Employers frequently require employees to sign confidentiality and non-competition agreements.  In most jurisdictions, these agreements are both lawful and prudent provided that they are carefully drafted.

In my practice, I draft confidentiality and non-competition agreements and litigate claims of breaches of those agreements.  In almost every agreement I either draft or review, there is a choice of law provision.  If I am drafting or editing the choice of law section, I do not just randomly select any state or a state that might be more favorable to my clients.  I pick the state that makes sense legally — such as because that is where the company is located or the employee signing the agreement will be working.

Although this is not an example of a choice of law provision that I drafted, it is fairly typical of ones I review:

“This Agreement is governed by, construed, interpreted and enforced in accordance with the substantive laws of the State of New York without regard to conflict or choice of law rules.”

For legalese, this is actually clear and I am sure many of you are wondering what might be wrong with this provision.  The problem with this provision is the last part.

24173069 - read the fine print words in small tiny letters or font typeface under a magnifying glass to illustrate a warning or danger alert to pay close attention to legal disclaimers

Even if a contract has a provision that says it shall be governed by one state’s laws without regard to conflict or choice of law rules, that does not mean a court will blindly enforce that choice.  Often the drafters of these contracts believe that simply because the parties agree to waive any conflict of law rules, that the contract terms will govern.  Instead, in many jurisdictions, the court will disregard these provisions and still independently analyze which state’s law applies.

A recent example of this is the DJR Associates LLC v. Hammond, et al. case in the Northern District of Alabama.  The Court dedicated a significant amount of time to discussing the choice of law provision before partially disregarding it.  I won’t bore you with the details of the court’s reasoning, but do note why this is important for companies.

There are some states that do not allow non-competition agreements at all (I’m talking to you California) and there are other states that will enforce them in only certain limited circumstances. When employers are located in multiple jurisdictions, it is important to know the laws in all of the jurisdictions that could apply in order to try to draft enforceable agreements.

In the DJR case, the court found that part of the agreement was governed by Georgia’s law despite the fact that the agreement stated Alabama’s laws would apply.  Georgia and Alabama’s laws differ on the extent to which an employer can prohibit a former employee from soliciting or accepting business from customers.  Indeed, Georgia law is far more critical of such provisions than is Alabama.  Further, under Georgia law, the court can only “blue-pencil” the agreement to strike the overbroad clause; courts cannot rewrite the provisions to be more narrowly tailored.

Although the Court ultimately found in favor of DJR, it also found that the non-compete provision was void under Georgia law, leaving DJR without an enforceable provision that would prohibit the soliciting of its Georgia customers.  Companies should take this as a lesson to have their counsel do an analysis as to which state’s law applies and to draft non-compete agreements accordingly.

Copyright: byzonda / 123RF Stock Photo
Copyright: byzonda / 123RF Stock Photo

Are you ready for the next frontier in ADA Access Litigation? We invite you to read Part 1 and Part 2 in a series of posts by Fox partner Dori K. Stibolt, regarding the new trend in ADA Title III litigation involving access to the internet for the visually impaired.

Many of these cases have focused on travel, hospitality, restaurant and service companies which necessarily include many companies in the franchise community.  Additionally, claims related to web access for the visually impaired* also implicate the self-serve kiosks which are rapidly becoming popular in many hospitality and service environments.

Become familiar with, and get in front of, this litigation trend so that you provide meaningful access to internet resources for all of your potential customers–and avoid costly litigation as a benefit.

*Self-serve kiosks should also be assessed for compliance with ADA’s 2010 Standards for Accessible Design which includes such issues as clear floor space, location of display screen, reach range of operable parts, etc.  

Copyright: mikkolem / 123RF Stock Photo
Copyright: mikkolem / 123RF Stock Photo

This past Friday, May 12th, ransomware known as WannaCry (also known as WannaCrypt or WCry) spread throughout the world, affecting more than 100,000 systems in 150 countries. Victims of the massive cyberattack included the NHS in the UK, cellular networks in Spain, universities in China and many other large organizations worldwide. For both franchisors and franchisees who are dependent on Windows systems, the attack highlights the significant risks and high costs associated with keeping cybersecurity on the back burner.

Fox partner Mark McCreary provided an update on the attack today on the firm’s Privacy Compliance and Data Security blog, and reflected on its impact after addressing client concerns on Friday and over the weekend.

