Starting on July 1, 2021. the NCAA permitted student-athletes throughout the country to profit from their name, image, and likeness (“NIL”). This decision marks a major shift from the NCAA’s longstanding amateurism model.  Twenty-eight states have also enacted their own NIL laws, and sixteen of those—including Alabama, Florida, Georgia, Mississippi, New Mexico, Texas, Kentucky, Ohio, Oregon, Pennsylvania and Illinois—have signed NIL legislation to take effect in 2021 alone.

Neither the NCAA nor the federal government have addressed NIL laws, which has made for a fragmented model that varies from state to state.  For example, Georgia’s NIL law allows for team pooling arrangements whereby student athletes who receive compensation for the use of their name, image, or likeness agree to contribute a portion of the compensation they receive to a fund for the benefit of other student-athletes.  Mississippi’s NIL law even authorizes student-athletes to hire agents to negotiate marketing opportunities.

Some student-athletes have already started taking advantage of this seismic shift in college sports.  University of Wisconsin quarterback Graham Mertz recently tweeted a video of his new trademark, and University of Iowa basketball player Jordan Bohannon has a deal with a local fireworks company Boomin Iowa Fireworks. And, when you get to college football royalty like Alabama? Well, Alabama QB Bryce Young has already obtained about $1 million in endorsement deals, according to his coach Nick Saban.

Meanwhile, boosters want a piece of the action as well. Dan Lambert, the owner of prominent MMA training facilities and a huge University of Miami football fan, has offered to pay every athlete on the ‘Canes roster $500 per month this year to promote his chain of gyms on social media. Lambert has also reportedly founded a company that will raise money from local Miami-area businesses to pay athletes who endorse them.

It will be interesting to see how NIL laws change the college landscape.  Recruiting is one of many areas where NIL laws may have an effect.  For example, a highly touted prospect with endorsements deals on the horizon might be swayed from School A to School B if School B is in a state with a less restrictive NIL law.  It will also be interesting to see how colleges and universities respond to their student-athletes’ outside endorsements.  What if a student-athlete signs a contract that conflicts with the school’s pre-existing sponsors or university codes of conduct? For example, BYU has already adopted a rule that bans athletes from endorsing a product that violates its honor code which, in the case of BYU, means not just alcohol but coffee is off limits.

Still interesting in having your franchise system or franchisees get a piece of the action, so-to-speak? Compliance with myriad NCAA and state rules respecting NIL should be carefully considered, as certain moves retain the risk of disqualifying athletes and teams–something no booster who bleeds blue (or red, or green or . . . well, you get the idea) wants to cause.  That said, navigating NIL rules laws may present some obstacles, but has the potential to be a high-reward endeavor.  And it might very well add a unique layer of intrigue and drama to college sports this season.

(Parts of this post previously appeared on the Fox Rothschild Above the Fold blog.)

With Ali Brodie

EB-5 Investments are a popular way of raising capital for franchise expansion. So it came as a bit of a shock last week the EB-5 Program was rocked by two major developments.

EB-5 Modernization Rule Struck Down (For Now)

On June 22, 2021, Magistrate Judge Jaqueline Scott Corley from the U.S. District Court for the Northern District of California ruled that the EB-5 Modernization Final Rule was not lawfully promulgated because the former-acting Department of Homeland Security Secretary Kevin McAleenan was not properly serving in his position.  As a result, the November 21, 2019 regulations have been vacated thereby reinstating the EB-5 minimum investment amount for TEA investments, temporarily, to $500,000.

It is unclear how long the lower investment amounts will last.  It is possible that Department of Homeland Security will appeal the decision and it is likely Secretary Mayorkas will seek to finalize the regulations.  Until then, the earlier investment amounts of $500,000 for TEA investments and $1 million for non-TEA investments remain in place.  Potential EB-5 investors should review the benefits and risks associated with filing an I-526 after this order.  There are a number of considerations worth discussing with immigration counsel.

EB-5 Regional Center Program Not Authorized (Yet?)

The EB-5 Regional Center Program will expired at midnight June 30, 2021, because Congress has not reached an agreement on reauthorization.

