The seeming confusion over Memorial Day, especially when we’ve lost almost 7,000 American servicemen and women in the wars we’ve been fighting in Iraq, Afghanistan, and Syria, and against ISIS, for almost two decades, bothers me. I respect and admire our Veterans, but their day is November 11th. And I have the utmost respect for all those currently serving in uniform, including a number of whom I count as friends. But Armed Forces Day was May 21st–did you remember to fly your flag and/or thank a service member?unknown soldier

Memorial Day, in contrast, is when we pause to remember, and honor, those who gave, as Abraham Lincoln so eloquently expressed it, the last full measure of devotion for their country. In this vein, the podcast 99% Invisible recently did a fascinating report on the history of, and the men who guard, the Tomb of the Unknown Solider at Arlington National Cemetery.  It is, in my humble opinion, very much worth a listen if you have some time this weekend.

So, before you head out to the white sales, auto lots, picnics or pool this holiday weekend, I kindly ask that you join me–and Fox Rothschild–in pausing to remember those who truly gave the last full measure of devotion to our Nation, so that we can enjoy its freedoms. As General Patton wisely noted, “It is foolish and wrong to mourn the men who died. Rather, let us thank God that such men lived.”

I recently attended the annual Franchise Times Finance and Growth Conference in Las Vegas. In addition to hearing dozens of emerging and established brands pitch their systems, one of the highlights of the Conference is certainly the Deal Makers Gala Awards Luncheon. This is where the Franchise Times recognizes those deals which “drive the capital the help build franchise empires.” The luncheon kicked off with a very insightful panel composed of three award winners:

  1. Greg Flynn, CEO of Flynn Restaurant Group discussing the acquisition of U.S Beef and its 358 Arby’s units;
  2. Heather Elrod, CEO, who detailed the sale of Amazing Lash to WellBiz Brands; and
  3. David Pipes, CFO of Inspire Brands, who closed two take-private deals acquiring Buffalo Wild Wings and Sonic.

Greg Flynn said the Flynn Restaurant Group’s success is looking for brands that are not frothy but solid. He acknowledges that Arby’s went through some hard times.  However, he is convinced that when you have a brand that well-known, it doesn’t take more than some improved management to turn things around.   In his opinion, buying brands at their peak, paying historically high multiples and ending up with a high cost basis just doesn’t make sense. Buying up units of solid and well-known brands, like Arby’s and other concepts like Applebee’s, at low prices, is a much better bargain and long-term bet. The price point coupled with the location of the units, business friendly Oklahoma and the Midwest where people love Arby’s, sealed the deal.

Heather Elrod spoke about the challenges in selling a service brand unknown to many in the male dominated private equity firms.   She focused on the white space available and the room for substantial growth in the eyelash extension market as over 91% of women in the markets where the units were located hadn’t tried the service. As someone with over 25 years experience in the wellness and beauty industry, Heather was skeptical of a service she thought only catered to a younger market. However, she was quickly sold when she realized there is a huge market to 40-50 year olds who use lash extensions as an anti-aging technique.

David Pipers discussed how there are many brands out there that need certain services and investments in technology that are costly but of ubiquitous need among various brands. Although Buffalo Wild Wings and Sonic were different in concept, David could leverage those important services across the systems in Inspire Brands portfolio. He also spoke frankly about the hurdles facing the Buffalo Wild Wings brand upon acquisition, including its attempt to shift from a sports bar concept to a casual dining concept, activist investors and a retiring CEO without any COO or succession plan in place. Notwithstanding those issues, David believes the loyalty among the Buffalo Wild Wings clientele are unparalleled and was optimistic about the system long-term.

It was a lively discussion with interesting takeaways and a great start to the Gala Awards Luncheon.

The long awaited ruling in Mission Products Holding, Inc. v. Tempnology LLC (In re Tempnology) has simplified the intersection of bankruptcy and trademark law, with the court holding that rejection “constitutes a breach” of an executory contract and not an irrevocable termination of the contract.