 

 

Tesla, the electric vehicle automaker, recently lost a round in the Supreme Court of Utah. Tesla set up a wholly-owned subsidiary called “Tesla UT” that was to hold a license to sell Tesla’s cars to the public. The Utah Supreme Court, in a narrow but unanimous decision, held that the arrangement between Tesla and Tesla UT amounted to an illegal automobile franchise under Utah law.

The case turned on a relatively straightforward point of Utah law. To wit, in Utah, automobile manufacturers are prohibited from having a subsidiary obtain a license to sell that manufacturer’s cars. In other words, the statute is written such that an entity independent from the manufacturer must hold the license.

Copyright: michaeljung / 123RF Stock Photo
Copyright: michaeljung / 123RF Stock Photo

Tesla first tried to argue that Tesla UT was not a franchise under Utah auto dealer laws. The Court handily rejected that claim based upon use of trademarks, a community of interests and purpose of the laws. First, despite an explicit disclaimer, the Court concluded that Tesla had in fact licensed Tesla UT to utilize its trademarks. Second, the Court found that there was a community of interests between Tesla and Tesla UT. Specifically, the Court found that they have a joint interest in the sale of Tesla cars. Finally, Tesla argued that the “purpose” of the Utah dealer laws–according to Tesla, the protection of independent franchisees–was not present because Tesla UT is wholly-owned by Tesla. The Court concluded that protection of franchisees was only one purpose of the law and found Tesla’s arguments to the contrary unavailing.

Tesla also advanced constitutional arguments, chief among them that Utah’s automobile dealership laws violated equal protection and due process. The Court rejected the constitutional arguments because it found that the Utah legislature could have a reasonable, rational basis of the enactment of the dealership laws. Importantly, the Court said that Utah’s legislators, in their wisdom, had rationally decided to split the responsibilities between manufacturers and dealers. The Court saw no irrationality with a conclusion that the legislature could decide that locally-owned dealers would likely be more responsive to their customers than a far-off manufacturer.

Whatever you think of Tesla’s efforts to re-imagine how cars are sold in the United States, it is a fascinating story that continues to be told all over the country. Most interesting to me is that old standards of franchise law–things like trademarks and communities of interests–continue to play a key role in the analysis even when the product being sold is a new and 21st century as automobiles that have an “insanity” mode!

Respecting a issue of great importance to the franchise community, Bloomberg Law this morning is reporting that repealing a cap on debit card transaction fees is the only issue holding up an otherwise unified Republican bill to revamp and largely repeal the Dodd-Frank Act, the Financial CHOICE Act of 2017.

Copyright: leaf / 123RF Stock Photo
Copyright: leaf / 123RF Stock Photo

Chairman Jeb Hensarling (R-Texas) told Bloomberg that the cap on debit card transaction fees is the “single most contentious portion” of the repeal bill.  The cap, also known as the Durbin Amendment, has many supporters in the retail industry. Retail believes that the fee caps promote competition and save customers money. Banks, the entities on the other side of this debate, want to repeal the Durbin Amendment.  Banks contend that the fee caps have cost them money while merchants have pocketed the savings and not passed them onto customers.

Like aspects of the fight to repeal the Affordable Care Act, repeal of the debit card transaction fee issue is one that splits Republicans yet leaves Democrats–who generally want the Durbin Amendment to remain in place–unified. Hensarling and his top lieutenants support repeal. Other top Republicans like Rep Dennis Ross (R-Fla.) support the Durbin Amendment’s caps because they believe the fees saved encourages employment growth at small businesses.  Consequently, getting to a unified Republican position on debit card fees is essential to getting the Financial CHOICE Act–a top priority of Congressional Republicans and the Trump White House–out of committee and onto the House Floor.

If you are interested in the issue of debit card transaction fees–and, if you are reading this, you probably are–now is the time to call or, better yet, write, your Congressperson and express your opinion.

Safe Step Walk In Tub Co. (“Safe Step”) failed to take the requisite “safe steps” before potentially becoming an accidental franchisor. In Safe Step Walk In Tub Co. v. CKH Industries, Inc., Safe Step filed an action against a licensee, CKH Industries, Inc. (“CKH”) for breach of contract for non-payment of certain fees. CKH filed 22 counter-claims against Safe Step including violation of the Federal Trade Commission Rule on Franchising (“FTC Rule”) as well as the state franchise laws of Connecticut, New Jersey, New York and Rhode Island for illegal franchise sales and wrongful termination of the franchise relationship. Safe Step filed a motion to dismiss CKH’s counter-claims and the Court denied that motion (in part) as further outlined below.

