A recent article in Wired instructed employees in how to digitally erase all their stuff when they quit their jobs. The problem is that the author drew few distinctions between wiping computers of all personal items–family photographs or videos, personal emails, etc.–and company-related work product. Most franchisors and franchisees will take the position–and rightly so!–that employees’ work product on their company-issued laptops, cell phones, and voicemail accounts is company property.

The corollary to the Wired article is what the employer should shut down when an employee resigns. Whenever an employee resigns their employment, companies must be prepared to take some immediate steps:

1. Unless there are ongoing projects that the employee needs to complete, the company should shut down or limit the employee’s access to confidential and proprietary information;

2. The IT Department needs to monitor the employee’s computer activity to ensure that they are not downloading or sending to personal email confidential or proprietary documents or information, including client lists; and

3. The employee should be reminded of any existing obligations under a confidentiality or non-disclosure agreement, or company policy. While many states have adopted uniform trade secret acts, and the recently passed Defend Trade Secrets Act provides a cause of action if a company’s trade secrets are misappropriated even in the absence of a restrictive covenant, it is helpful to be able to point an employee to concrete obligations in an agreement when they resign their employment.

Post-separation, franchisors and franchisees need to be prepared to enforce their restrictive covenants. If an employee destroys or misappropriates trade secrets when they wipe their company-issued computer clean, companies should be prepared to enforce their rights.

This post was authored by Catherine Barbieri and first appeared in slightly edited form on Fox Rothschild’s Tech in the Workplace blog.

Neon NoOn September 22, 2016, California Governor Brown vetoed two pieces of franchise legislation which had been passed by both houses.  Both of these bills originated with the State Bar of California’s Franchise Law Committee.

The first bill is Assembly Bill 1782.  Effectively, Bill 1782 provided for a Limited Trade Show Exemption, which means that a franchisor can attend a trade show in California without being registered in California.  The provisions of the bill included numerous conditions for allowing a franchisor to attend these trade shows, including submission of a detailed notice to the commissioner regarding the franchisor, the posting of a conspicuous sign at the show stating that the franchisor is not legally able to offer a franchise for sale in California and the payment of a fee. Other states, such as New York, make certain allowances for franchisors to attend trade shows in state without being registered.

The Governor vetoed this legislation stating the following reasons:  “Registration gives the Department [of Business Oversight] the opportunity to review franchise disclosure documents and ensure that franchisors are providing accurate information to potential customers.  Allowing unregistered franchisors to market at these events without verifying their eligibility to do business in California is a step in the wrong direction.”

The second bill is Assembly Bill 2637.  Bill 2637 removed the present provision in California franchise regulation requiring that a franchisor disclose to a prospective franchisee all terms of the franchise agreement and related agreements which the franchisor had negotiated with other franchisees in the past 12 months in order to be exempt from an additional registration requirement for sales on terms different than those reflected in the registered franchise disclosure document.  The proposed legislation added the requirement that the original offer was of the documents registered with the state and that language must be added to the cover page or state addendum in the franchise disclosure document to the effect that the franchisor is able to negotiate the terms of the franchise agreement and related documents.

The Governor vetoed this legislation stating the following reasons:  “While it is important to promote bringing new businesses into California, doing so at the expense of transparency could be detrimental to potential franchisees, as the bill proposes to do.  The current process, which allows the Department to review contract changes, ensures that franchisees are not placed at a disadvantage in their final agreement.”

Both veto responses seem to misunderstand some of the effects of this legislation.  With respect to the trade show legislation, no transactions may take place without registration so I am not sure what additional protection this may provide.  I suspect that many trade shows may be looking for alternative venues.  Even more obvious to me, however, is the second veto.  The result will be that many franchisors will continue to refuse to negotiate or give any requested concessions to their franchisees in California.

The State Department announced that it will begin accepting applications for the FY 2018 Diversity Immigrant Visa Program—commonly called the diversity visa (DV) lottery—beginning Tuesday, October 4, 2016. Applicants who are selected and approved may apply for a green card starting on October 1, 2018.

Each year, the State Department randomly selects 50,000 immigrant visa applications from a pool of foreign national applicants who were born in certain countries with historically low rates of immigration to the United States. The State Department will accept diversity visa applications for FY 2018 beginning on Tuesday, October 4, until Monday, November 7.

Applicants who are selected in the lottery must meet certain requirements before becoming eligible to apply for lawful permanent residency (i.e., apply for a green card).