Tempnology licensed clothing and accessories to Mission Products, but Tempnology filed bankruptcy to, among other things, “reject” burdensome contracts such as that held by Mission Products. Section 365 of the Bankruptcy Code enables a debtor to “’reject any executory contract’ – meaning a contract that neither party has finished performing” Justice Kagan wrote in the majority opinion. Tempnology rejected the license so that it could, as a business strategy, jettison this burdensome contract, or perhaps resell or renegotiate the license. Mission Products argued that because rejection is considered a breach, traditional contract law would be kinder to the non-breaching party, and would allow the choice of retaining the rights granted by the breaching licensor or damages.

The Supreme Court held that outside bankruptcy, a licensor’s breach cannot revoke continuing rights given to the licensee, and that bankruptcy does not enlarge the debtor’s rights in its assets. To hold otherwise would do violence to contract right enforcement and would broaden Congress’ limits on unwinding pre-bankruptcy transfers that would undermine the bankruptcy process. The Court did recognize, however, that the debtor was not required to perform its obligations under the rejected contract and that this, too, could create damages in favor of the rejected licensee.

The Court rejected Tempnology’s arguments that the substantive law of trademark compelled the treatment of rejected trademark licenses as rescinded. A concurrence by Justice Sotomayor clarified that not every trademark license has the unfettered right to continue using licensed marks post-rejection. What remains undecided is whether, under the facts and circumstances in each case, a licensee’s rights would survive a breach under applicable non-bankruptcy law. Justice Sotomayor also noted that because trademarks are not defined as intellectual property in the Bankruptcy Code, a trademark holder’s rights in bankruptcy might not be as limited as a rejected patent holder’s rights would be. For example, rejected patent licensees who choose to retain their rights must pay royalties, but trademark holders may be able to set off post-petition royalties against damages.

Justice Gorsuch explains in his dissent , however, that the bankruptcy case had been fully administered, so there was no live case or controversy, and, therefore, this was a moot decision not within the Court’s jurisdiction. The majority did address the mootness issue to show that this decision was not simply an academic exercise.

Franchisors that have filed bankruptcy have previously used the strategy of rejecting area development agreements with the plan to renegotiate or resell those areas. Following this opinion, this strategy will no longer be available and will require termination of the development agreements on the merits to proceed with the same strategy.  In this area and others, pre-bankruptcy planning respecting trademarks will take on much greater importance for franchisors contemplating the filing of a bankruptcy petition.

We previously discussed the split in the Circuit Courts of Appeal that led to the Supreme Court decision here.

A wage and hour case before the Ninth Circuit Court of Appeals, Vazquez v. Jan-Pro Franchising International, is the latest front in the joint employer battle.  In Vazquez, unit franchisees of a janitorial service system alleged that they were employees of the franchisor.  The District Court granted summary judgment to the Franchisor, based on a prior decision from the First Circuit.

On appeal, the Ninth Circuit first decided that the First Circuit decision—a class action–was not res judicata for the action before the District Court.  The reason was that the Vazquez plaintiffs allegedly were not “adequately represented” in the prior case.

Copyright: stocksolutions / 123RF Stock Photo

The next big issue was whether the California Supreme Court’s recent decision in Dynamex Ops. W. Inc. v. Superior Court, which adopted the “ABC Test” for whether workers are independent contractors or employees, applied retroactively.  The Dynamex question was huge.  As the Ninth Circuit noted, prior to Dynamex, the standard applicable to determining whether a franchisor is an employer of a franchisee was unsettled in California.

The prior employment test came from a case called Martinez v. Combs and set forth three alternative definitions of “to employ”:  (1) to exercise control over the wages, hours or working conditions, or (2) to suffer or permit to work, or (3) to engage the person to work.  The Ninth Circuit recognized that Jan-Pro franchisees did not qualify under prong 1 or 3 of the Martinez test.

But Prong 2 is where Dynamex comes into play.  Dynamex significantly expanded the definition of “suffer or permit” under California law by adopting the so-called ABC test.  Under this test, a hiring entity must establish three elements to disprove employment status:

A.  that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact;

B.  that the worker performs work that is outside the usual course of the hiring entity’s business; AND

C.  that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

As the Ninth Circuit acknowledges, the ABC test is “exceptionally broad”.  I would add that Part B is exceptionally difficult for franchisors to meet.