Under the terms of the applicable licensing agreements, CKH is the exclusive licensee permitted to market the Safe Step products in designated regions. Additionally, CKH was required to pay Safe Step a licensing fee. Lastly, there were certain addenda to the licensing agreements that regulated CKH’s business plan. Specifically, Safe Step assisted CKH with a marketing plan and could makes changes to CKH’s business model. Further, the agreements forbid CKH from offering competitive products and allowed Safe Step to terminate the licensing agreements if CKH failed to complete certain training programs.

Copyright: iimages / 123RF Stock Photo
Copyright: iimages / 123RF Stock Photo

When examining whether a franchise relationship had been formed, the Court first looked to the FTC Rule. The FTC Rule of course defines a franchise as an arrangement where the franchisee obtains the right to use the franchisor’s mark, the franchisor exerts a significant degree of control over the operation of the business, and the franchisee pays the franchisor a non-nominal fee. Here, the Court easily determined that the licensing agreements fulfilled the first and third prongs of the test because Safe Step permitted CKH to offer products under Safe Step’s marks and CKH paid Safe Step a licensing fee. Additionally, the Court held that Safe Step’s alleged involvement in the business outlined in the paragraph above may rise to the requisite level of “significant degree of control”. Further, as have many courts before it, the Court noted that it did not matter that Safe Step called the arrangement a licensing agreement.

The Court then examined the state franchise laws. The definition of a franchise under each state law is similar to the definition under the FTC Rule except that the state laws are more specific with respect to the “significant degree of control” aspect of the test. Under each state law (except for New York where the statute of limitations had already run on certain of its counter-claims), CKH had proffered enough facts to argue that its Safe-Step related operations qualified as franchises.

The outcome of this case is another cautionary tale for those companies that are structuring licensing arrangements to avoid complying with federal and state franchise laws. It is important to examine federal law and each state’s law to make sure you are taking the “safe steps” to prevent the accidental franchise relationship. As this blog has often noted, many people, including otherwise experienced business lawyers unfamiliar with franchise law, are unaware of how easy it is to form a franchise relationship under federal law and many state laws.

Menu and chef
Copyright: yarruta / 123RF Stock Photo

Over two years ago, on December 1, 2014, the U.S. Food and Drug Administration (“FDA”) published a food labeling rule requiring “chain” restaurants and similar retail food establishments to list calorie information on menus and menu boards, including food on display and self-service food (the “Rule”). On May 5, 2017, the FDA will begin enforcing the Rule. Businesses covered by the Rule must be in compliance by May 5, 2017.

The Rule implements the nutrition labeling provisions of the Patient Protection and Affordable Care Act of 2010, which is intended to give consumers direct, point-of-purchase access to nutritional information, including the calorie content of foods. When the Rule was published, we blogged about the Rule’s impact on restaurants and vending machines.

Who does the Rule apply to?

The Rule applies to any chain and franchised food business which meets the following criteria:

  1. It is part of a system with 20 or more locations;
  2. All of the restaurants or food establishments in the chain do business under the same name; and
  3. All of the restaurants in the chain offer for sale substantially the same restaurant-type food menu items.

What must covered businesses do?

Covered businesses are required to determine and disclose to consumers the nutritional content of the food they serve, including by:

  1. Disclosing calorie information on menus and menu boards for standard menu items;
  2. Posting a succinct statement concerning suggested daily caloric intake on menus and menu boards; and
  3. Posting on menus and menu boards a statement that written nutrition information is available upon request.

The Rule was originally slated to come online on December 1, 2015. In response to multiple requests from stakeholders to give businesses more time to comply, the FDA extended the compliance deadline until December 1, 2016. However, per applicable law, the Rule could not be enforced until one year after the FDA published a Level 1 guidance with respect to nutrition labeling of standard menu items. The FDA did so on May 5, 2016, extending the enforcement deadline until May 5, 2017. Recently, the FDA made clear that May 5, 2017 was the deadline for both compliance and enforcement 017.