An attempt by Senators Chuck Grassley and Patrick Leahy to pass the EB-5 Reform and Integrity Act of 2021 was blocked by Senator Lindsay Graham.  Despite the lapse, it is expected negotiations will continue although there is much uncertainty surrounding the timing and outcome of the negotiations.  It is important to note the lapse in authorization does not affect EB-5 petitions filed by EB-5 investors seeking benefits outside the Regional Center Program.

Today, U.S. Citizenship and Immigration Services (USCIS) issued guidance on how the agency will handle EB-5 Regional Center filings during the lapse:

  • Form I-924, Application for Regional Center Designation Under the Immigrant Investor Program:  USCIS will reject Form I-924 applications received on or after July 1, 2021 except when the application type indicates that it is an amendment to the regional center’s name, organizational structure, ownership, or administration.  USCIS will place any pending applications as of July 1, 2021 on hold.
  • Form I-526, Immigration Petition by Alien Investor:  USCIS will reject Form I-526 petitions received on or after July 1, 2021 when it indicates the petitioner’s investment is associated with an approved regional center.  USCIS will place any pending applications as of July 1, 2021 on hold.
  • Form I-829, Petition by Investor to Remove Conditions on Permanent Resident Status: USCIS will continue to accept and review Form I-829 petitions, including those filed on or after July 1, 2021.  These petitions will not be affected by the expiration of the Regional Center Program.
  • Form I-485, Application to Register Permanent Residence or Adjust Status:  USCIS will begin rejecting Form I-485 applications and any associated Form I-765, Application for Employment Authorization, and Form I-131, Application for Travel Document, based on an approved Form I-526 associated with an approved Regional Center.  The agency will be unable to act on any Form I-485 based on an approved Form I-526 associated with an approved regional center unless the Regional Center Program is reauthorized.  Further clarification from USCIS is needed as to how USCIS will handle pending Form I-765 and Form I-131 applications associated with a pending Form I-485.

Additionally, after June 30, 2021, the U.S. Department of State (DOS) will not issue immigrant visas to applicants seeking immigrant visas pursuant to an approved Form I-526 at U.S. consulates abroad.

Fox Rothschild, which has one of the most comprehensive corporate immigration law and compliance practices in the United States, will continue to monitor negotiations and other EB-5 Regional Center Program developments.

Ali Brodie blogs about immigration issues at Immigration View, where this information first appeared. Ali is a Partner and the Co-Chair of the Immigration and EB-5 Immigrant Investor Practice Groups of Fox Rothschild LLP and has extensive experience in corporate immigration law and compliance.  Based in Fox Rothschild’s Los Angeles, California and Denver, Colorado offices, Ali’s practice spans the United States and reaches Consulates worldwide.  You can reach Ali at (303) 446-3854 or at abrodie@foxrothschild.com.

Please join Elizabeth Rose of Caiola & Rose LLC, Jason Binford of the Texas Office of the Attorney General, and me, John Gotaskie, on July 14th for a 90 minute CLE sponsored by the ABA Forum on Franchising discussing Franchise Agreements in Bankruptcy Cases and Business Restructurings.

Bankruptcy and other forms of business restructuring can throw agreements that existed prior to the bankruptcy or restructuring into chaos, and franchise and licensing agreements are no exception. A 2019 Supreme Court case, Mission Product Holdings, Inc. v. Tempnology, LLC, demonstrated that when a licensor goes bankrupt, the licensee’s rights to the license (in that case a trademark) may not necessarily end. This webinar will assess the impact of that case on franchise agreements, and will also look at issues that arise when franchise agreements are terminated before the bankruptcy filing, the franchise related issues involved in the restructuring of large multi-unit franchisees both inside and outside of bankruptcy, and the impact of large restructurings on the franchisor’s and franchisee’s ability to obtain credit. We will also address the different types of issues that bankruptcy can—and cannot— effectively address, along with the reasons why Subchapter V might be useful to consider as we exit from the COVID pandemic.

So yesterday I discussed some background related to anti-poaching and non-compete law. Today, I explain why the decision in Pittsburgh Logistics Systems provides a helpful analogue to franchising.