As if the mere retroactive application and remand itself wouldn’t be enough to send a shiver down the spine of a franchise community, on remand, the Ninth Circuit further directed the District Court to apply Dynamex without regard to prior California cases respecting the “special features of the franchise relationship”.  The Appeals Court specifically stated that tests employed for vicarious liability in tort cases have “little to do” with wage cases and directed the District Court to ignore them.

But the Ninth Circuit didn’t stop there.  Instead, it highlighted for the District Court cases where courts applying the ABC test in other jurisdictions have found an employer-employee relationship between franchisors and unit franchisees.

These court developments bear close watch.  The shift of the battleground over the joint employer doctrine to the courts necessarily means that careful development of policy—as might be expected from the regulatory process—could get rushed, and judicial decisions may result that do not reflect the unique realities of the franchise model.

The female panelists at last month’s Philadelphia IFA Women’s Franchise Network Meeting provided so many great tips on how they utilize social media online to drive franchise sales that we couldn’t fit them into one blog post! Feedback from the 40 women professionals in the audience was overwhelmingly positive. Below are some additional takeaways from the day:

  1. Use an Outside Agency to Fill in Knowledge Gaps. The most frequently asked questions during the panel related to the use of outside agencies.   As Jena Henderson, Vice-President of Growth at Saladworks explained, everyone is an expert on Instagram now and we need more than a camera phone and photograph of a salad to sell the brand.   Ashley Mitchell, VP of Marketing & Communications at Soccer Shots recommended systems outsource to experts where internal marketing does not maintain core competencies. For example, Ashley recognizes she is not a digital optimizer so she is trusting her outside agency to do that.
  2. Remember Customers Can Be Franchises Too. Consumer marketing is not typically looked at as a component of franchise development but Saladworks found success in leveraging its loyalty app to convert customers to franchisees. The loyalty app reminds customers that Saladworks is a franchise.   Recently, the brand was contacted by a professional NFL player who grew up in the Northeast where Saladworks were prevalent and the brand was his go-to lunch spot. He played football in the south and decided he wanted to ensure that his favorite place to eat lunch was around.  Customer to franchisee success story!
  3. Consider Engaging Franchisees in the Discussion. Veronica McKee, Vice-President of Marketing at Philly Pretzel, says that a lot of their best marketing ideas come from franchisees and recommends engaging your system’s advisory council in brainstorming.
  4. Use Yext and Webpunch to Enhance Franchisees Profiles. Most of the panelists use sites like Yext or Webpunch to ensure that franchisee contact information across all platforms is constantly up to date and consistent among websites.  Frankly, there is one area where all the panelists agreed that outside resources are necessary because it is almost impossible to catch and update every website where a franchised unit is referenced.    For example, one of the panelists found that one unit location was listed under two different mailing addresses (one interstate street number and one local street name) which depressed its online presence and confused its hits on Yelp and Google. However, when it comes to Yelp, panelists recommended warning its franchisees against signing up for enhanced packages that do not provide a lot of additional value.   In fact, our panelists found that Yelp has a habit of contacting its franchisees to sell them these unnecessary expensive subscriptions.

If you found this information useful and are a franchise system, franchisee, area developer or franchise industry supplier in the Philadelphia, New Jersey or Delaware area seeking to join the Women’s Franchise Network, then click here.