In addition to the Rule itself, food establishments affected by the Rule should review the FDA’s Small Entity Compliance Guide, which restates the Rule’s requirements in plain language. The Guide is organized in a question/answer format. We’ve previously blogged in detail on the Guide, which includes information on multiple topics, including:

  • What establishments the Rule does and does not cover;
  • What types of food the Rule does and does not cover;
  • How to label menus and other displays with nutritional information; and
  • How to determine nutritional content of foods, including how to substantiate menu labels to the FDA.

Additional industry guidance is also available at the FDA’s website.

The Rule is highly detailed and includes requirements for restaurants to substantiate their nutritional information claims and clarifies how the Rule will be enforced. Experienced counsel can help businesses understand whether they are affected and, if so, how best to satisfy the new standards.

Today, we continue our look at proposed changes to Florida’s franchise laws, including proposed changes in transferring franchised businesses, franchisor repurchase obligations and other miscellaneous changes

TRANSFERRING FRANCHISED BUSINESS

The Act prohibits a franchisor from restricting a franchisee’s ability to transfer its franchised business if the franchisee complies with franchisor’s “reasonable” transfer conditions, and the potential purchaser meets the qualifications for new and renewing franchisees. The Act fails to define what a “reasonable” transfer condition would be. Further, a franchisor must make the list of qualifications available to the franchisee creating an additional, unnecessary burden on franchisors.

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Copyright: solerf / 123RF Stock Photo

REPURCHASE OBLIGATIONS

If a franchisor is ends a franchise relationship via termination, non-renewal or expiration, a franchisor must repurchase at fair market value all inventory, supplies, goods, fixtures, equipment and furnishings of the franchised business. A franchisor even has to compensate the franchisee for the “goodwill” of the franchised business. Nearly all franchise agreements expressly state that any goodwill derived from the franchised business is owned by the franchisor. The Act would turn this point on its head. Further, the Act fails to define how the goodwill of the franchised business will be quantified.

These provisions would also apply if a franchisee dies or is incapacitated during the term of the franchise agreement. The successor has one year to exercise this right. Furthermore, if a franchisor fails to purchase the items required to be repurchased, the franchisor is civilly liable for the entire value of those items plus the franchisee’s reasonable attorney fees and expenses. This is a steep penalty for failure to comply with this section.

MISCELLANEOUS OBLIGATIONS

Additionally, the proposed law requires franchisors to fully indemnify franchisees against any loss or damage arising out of any claim involving misrepresentation, breach of warranty, negligence, strict liability, manufacture, assembly or design of goods or any other function which is beyond the control of franchisee. This indemnification seemingly has no limits and would likely unnecessarily burden the franchisor.

Lastly, the Act prohibits certain conduct including: (i) any effort to sell or establish more franchises than is reasonable for the market area; (ii) coercing a franchisee to enter into an agreement by threatening to cancel the franchise agreement; (iii) using false or misleading advertisement; (iv) willfully discriminating against a franchisee; (v) requiring a legal release from claims under the Act; or (vi) “competing” with a franchisee within its exclusive territory. One of the problems with these prohibitions is that the Act fails to provide a definition of what it means to “compete” with a franchisee by failing to take alternative channels of distribution into consideration.

PENALTIES AND CONCLUSION

Not only are the substantive provisions of the Act onerous and unreasonably restrictive, the penalties for failure to comply with the Act are significant. Specifically, a franchisee can receive a judgment of all of the money it invested in the franchised business, including losses and damages, as well as attorneys’ fees, if it is successful in its lawsuit under the Act. Additionally, the Florida Department of Legal Affairs may institute an action under the Act and impose fines.

If the Act is signed into law as currently written, it will likely cause a substantial influx of franchisee lawsuits.  Additionally, fewer franchisors will offer and sell franchises in Florida. The Act is in its early stages of development so it is yet to be seen what, if any at all, portions of the law will pass in Florida.

Two state legislators from Florida recently introduced a bill entitled “Protect Florida Small Business Act” (the “Act”), which could actually have the exact opposite effect on franchise relationships in Florida. While many states regulate the franchisor-franchisee relationship through franchise registration and restrictions on termination and non-renewal rights, this proposed legislation would implement some of the most extensive regulations on the franchise relationship in the United States.