First, applicants must be born in countries that have historically low immigration rates. Individuals born in the following countries are ineligible to apply for a DV for fiscal year 2018: Bangladesh, Brazil, Canada, China (mainland-born**), Colombia, Dominican Republic, El Salvador, Haiti, India, Jamaica, Mexico, Nigeria, Pakistan, Peru, Philippines, South Korea, United Kingdom (except Northern Ireland) and its dependent territories and Vietnam. Most notably, nationals of Ecuador are eligible to apply in this year’s diversity visa lottery program, a change from being ineligible in years past. Those not born in an eligible country may still be able to apply for a DV through a spouse (if that spouse was born in an eligible country) or, in certain circumstances, through a parent.

Secondly, each DV applicant must have at least a high school education or its equivalent or, alternatively, have two years of work experience in a position that requires at least two years of education, training or experience to perform. The State Department encourages applicants to avoid procrastination in applying, as heavy demand in their application system may cause delays or other technical errors. Applicants will be able to check if they were selected in the randomized lottery starting May 2, 2017.

Employers, including franchisors and franchisees, are often interested in having a qualifying employee apply for a diversity visa in order to avoid costly traditional employment-based green card applications (such as first conducting mandatory advertisements in connection with a PERM filing with the Department of Labor). Both employers who encourage their foreign employees to apply, as well as any other prospective individual applicants, should be mindful of complex requirements in order to avoid rejection, denial or other avoidable issues throughout the diversity visa application process.

**Note: Persons born in Hong Kong SAR, Macau SAR and Taiwan are eligible.

For more information, please contact Michael W. Stevenson, who contributed this post, or any member of Fox Rothschild’s Immigration Practice.

Copyright: stuartphoto / 123RF Stock Photo
Copyright: stuartphoto / 123RF Stock Photo

My colleagues and I have posted in the past about the proposed commentary on Item 19 Financial Performance Representations (“FPR Commentary”) drafted by the North American Securities Administrators Association, Inc. (“NASAA”).   The FPR Commentary is intended to provide practitioners with clarification about how franchisors should make an FPR in Item 19 of the Franchise Disclosure Document and will answer frequently asked questions about how franchisors can make a financial performance representation (also known as an earnings claim) under federal and state franchise disclosure guidelines.

The NASAA is once again seeking public comments on a revised proposal for the FPR Commentary.  This is a second request for public comments following the feedback received on the original proposed FPR Commentary.  The original proposed FPR Commentary was released for public comment in October of 2015.

A copy of the proposed FPR Commentary with instructions on how to provide your comments can be found here.   Comments on this revised proposed FPR Commentary are due on or before October 13, 2016 and the NASAA reminds everyone after the comment period has closed, NASAA will post to its website the comments it receives as submitted by the authors. Parties should therefore only submit information that they wish to make publicly available.

Copyright: bbbar / 123RF Stock Photo
Copyright: bbbar / 123RF Stock Photo

The attorneys in Fox Rothschild’s Franchising, Licensing & Distribution practice are excited to welcome Craig R. Tractenberg as he joins Fox’s franchise practice in our Philadelphia and New York offices. Craig is the former head of the franchise practice at Nixon Peabody and also enjoys a terrific reputation as an international litigator.

All of our clients will benefit from the remarkable depth of experience that Craig brings to the table, and all of us — Craig’s new colleagues here at Fox and clients alike — will surely benefit as well from his strategic thinking and sage counsel.

Here’s a condensed version of Craig’s very impressive bio:

  • Craig is a skilled international litigator who focuses on complex business disputes involving franchises, intellectual property, licenses, business torts and insolvency issues. He has represented individuals, companies and governments in litigation before state and federal courts and in international arbitration forums such as AAA, the International Centre for Dispute Resolution (ICDR) and the International Centre for Settlement of Investment Disputes (ICSID).
  • His practice centers on developing and protecting the financial and brand equity of franchise companies, real estate projects and energy projects. For franchise companies, he regularly structures new franchise programs, many of which are international. He also defends and enforces franchise agreements.
  • Craig has prosecuted or defended fraud, defamation and unfair competition cases and also enforces and defended trade secrets and restrictive covenants in state and federal courts.
  • In international work, Craig successfully defended the Republic of Turkey against an investor claim before the International Centre for Resolution of Investor Disputes in Paris. This followed the successful defense of the Republic of Turkey before the International Chamber of Commerce Court of Arbitration in Geneva. He also successfully represented a claimant U.S. company in an intellectual property licensor’s claim brought against a Brazilian licensee before the ICDR.
  • Accolades from clients and colleagues have placed Craig on many of the most important lists of leading lawyers. For nine consecutive years, he has been included in a list of “The Best Lawyers in America” for Franchise Law in New York. He has been recognized as a “Legal Eagle” every year since 2005 by Franchise Times. In the preeminent lawyer rankings by Chambers USA, he was named as one of the leading Franchise attorneys in New York. He is also listed in the International Who’s Who of Franchise Lawyers and in “Super Lawyers.”
Copyright: wattanaphob / 123RF Stock Photo
Copyright: wattanaphob / 123RF Stock Photo

The Radio Shack bankruptcy case raised a fundamental question regarding the sale of personally identifiable customer information: Can it be done? The answer is “Probably”. (You expected anything else?)