Yesterday, Washington’s Governor, Jay Inslee signed HB1450 [PDF] which targets the use of restrictive covenants in the State of Washington (the “Non-Compete Act”). The signing of the Non-Compete Act follows the recent settlement on March 18, 2019 of three cases filed by private plaintiffs challenging the no-poaching provisions in franchise agreements of Auntie Anne’s, Arby’s and Carl’s Jr. in the U.S. District Court for the Eastern District of Washington. The new law will take effect on January 1, 2020 and has three significant components:

  1. It places new conditions on the use of any noncompetition agreement by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind. For example, (i) non-competes will only be enforceable against employees making $100,000 annually or independent contractors earning $250,000 annually; (ii) the post-separation duration must not exceed 18 months without clear and convincing evidence that a longer period is necessary to protect business; and (iii) there must be additional consideration paid if the covenant is entered into after the term of employment.
  2. It bans anti-raiding/non-solicitation provisions in vertical franchise agreements. Under Section 7 of the Non-Compete Act, “[n]o franchisor may restrict, restrain, or prohibit in any way a franchisee from soliciting or hiring any employee of” either the franchisor or another franchisee of the same franchisor.
  3. Section 8 of the Non-Compete Act provides that an employer may not restrict, restrain or prohibit an employee earning less than twice the state minimum wage from ‘moon-lighting’ (having another job, being self-employed or working as an independent contractor) unless the work raises legitimate concerns regarding safety, interferes with scheduling or creates conflicts of interest.

Effective January 1st, it will be illegal in Washington state for franchisors to restrict or prohibit its franchisees from soliciting or hiring other franchisees’ employees in the system or employees of the franchisor. However, in a piece of good news for franchisors, the Non-Compete Act excludes from coverage a noncompetition covenant entered into by a franchisee, as long as the franchise sale is properly registered under Washington’s Franchise Investment Protection Act, or exempt from registration.

Violators of the statute may be subject to statutory damages and liable for attorneys’ fees, costs and expenses of the aggrieved party, even if the provision is only partially struck down (blue penciled). In other words, a court may still modify a restrictive covenant so it becomes enforceable, but you will still be subject to damages and penalties. This could further significantly chill the use of noncompetition agreements until the contours of the Act are defined by regulation or case law.

This new statute has broad reaching effects on various types of agreements with a franchise system’s business parties. If you have not already reviewed the restrictive covenants in your franchise agreements as well as agreements with employees and independent contractors, then now is the time to do so!

Before signing an agreement with a new franchisee, franchisors often want to make sure the franchisee has the knowledge, skill, and investment necessary to be successful. While many people are interested in buying franchises, not everyone qualifies for every type of franchise. A franchise application is one tool that can help franchisors weed out potential franchisees who may not be the best fit for the system. An application can include questions about a franchisees experience in a particular industry or about the franchisees’ goals, including whether they would be interested in owning multiple locations. Additionally, obtaining a background check and credit report on potential franchisee can give a franchisor some comfort that the prospective franchisee has the ability to properly invest in the new franchise. While obtaining these checks may be a good practice for a system, a franchisor cannot simply request a background check or credit report without first seeking permission from the franchisee.

In addition to basic biographical information, an application could ask for references, past employers, as well as educational experience. These questions should be tailored to the specific system at issue. For example, an education-based franchise may have more questions about the franchisee’s schooling background than others might. The franchisee application could includes questions about whether the franchisee will devote full-time to the operation of the franchise, whether the franchisee has any management experience, and whether the prospective franchisee is willing to re-locate if a territory is not available where the prospective franchisee currently lives.

If a franchisor wishes to perform a background or credit report, it must comply with the Fair Credit Reporting Act and obtain the consent of the prospective franchisee, and likely the franchisee’s spouse. This consent should be clear and explicit, with specific reference to the FCRA. For example, an application could include a disclaimer with the following or similar language:

In connection with my or my spouse’s franchise application consideration by FRANCHISOR, I understand that Investigative inquiries may be made on myself or my spouse as to background, experience and immigration status. Further, I understand that FRANCHISOR may use an investigative agency (“Agency”) to request information from various federal, state and other agencies which maintain records concerning my past activities, criminal history, driving record, educational history, employment history, and finances. I authorize, without reservation, any party or agency contacted by the Agency to furnish the above mentioned Information, and I consent to the Agency and/or its agents from any claims or liability resulting from the reporting of this background information. I and my spouse authorize FRANCHISOR and its designated agents and representatives to check my/our credit with a credit bureau, conduct a background and criminal investigation, and conduct whatever investigation as permitted under the Fair Credit Reporting Act (FCRA). I agree that a copy of this authorization release is as valid as the original.