APPLICABILITY

First, the Act is not explicitly clear about what agreements and parties it applies to. The Act states that it applies to all Florida residents, those domiciled in Florida, and those whose franchised business is, has been, or will be operated in Florida. However, the Act states that it also applies to any franchisor who “engages in an agreement within Florida.” This means that it may apply to all franchisors headquartered in, or operating out of, Florida.

Additionally, the Act states that it applies to any franchise entered into, renewed, amended or revised after the Act is instituted but also provides that it applies to any written or oral agreement between the parties as well as any existing franchise of infinite duration. These ambiguities leave franchisors in the dark and make the Act ripe for controversy.

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Copyright: captainvector / 123RF Stock Photo

TERMINATION AND NON-RENEWAL

Second, the Act prohibits a franchisor from terminating a franchise agreement except for good cause. Good cause is defined as the failure of a franchisee to substantially comply with the reasonable and material requirements of the franchise agreement. Unfortunately, the Act does not provide any guidance as to what would be considered a “substantial” noncompliance or a “reasonable and material” provision, which could result in an increase in frivolous lawsuits.

Further, the Act requires that a franchisor give a franchisee no less than 90 days’ notice of termination and at least a 60-day cure period to cure almost all defaults. This is longer than nearly any cure period imposed by contract or state law. As with other state franchise statutes, there are some exceptions to this 60-day cure period due to franchisee’s abandonment, bankruptcy, failure to comply with any law or regulation, felony conviction and certain other suits or actions against the entity.

Under the Act, a franchisor may not refuse to renew a franchise agreement unless the franchisor provides the franchisee with at least 180 days’ notice. Further, termination of the franchise must be proper under the Act or the franchisor must be completely withdrawing from distributing its products or services in the geographic market. The Act does not provide any definition as to what would constitute “completely withdrawing” from the region, leaving more room for interpretation and litigation. It also does not contemplate any alternative channels of distribution for products and services.

Additionally, the franchisor has to waive its right to enforce any non-competition covenant against a franchisee if it refuses to renew the franchise agreement. Furthermore, if a franchisee receives a notice of non-renewal, it may request an arbitration during that 180-day notice period for a determination as to whether such non-renewal is proper. The franchise agreement remains in effect until the determination is made. This could stall the expiration of a franchise agreement and future re-sales in that geographic region if the arbitration takes additional time.

 

Contributed by Judy Rost and Ryan Howe*

On February 1, 2017, the Franchises Act S.B.C. 2015, c. 35 (the “Act”) came into force in the province of British Columbia, Canada.

What this means for franchising in British Columbia:

The most important implication for franchisors with operations in British Columbia (“BC”) will be the franchise disclosure requirements stipulated under section 5 of the Act, and as prescribed by the Franchises Regulation, B.C. Reg. 238/2016 (the “Regulation”). Much like the existing legislation in Ontario and Alberta, the Act requires that a franchisor provide a prospective franchisee with a disclosure document at least 14 days prior to the earlier of:

(a)  the signing, by the prospective franchisee, of the franchise agreement or any other agreement relating to the franchise; and
(b)  the payment, by or on behalf of the prospective franchisee to the franchisor or the franchisor’s associate, of any consideration relating to the franchise.

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This 14-day “cooling off” period is identical to the requirements in Ontario under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 and ensures that franchisees have adequate time to consider their investment in the franchise system with their legal and tax advisors without being pressured by overzealous franchisors.

An immediate benefit to franchisees in BC is that the cooling off period prevents franchisors from collecting any fees or non-refundable deposits or any other form of consideration relating to the franchise. Currently, deposits and other monetary expressions of interest are common in BC, which places additional pressure on a prospective franchisee to sign the franchise agreement. The legislation will stop this practice and provide prospective franchisees in BC with some breathing room during their deliberations.

Notwithstanding the additional costs for franchisors which will be incurred by virtue of the preparation of disclosure documents for BC franchisees, for those franchisors who are already operating in the other disclosure jurisdictions, “wrap around” language in the current disclosure document should be relatively easy to implement, given the similarities between the Act and franchise legislation in the other Canadian disclosure jurisdictions.

Unfortunately, those franchisors who are currently operating solely in BC or in other jurisdictions that do not require disclosure, will have to incur the not insignificant cost of preparing a disclosure document which meets the requirements of the Act.

Continue Reading Here’s What You Need to Know about British Columbia’s New Franchise Law