When Radio Shack filed for bankruptcy protection, it had collected personally identifiable customer information respecting 117 million individual customers. Radio Shack had promised customers in its privacy policy that it would not “rent or sell” their personally identifiable information to any third party. In the bankruptcy proceedings, the customer information was identified as an asset. Radio Shack proposed to sell this asset for the benefit of creditors. The FTC, many state attorneys general, Verizon and AT&T objected to the proposed sale. A privacy ombudsman, permitted by the Bankruptcy Code, was also appointed by the Court.

The Bankruptcy Court ordered all parties to mediate the dispute. In mediation, a deal was reached permitting customer information to be sold. However, a number of conditions were attached to the sale. First, the buyer had to agree to be bound by Radio Shack’s privacy policy. Second, customers had to be given notice of the sale and an opportunity to “opt-out” either via email or mail, depending upon whether Radio Shack had a valid email address for the customer. Third, opt-out information had to be “prominently” posted on the Radio Shack website. Finally, the buyer was prohibited from the use of “sensitive” information, including debit/credit card information, date of birth and government IDs such as Social Security numbers.

The Radio Shack settlement provides a number of takeaways respecting the sale of personally identifiable customer information, in and out of bankruptcy:

  • Even government actors such as the FTC and state AGs appear to recognize that privacy rights are not absolute and need to be balanced against the interest driving a sale.
  • A bedrock principle is the need to honor the promises made by the company that collected the information.
  • Government regulators require an “opt-out” process.
  • Company privacy policies and disclosures should make it explicitly clear that information collected from customers may be sold and/or provided to a successor or buyer company, including if such information is sold in the context of bankruptcy.
  • Don’t ignore HIPPA, which will always apply to medical information.
Copyright: goldfinch4ever / 123RF Stock Photo
Copyright: goldfinch4ever / 123RF Stock Photo

Following on the heels of other states, Republicans in the Virginia House of Delegates have pre-filed a bill intended to override any action by the U.S. Department of Labor to make the employees of a franchisee also employees of the franchisor.  The bill is House Bill No. 1394 for the January 2017 General Assembly legislative session.  A very similar bill was vetoed by Governor Terry McAuliffe during the 2016 session.  Virginia Republicans are hoping to gain the support of enough delegates to override a potential future veto.

Similar to other states, the legislation clarifies that an employee, for purposes of Virginia labor law, is not an employee of a franchisee’s franchisor.  The following additional language proposed is added to the definition of “Employee”:  “Notwithstanding any voluntary agreement entered into between the U.S. Department of Labor and a franchisee, neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisee’s franchisor for any purpose to which this section applies.

Delegate Chris Head, who introduced the legislation, states “Small businesses are the backbone and lifeblood of our economy.  In recent years, President Obama’s National Labor Relations Board has sought to expand the influence of labor unions over small business franchises to the detriment of their hard working employees. This legislation protects employees from the overreaching federal government and overzealous labor unions.  This bill is consistent with Virginia’s proud history as a right-to-work state.”

For more information, I recommend the following Bloomberg podcast interviewing Bloomberg BNA Capital Hill reporter Chris Opfer.

If your brand standards require franchisees to upgrade and improve their locations, a recent federal case demonstrates how thoughtful disclaimers and disclosures can shut down a franchisee lawsuit in its early stages. 

In Devayatan, LLC v. Travelodge Hotels, Inc., a franchisor terminated a franchise agreement due to the franchisee’s alleged failure to improve and maintain a hotel in accordance with brand standards.  No. 6:14-cv-561-Orl-41TBS (June 24, 2016 M.D. Fla.).  The franchisee filed suit, alleging the franchisor negligently misrepresented the amount of required repairs and violated Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”).  Citing the franchisor’s multi-pronged disclosure of the franchisee’s improvement and maintenance obligations, the Court granted the franchisor’s motion for summary judgment, stopping the franchisee’s claims short of trial.

In Devayatan, a franchisee signed a franchise agreement with hotel franchisor Travelodge Hotels, Inc. (“THI”).  A prior franchisee had been operating the hotel under a franchise agreement with THI, but the hotel was in a state of disrepair and the prior franchisee was in default of its maintenance obligations.