This disclaimer must be signed by the prospective franchisee and the spouse, if the check will also include the spouse.

Franchisee applications can be a useful tool for a system to create standards for franchise applicants as well as giving the franchisor more information about the prospective franchisee. If a system wants to employ an application process, it must be done in a uniform manner and any review process must be standardized and fair.

Top marketing executives from some of the most popular and growing franchise systems recently spoke at the Philadelphia Chapter of the International Franchise Association Women’s Franchise Network meeting about capitalizing on social media to increase sales and build business.

According to the esteemed panelists, by far the two most utilized social media sites used in marketing to potential franchisees is LinkedIn and the still classic, Facebook.   LinkedIn and Facebook  provide the most fertile ground for executives and entrepreneurs seeking new business opportunities.

Although, unlike consumer focused marketing, marketing to franchisees is not regularly scheduled on a continuous drip.  On the consumer side, it is easier to have scheduled posts and consistent content.  For marketing to franchisees, panelist described a common strategy of ensuring that content is timely and focused on news that will motivate new franchisees to come on board.  Veronica McKee, Vice-President of Marketing at Philly Pretzel Factory, said that she focuses on new openings.  Public relations related to the success of new franchised outlets is the best way to get new franchisees through the door.

Jena Henderson, VP of Growth at Saladworks, was frank telling the group that systems will not hit the right online analytics on the backside if they are not using video.  Using videos of franchisees and their staff are a very productive way to connect to prospective franchisees to sell the brand.   Focusing on the message is also critically important.  Ashley Mitchell, VP of Marketing & Communication at Soccer Shots Franchising, cautioned attendees to make sure the messaging is right.   Once on board at Soccer Shots she quickly realized that photos of smiling happy children was great but didn’t deliver completely on qualified leads.  She worked to adjust the messaging to focus on the business benefits of owning a Soccer Shots franchise to increase the interest of LinkedIn and Facebook subscribers and expand the pool of potential franchise owners.

Regardless of how a franchise system decides to use social media, our panelists were all consistent in one piece of advice.  BE READY TO PIVOT.   An 18 month marketing plan is really just a pretty picture.  Don’t be surprised that when it constantly changes as channels to reach prospects change, messaging changes and competitors change.  Although Ashley Mitchell was quick to remind attendees to be ready to pivot in ways that are strategic and make sense for your brand.  Chasing a shiny object for the sake of chasing a shiny object won’t benefit your system in the long run.

Stayed tuned for Part II where we discuss how and when our panelist use loyalty apps, outside agencies and other service providers to drive franchise sales.

Today, we welcome guest author Elizabeth G. Hodgson from our Exton, PA office. Elizabeth represents clients in a variety of industries, including food and beverage, Pennsylvania liquor licensing, startup and growth stage companies, hospitality, real estate, technology and financial services. Today, she describes how an upcoming ruling from the U.S. Supreme Court could impact the wine and spirits market in nearly half the country:

The impending ruling from the United States Supreme Court in Tennessee Wine and Spirits Retailers Association v. Zackary Blair, could make the wine and spirits retail market in 21 states a much friendlier place for emerging and growth companies.

This spring, the Court will decide whether the 21st Amendment permits states like Tennessee to restrict granting (and in some cases, renewing) retail or wholesale liquor licenses only to individuals or entities that have resided in the state for a certain period of time. Many argue that such durational residency requirements run afoul of the dormant commerce clause, which prohibits states from passing laws that discriminate or excessively burden interstate commerce.

Proponents of durational residency requirements argue that such requirements foster public health, safety, and welfare by requiring a prospective licensee to become acquainted with the community in which the licensee will sell alcohol and affording the state more time to vet a prospective licensee’s background and qualifications. They interpret the 21st Amendment broadly, arguing that it has historically given the states control over alcohol laws since the repeal of Prohibition nearly a century ago.