Facts

The case involves a no poach clause sought to be enforced by the current employer, Pittsburgh Logistic Systems (“Systems”), against four employees of Beemac Trucking, doing business with Systems.  The four employees all left Systems to work at Beemac, and Systems sought to enforce the non-compete clause in the employment agreements with the employees. A temporary injunction was initially entered against the employees, but ultimately the injunction was vacated as being unreasonable.

Systems then sought to enforce the no poach clause against Beemac, which would prevent Bee mac from employing the four employees who’s non-compete agreements could not be enforced. As the case wound it way through the courts, the judges and counsel astutely identified the dilemma of indirectly restricting the activities of the employees that they did not agree to make for themselves. In attempting to address the issues, the Supreme Court of Pennsylvania did review the law in several states and noted that while California and Wisconsin held no poach clauses per se unenforceable, Texas, Virginia and Illinois do enforce the clauses. In fact, the Attorney General of Pennsylvania filed an amicus brief in the case urging a blanket rule against the enforcement of no poach agreements.

Holding

The Pennsylvania Supreme Court weighed the legitimate business interest of Systems in preventing its business partners from raiding its trained employees against the public harm that the restriction caused. The Court determined that the no-hire provision at issue was overbroad because it was not limited to System employees who had worked with Beemac. The Court concluded that the no poach provision was likely to impair the employment opportunities and job mobility of all System employees. The Court also found that the restriction undermined free competition in the shipping and logistics industry labor market and thus harmed the public. The Court refused to apply a per se rule, and applied the existing reasonableness analysis applied to non-compete agreements in Pennsylvania to affirm the lower court’s decision not to enforce the no poach clause.

Lessons

The Pennsylvania analysis will likely guide courts in other states regarding the interplay of no poach, no hire, no solicitation and non-compete enforcement in other states. The lessons learned from the decision tell us that:

  1. Activity restrictions in existing franchise agreements need to be re-evaluated in light of changing jurisprudence.
  2. No poach agreements in many instances will be difficult to enforce, and even the inclusion of such a provision in a franchise agreement may lead a court to conclude that the franchisor is overreaching in other aspects of the franchise relationship.
  3. Franchisors with legitimate business interests requiring activity restrictions should be able to link the provisions to protection of confidential information and to tailor the provisions as narrowly to demonstrate reasonableness.
  4. Geographic reasonableness and non-solicitation should be reviewed and tailored in light of social networking and technological advancements.

Activity restrictions in franchise agreement protect the branding, the uniqueness, the competitive advantages through innovation, and the secrets of success of the franchisor. Now is the time to reappraise the tools being used to protect these most important assets.

Let’s review the status of activity restrictions in franchise agreements. Do they serve the purpose intended? Are they enforceable? Are they worth it? The Pennsylvania Supreme Court’s decision in Pittsburgh Logistics Systems v. Beemac Trucking, 2021 WL 1676399 (PA 4/29/2021) applies an analysis usually used to evaluate covenants not to compete, and concludes that on the facts presented, the no-poach clause was unenforceable as written. The case is instructive for all franchisors because its reasoning will be followed in other states.

No poach clauses and no solicitation clauses are post-employment restrictions against competition. In franchise agreements, these clauses usually are drafted to prevent franchisees from raiding the employees of other franchisees or of the franchisor. Sometimes, these clauses appear in agreements with critical vendors and business partners, so that no raids will cannibalize the staff. Application of the clauses stabilize the staff of the contracting parties but restricts the mobility of their employees. These employees did not agree to these restrictions, nevertheless, an invisible hand eliminates their opportunities.

Covenants not to complete are restrictions on competition, both during the term of the franchise agreement and after. These are evaluated based on the scope of the restriction, the period of the restriction and the geographic scope of the restriction. The in-term covenant against competition usually precludes engaging in competitive activity which would be disloyal to the franchisor or would impact the franchised business, and with a few exceptions, need not be limited in geographic scope. The post-term covenant precludes competition against the franchisor or other franchisees, and to be enforceable, must be reasonably limited in scope, time, and geography.