THI put the new franchisee on notice that it would be responsible for bringing the hotel up to brand standards.  The franchise disclosure document estimated the initial investment ranged from $177K to $1.4M, depending on the condition of the property.  The franchise agreement also provided a “punch list” of items that were not in compliance with brand standards.

When the real list of repairs far exceeded the punch list (including curing multiple legal violations), the franchisee cried foul.  The franchisee claimed that the franchisor negligently misrepresented that the punch list was a complete list of required improvements.  However, the negligent misrepresentation claim required “justifiable reliance” on an incorrect statement and the FDUTPA claim required statements that were “likely to mislead.”  Thanks to thoughtful drafting, both claims missed the mark.

Several features of the FDD and franchise agreement proved valuable in defeating the franchisee’s legal claims:

  • First, the FDD disclosed a broad range of possible initial investments, and indicted that the range was based on the condition of the property.
  • Second, the franchise agreement clearly indicated that the punch list was based on a “random sample inspection” and did not purport to be a complete list based on a full inspection.
  • Third, the punch list explained that the franchisee was “responsible for ensuring that the hotel was in compliance with all applicable federal, state and local laws, codes, ordinances and regulations.” The punch list explicitly stated that such renovations were not included.

2528605_sThus, the court found the franchisee unreasonably assumed that the punch list was a complete list of repairs and that the franchisor’s statements were not likely to mislead.

Franchisors often require franchised locations to be improved and maintained according to continually evolving brand standards.  Franchisors may find it beneficial to provide a punch list of repairs or other assistance the help franchisees to meet their obligations.  However, franchisors should take care that their good deed is not punished.  Devayatan provides a few lessons:

  1. FDDs and franchise agreements should clearly state and disclose franchisee’s obligations to improve and maintain their locations and, where appropriate, disclose the amount or range of amounts for such expenses.
  2. Punch lists or similar documents should not attempt to list every single repair and improvement. Doing so may require a franchisor to bear the burden of inspection and assume the risk of any issues not included.  Any such list should clearly state that it is not a complete list.
  3. Franchisees often assume the responsibility of complying with federal, state and local laws and ordinances. If this is the case, a list of improvements and maintenance should explicitly state that it does not include renovations required for such compliance.

Unfortunately, proper disclaimers and disclosures can only make a lawsuit less likely, not prevent it altogether.  But they may help achieve dismissal in the early stages of a lawsuit, saving the money and time that would otherwise be spent at trial or in settlement.

Franchisors offering and selling franchises in Rhode Island should take note of recent amendments to Rhode Island’s Franchise Investment Act:

Disclosure Requirements

Franchisors must now provide prospects with an FDD at least 14 calendar days before the execution of an agreement or the payment of any consideration related to the franchise.  “Calendar days” include all days of the week, including weekends. The amendments delete Rhode Island’s prior requirement that franchisors provide an FDD in advance of the first meeting to discuss a franchise sale.

Advertising Requirements

Franchisors must now retain any advertising that offers to sell a franchise for 5 years (if the franchise is required to register under Rhode Island law).  The amendments delete Rhode Island’s prior requirement to file advertising with the state at least 5 days prior to its first publication.

 

Copyright: qvist / 123RF Stock Photo
Copyright: qvist / 123RF Stock Photo

The headlines regarding data hacks of the last two months from both the business world and presidential campaigns remind us that our data security is constantly under attack. Whatever you think of the campaigns this year, you need to resign yourself to the fact is that you are almost certainly going to be hacked.

I am not suggesting you should forget about electronic walls or moats or fences. You’d be foolish not to have them. But the number one thing to remember is this: 100 percent deterrence is practically impossible to come by, unless you want to unplug yourself from the web entirely. And that’s not realistic.

Because I thought they are again timely, following are a couple of observations I made about the alternative strategy of containment several months ago:

  1. Acknowledge that, while necessary, security walls and other deterrence measures are highly unlikely to be 100% effective at defeating determined hackers.
  2. Admit to yourself that breaches will occur.
  3. Have two plans in place: one for before the hack and one for after the hack.
  4. The “before” plan should include a detailed review of what data is stored on your systems and where is it stored. Map it out so you know. Also, take a hard look to see if you really need all of the data being stored. As storage has become cheaper, more and more data is being stored for longer and longer periods of time. Importantly, conduct a review with all of your vendors. In many of the high profile breaches of the last three years, vendors’ systems were used as a “back door” into the primary target.
  5. The “after” plan is what to do after you learn of a hack. This means having your IT, insurance, PR, marketing and legal team, and response plans, in place. Getting in front of the breach is essential. You want to reassure your customers and, if a franchisor, your franchisees, that you are putting their interests first.

Now is the time to develop your plans. Customer loyalty depends upon your preparation.