Opponents of the restrictions argue that state residency has no bearing on the public safety considerations; a person living just over the Tennessee border in Fort Olgethorpe, Georgia is likely more in tune with the community in Chattanooga, Tennessee (9 miles away) than a fellow Tennessee resident living in Memphis (337 miles away). Additionally, Tennessee law already requires prospective licensees to complete a criminal background check and demonstrate adequate moral character and business experience before receiving a license. Opponents argue that durational residency requirements constitute economic protectionism and discriminate against new or out-of-state residents in violation of the dormant commerce clause.

Both sides agree that if the case concerned any product other than alcohol, which implicates the 21st Amendment, such durational residency requirements would be unconstitutional.

A decision in favor of opponents of durational residency requirements could significantly expand opportunities for emerging and growth stage companies to enter or expand in the wine and spirits retail space by forcing state legislatures in 21 states to draft new laws that are more favorable to out-of-state and new state residents. And although not central to the facts in Tennessee Wine, the Court’s decision could create significant opportunities for wine and spirit retailers by expanding their ability to ship alcohol directly into states that currently permit direct shipments of alcohol from in-state producers only.

In the near future, customers will likely be ordering their fast food through their smart home devices, such as Amazon’s Alexa or Google Home. Gary Vaynerchuk, chairman of VaynerX, a modern-day media and communications holding company, gave this prediction at the International Franchising Association Convention in February 2019. Lawyers need to be prepared for this because you want the consumer’s system to offer your client’s brand.

We can envision this future when one of these companies will have contracts for delivery with Grubhub or Uber Eats. But what company will supply the burger? It could be any of the numerous quick service restaurants, or an as yet-to-be-branded burger. The determinative factor is likely to be the strength of the brand. When customers order vocally, their minds are lazy, and only the brand and its signature sandwiches will come to mind. Thus, those with the strongest connection with the consumer will win the battle of the brands for internet ordering.

What type of burger or sandwich will this be? The branding will probably dictated a truncated list of selections and we cannot expect too much variety at first because the delivery systems have to be perfected. However, brands that have more plant-based offerings are likely to be high on the list.

Healthy lifestyles are now the rage as the baby boomers age. According to research, approximately a fourth of consumers in the United States state they eat plant-based protein as well as animal-based protein, and many of these people do not identify as vegetarian or vegan.

The consumers driving the demand for plant-based protein are exactly those who are the heaviest users of the internet. The brands which now feature menu items that are “beyond meat burgers” include White Castle, Carl’s Jr., TGI Friday’s, In-N-Out Burger, and Chili’s. In order to stay on top, brands will need increased marketing initiatives, up-to-date websites and menus, and, for continued brick-and-mortar sales, the display of additional point of sale information. Staff will need to be trained to accurately and quickly answer customer inquiries. As has already begun in India, the menu board and take-out boxes should contain plant-based indicators to raise awareness and assure quality control.

In the past, plant-based options were unpopular. They were expensive, did not taste good, seemed unnecessary, and were not seen as a treat like the juicy, fattier options were. But demand is rising, and so is the realization that these options must not only be on the menu and attractively priced, but also that they must be advertised to ensure the brand is reinforced. Consumers need to know where to go for healthy options.

So, how will restaurants pay for this? Labor costs keep escalating, and the minimum wage will keep rising. Technology may reduce some labor costs, but all of the technological intermediaries that enable ordering and delivery will soon be eliminating the thin margins currently in place. Franchise restaurants may need the franchisor to reduce its fees. Reducing royalties is anathema to franchisors and their financiers. These royalty streams are etched in stone and may not be flexible. Franchisors, however, do have more flexibility with the costs they charge for opening new outlets and the initial franchise fees for each unit that a multiunit operator pays. Restaurant industry analyst Roger Lipton goes further, suggesting that the franchisors should absorb more of the technology upgrades that the franchise system needs to improve.

As consumers become more dependent on technology, branding will be the key to gaining customers. Branding for the new consumer needs to start now. In the future, we can expect labor costs to continue to rise, and we can expect internet fulfillment to extract a greater proportion of the available margin.