As restrictions on competition, these clauses may be regulated by federal antitrust laws, state antitrust laws and state common law. Certain states, like California and Washington, prohibit the enforcement of such restrictions as against public policy, subject to certain exceptions. For example, Washington state entirely prohibits no poach agreements as anticompetitive. The attorney general of Washington negotiated the nationwide elimination of no poach agreements with over 200 franchisors if they wanted to continue to do business in the state of Washington. California has a statute which states that non-compete agreements are unenforceable, but exceptions exist for very narrow restraints in franchise agreements and for protection of trade secrets. See Bamboo Franchising, LLC v. Nguyen, 2021 WL 1839664 (N.D. Cal. May 7, 2021) (enforcing non-compete under the trade secret exception).

The jurisprudence in this area is changing rapidly. The Department of Justice and the Federal Trade Commission in 2019 concluded that no poach clauses should be analyzed under a rule of reason analysis because of pro-competitive benefits of such clauses. Antitrust attack on no poach agreements are difficult because of proving the necessary elements of antitrust damages, and these are expensive cases to prepare and try.

Big News from the Office of Pennsylvania Governor Wolf today! While there does not yet seem to be an Order, the Governor’s Office issued a press release today outlining significant changes to targeted COVID-19 business restrictions in Pennsylvania.

On April 4, 2021, the following changes will be implemented:

  • Restaurants
    • May resume bar service for the first time since November 23, 2020.
    • Alcohol may be served without the purchase of food.
    • The 11 pm cut off for alcohol sales and the 12 midnight curfew for removing alcoholic drinks from tables will both end.
    • For restaurants that self-certify compliance with COVID-19 mitigation protocols, capacity will increase to “up to” 75%. (50% for restaurants that do not self-certify.)
    • Outdoor dining, curbside pickup, and takeout remain encouraged.
  • Other Businesses
    • Capacity for personal services facilities (hair salons, barbers, nail salons), gyms, and entertainment facilities (casinos, theaters and malls) will be increased to up to 75% capacity.
  • Events (including attendance at sporting events)
    • Indoor events capped at 25% of maximum capacity.
    • Outdoor events capped at 50% of maximum capacity.

NOT changing are Pennsylvania’s statewide mask mandate and social distancing (6 feet) rule. This latter requirement is very important here, as all of the above capacity limitations are further limited by social distancing. That is, if you can only accommodate for example 60% capacity with the required social distancing, then your establishment is limited to 60% capacity. Furthermore, the Governor’s plan does not replace local restrictions, which can be more restrictive. Right now, Philadelphia has stricter restrictions than the state as a whole. We will have to see if it relaxes its rules and/or if other counties impose more stringent rules.

Overall, though, the Governor’s Announcement is great news, as it means Pennsylvanians are one step closer to normalcy–and that the pandemic continues to subside in the Commonwealth.

The idea for this blog comes from Sahara Pynes. Sahara is a member of our Labor and Employment team and presented her own Tips for New Entrepreneurs in our California Employment Law blog. Thanks to Sahara for this idea, and please check out her post!

The pandemic has had a disproportionate effect on women, with nearly 3 million women having left the workforce since the start of the pandemic. However, there have been a record number of new business applications filed throughout the country, according to the U.S. Census Bureau.

In honor of International Women’s Day, we wanted to provide a few tips to women (and others!) looking to take that leap into entrepreneurship, potentially as a franchisee. Here are few top considerations for any prospective new franchisee:

  1. Learn Local Licensing Laws. Most states have various licensing laws and requirements that any new business must obtain. These could include food and beverage requirements, zoning concerns, and tax issues. It is critical to research these issues before signing your franchise agreement.  You don’t want to learn too late that you have to jump through various state and local regulatory hoops.

 

  1. Form a Business Entity and Obtain Insurance. Many franchisors may require you to form some type of business entity to operate your franchise. This could be a limited liability company, or corporation. By forming such an entity, you may be able to protect your personal assets from third-parties claims. Moreover, you will likely be required to obtain insurance to protect your business as well as the franchisor. Consult with a business advisor, accountant, and insurance agency to assist with these decisions.

 

  1. Review the Employment Laws in Your State. States may have differing standards and requirements for determining when an individual is considered a contractor versus an employee as well as guidance related to minimum wage, break times, healthcare, and other leave. Consult with an attorney to determine how to structure your employment relationships, particularly as the franchisor is unlikely to provide much guidance in this area.

