. What do you do? Do you register as trademark, patent, and copyright? If you register the copyright to the synthesizer description, can you skip registering the patent? If consider the logo a copyright, can you skip registering it as a trademark? Think again. As the USPO noted in their example, a description of a machine [the synthesizer in our case] could be copyrighted, but this would only prevent others from copying the description; it would not prevent others from writing a description of their own or from making and using the machine.

Post from the Field: When Should I Call my Franchise Attorney…..

Mary Beth — Thu, 08 Mar 2012 01:30:25 +0000

Running a franchise system, franchisors run into issues daily that can have legal consequences. But, when do you call an attorney? No one wants to be legally micromanaged, but there are situations that can have grave legal consequences. We picked out the top 6 times when you should call a franchise attorney. Here they are:

When you are thinking about putting a franchisee in default. Just because the franchise agreement says you can, it does not mean you can or should put a franchisee in default or take other diverse action against a franchisee.

When you are thinking about terminating a franchisee. Many state laws prevent you from terminating a franchisee without good case and proper notice. If you terminate a franchisee without following the law, you may be subject to years of franchisee loss profits.

When you are thinking about not renewing a franchise. State laws prevent you from not renewing a franchisee without good case and proper notice. If you do not renew a franchisee without following the law, you may be subject to franchise term of loss profits.

When you are thinking of sending out an email blast, doing an ad spot on the internet for prospective franchisees. Some states require the submission of ‘advertisements’ prior to publishing. Advertisement includes lots of different things. Another big worry is making an improper statement about the financial rewards of owning a franchise. A misstep in looking for franchise candidates can lead to federal and state regulatory compliance issue.

When you add or lose management or sales staff. The salesmen, officers, directors, and managers of your franchise system do matter. A change in your franchise sales or management team can be effected if someone buys a franchise. Your franchise agreement may need to updated.

When you are thinking of changing what you offer or require of franchisee. Whether it is the introduction of a new software system, product offering, service, or fee, if you change what franchisees are required to buy or use and it cost money learn, you may need to update your franchise disclosure document and you may not be able to require your existing franchisees to adopt the new initiatives.

Lesson from the Court: What do mean, I Cannot Sue You?

Mary Beth — Fri, 02 Mar 2012 14:34:09 +0000

Franchisors commonly request franchisees to sign a release of claims. A release of claims is where one or both parties agree not to sue the other. When signing a franchise agreement, renewing a franchise, transferring a franchising, closing a franchise, or resolving franchise disputes, franchisees are commonly asked to sign a release of claims.

As discussed in our post about franchise renewals, some states will not enforce a release of claims that is signed in conjunction with the renewing or acquiring of a franchise. In the state of Michigan, the law says: “[a] requirement that a franchisee assent to a release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in this act” is “void and unenforceable if contained in any documents relating to a franchise.”

As seen in a case out of Michigan, laws that prevent the enforcement of the release of claims may not apply to circumstances beyond the signing of the franchise agreement. An example case is NBT Associates, Inc. v. Allegiance Insurance Agency CCI, Inc. In this case NBT Associates (NBT), a franchisee of Allegiance Insurance Agency CCI (Allegiance) sued Allegiance claiming fraud and misrepresentation in the sale of the franchise. Allegiance said, ‘You cannot sue us. You signed a release.’ The court agreed. NBT entered into a settlement agreement with Allegiance to resolve the payment of delinquent royalty fees. In exchange for Allegiance forgiving the late payment of fees, NBT signed a release of claim in favor of Allegiance. The court held that since the release was signed pursuant to a settlement and not the acquiring of a franchise, the release of claims was enforceable. NBT was barred from waging claims against Allegiance.

Lesson from the court: There are federal and state laws that govern the sale of a franchise, state laws that govern the franchise relationship, but very few laws that govern settlement agreements between franchisors and franchisees.

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

Mary Beth — Fri, 17 Feb 2012 01:25:04 +0000

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.