 

  1. Research Possible Franchisors. If you are interested in being an entrepreneur, but also having the support of a larger entity, then franchising is likely a good option. People think of “fast food” when they think if franchises, but there are thousands of franchise systems offering all types of services and products all across the country. Before making a decision, carefully research different industries and franchisors to determine what is the right fit for your business dreams.

 

Joining a franchise system can be a great way for an entrepreneur to start their own business, while also having the support of a proven concept. While the pandemic may have forced many women to leave the workforce, starting their own franchise gives many women an opportunity for economic independence and growth. These tips can help prospective franchisees from falling into unnecessary, and potentially costly, traps before their business gets off the ground.

Contributed by Odia Kagan.

This blog has discussed the importance of ensuring and auditing your vendors’ data security practices. A recent enforcement action from the Federal Trade Commission (FTC) drives home the importance of being proactive about vendors and data security.

Specifically, the FTC recently entered into an enforcement action with an analytics company for breaching the FTC’s Safeguards Rule issued pursuant to the Gramm-Leach-Bliley Act (GLBA) by failing to properly vet a third-party vendor it engaged. The vendor stored personal information in cleartext in an unprotected cloud-based location that could be accessed by anyone with the relevant URL. The information was exposed for a year and was accessed by 52 unauthorized IP addresses.

The company, Ascension Data & Analytics, was ordered to:

  • Put in place a written data security program.
  • Designate a person responsible for managing the data security program.
  • Conduct an annual risk assessment.
  • Require every vendor in advance of engaging them to:
    • Provide documentation of their information security practices.
    • Describe how and where the personal information will be stored and the protections that will be applied to it.
    • Assess the risk to the information they receive including an annual vulnerability scanning and penetration test.
  • Contractually require vendors to implement and maintain safeguards for personal information.
  • Assess the sufficiency of the safeguards annually and after any incident.
  • Assess the data security program at least annually and after any incident.
  • Present for review initial and biennial data security assessments performed by a third party.
  • Provide an annual certification from a senior corporate manager re: compliance with this order.
  • Report to the FTC about any data breach incident.

Key Takeaways

  • It’s not enough to have a written program that requires vendors to fill out an information security questionnaire if you then don’t take steps laid out in your program to evaluate whether the vendor could reasonably protect the personal information.
  • It is NOT enough (by far) to say in your contract with the vendor that “any nonpublic personal information . . . shall be protected from disclosure with all the provisions of the GLBA.”
  • You should include contractual provisions that at least require compliance with the Safeguards Rule.
  • You should specify in your contract the actual safeguards that service providers must implement, or otherwise require them to take reasonable steps to secure personal information.
  • You need to conduct a risk assessment for all of your vendors.

Odia Kagan is a partner in Fox Rothschild’s Privacy & Data Security Practice and Chair of the firm’s GDPR Compliance & International Privacy Practice. For questions about this post or other data privacy compliance issues, she can be reached at 215.444.7313 or okagan@foxrothschild.com.

It was predictable – even inevitable – that the Biden administration would reverse much of Trump’s labor oeuvre. But no one could have predicted how quickly! In a little more than a month, the administration has:

  • Installed Department of Labor leadership widely viewed as labor-friendly
  •  Abruptly replaced the NLRB’s Chief Counsel
  • Euthanized Trump’s joint employment regulation
  • Added a $15 minimum wage provision to the latest round of COVID funding

Reading the favorable tea leaves, Democrats have reintroduced the PRO Act. That piece of legislation, among other things, would outlaw state right to work laws and establish a national ABC employment standard.

Will this mad rush continue?! Or will the train slow down long enough to consider the implications of these actions? Can the franchise industry find a safe path through the maelstrom?

This question emerged in sharp detail a couple of years ago when the California legislature was considering passage of AB-5, the bill that established the ABC employment test as law in that state. Franchisors, franchisees, and the International Franchise Association lobbied, ultimately unsuccessfully, for a franchise exemption from the law. The logic of such an exception is obvious: Thousands of entrepreneurial franchisees are business owners, employing hundreds of thousands of Californians. As I noted in a previous blog (reference to Unintended Consequences blog), the ABC test risks classifying the franchisor as the employer of all those franchisees and all their employees. Under a broad interpretation of the ABC test, franchisees are no longer business owners; they are de facto manager employees of the franchisor. Much of the value franchisees worked hard to build in their independent businesses could suddenly disappear.

The perilous winds now blow nationally, and the franchise industry is already actively lobbying for a safe harbor. But what could a safe harbor look like? And is it achievable?

The simplest safe harbor is to exempt the franchise industry from application of the ABC and joint employment test. Unfortunately, such a simple and straightforward safe harbor exempts an impossibly wide swath of the economy and failed in California. But in the Venn diagram of legislation, could an acceptably narrow (from the point of view of labor advocates) and acceptably broad (from the point of view of franchisors and franchisees) be defined? Consider, for instance, a safe harbor defined as:

  • Franchisors that comply with the Federal Trade Commission franchise disclosure rule, and their franchisees (to narrow the scope of any safe harbor); and/or
  • Franchise relationships with franchisees having a minimum net worth and meet a liquidity standard (a well-heeled franchisee should be able to bear the expense); and/or
  • Franchise relationships in which the franchisor guarantees the franchisees’ payment of employment-related taxes to governmental agencies (to ensure ultimate payment); and/or
  • Franchise relationships in which the franchisor sets and enforces contractual requirements for the franchisee to comply with governmental pay and labor standards (to reduce the instances of non-compliance).

The public arguments in favor of the ABC test complain of low employee wages, the absence of protective mechanisms for workers, and violation of some federal labor standards. The suggestions above would seem to answer those complaints.

But politics is the art of the possible. The union agenda is broader, seeking the ability to organize vast numbers of workers more conveniently. It’s the union view that encourages a fundamental mischaracterization of the franchise industry as a segmented unitary “business” rather than a licensor providing franchisees an opportunity to build their own business using the licensor’s model. Union proponents will not be satisfied with anything less than the ability to organize the employees (and franchisees) of a large franchisor entity as if it were a unitary body.

Franchising should find allies in the more than 20 states that have enacted right to work laws. But overcoming PRO Act supporters to protect an industry that has allowed so many individuals, most of the small business owners, to build wealth will not be easy – indeed, it’s already proven to be difficult. But it’s worth the effort. Keep the lobbying pot at a boil!

Wooden Blocks with the text: Claim Denied. Insurance Business concept
Wooden Blocks with the text: Claim Denied. Insurance Business concept.

Back at the beginning of the pandemic, there was a flurry of articles that maybe, just maybe, insurance would cover losses at businesses closed by the pandemic. I was skeptical. Now, as more cases roll in, it looks as if that skepticism was warranted.  In fact, a recent case from my lonely neck of the woods–Western Pennsylvania–continued that trend.

In the case, a tavern and restaurant business sought coverage under a policy of property insurance for lost business income relating to the bar and restaurant shutdown ordered by Pennsylvania Governor Tom Wolf in March 2020.  Specifically, on March 19, 2020, Governor Wolf ordered the closure of all “non-life sustaining” businesses.  Even now, taverns and restaurants in Pennsylvania, while re-opened, are under emergency disaster orders for limited capacity–50% if self-certifying compliance with certain protocols and 25% if not.

The tavern and restaurant argued that policy language requiring “direct physical loss of or damage to” the business included losses caused by governmental orders limiting use of the property, as the occassional court has found. The U.S. District Court, however, rejected that contention, stating that such an interpretation of the policy “would stretch the language beyond the plan meaning of its terms and beyond the interpretive authority of the Court”.  It continued that coverage “unrelated to physical impact” would lead to a “contrived” interpretation of the policy language.

The Court also rejected an argument based on the “physical presence” of the virus at the insured premises.  Again, the Court decided that, even if the coronavirus was present on the premises, the plaintiff could not show it was so “physically ubiquitous as to prevent access to or operations at the property.”  Additionally the Court briefly addressed the the Civil Authority clause, concluding that the Governor’s order did not implicate it due to, again, a lack of physical damage.  Consequently, the Court granted the insurer’s motion to dismiss.

As a–maybe to me only–interesting side note, the judge who decided this case is the same federal judge who concluded that Governor Wolf’s decision to order the closure of “non-life sustaining” businesses was unconstitutional. To me, this shows that even those jurists most sympathetic to the plight of businesses impacted by pandemic closure orders remain likely to enforce insurance contracts strictly.