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.

16431114 - british columbia flag british canada isolated with clipping path

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

Commentators are writing a lot about integrating millennials into the business world.  A  recent article in QSR Magazine  brings this discussion to the franchise industry by urging franchisors to target millennials as the next generation of franchise business owners.  According to the article, millennials (those born between 1980 and 2000) spend more money in restaurants per capita than any previous generation and are the largest living generation in the United States.   Millennials have the potential to be innovative managers and franchisees but are selective about finding an authentic brand that fits their lifestyle. The article quoting Dan Rowe, founder and CEO of Fransmart, says that millennials are finding successful and thriving brands through social media and seeking out franchise opportunities unsolicited.

Copyright: iqoncept / 123RF Stock Photo
Copyright: iqoncept / 123RF Stock Photo

For franchise brands looking to attract millennials as franchisees it pays to keep in mind the things that induce them to the franchise industry:

  1. Social Media Buzz. Because many millennials are well versed in public relations, technology savvy and driven by things like Yelp ratings, it pays more than ever for a franchise system to have a good social media presence.
  2. Alternative Financing.   Gone are the days when the only way to finance a new business venture was to walk into your local bank and ask for a loan. Millennials are willing and able to take advantage of funding sources available online for start-up costs. Franchisors should be aware of these financing opportunities when evaluating prospects.
  3. Understanding Their Own Weaknesses. Millennials are more honest with themselves at what they are good at and what they are not good at. Millennials are often attracted to models where a system provides the “back-end work figuring out suppliers and logistics.”

While many articles have focused on how to “deal with” millennial traits that may not be desirable to a market still filled with babyboomers and Generation Xers, this article does a good job outlining Millennials positive attributes. Franchise systems looking to expand their prospect pool should give it a read.

Contributed by Ted Jobes, Chair of Fox Rothschild’s Anti-Trust Practice Group

62267877 - a wrod cloud of brand licensing related items
62267877 – a word cloud of brand licensing related items

Updating policies that had been on the books for more than two decades, the U.S. Department of Justice and the Federal Trade Commission has issued new Antitrust Guidelines for the Licensing of Intellectual Property that replace guidelines issued by the same agencies in April 1995. Such guidelines state the antitrust enforcement policy of the agencies relating to the licensing of intellectual property protected by patent, copyright and trade secret law, and of know-how. They do not cover the antitrust treatment of trademarks.

These modernized guidelines will be fundamental to the agencies’ review and analysis of the licensing of intellectual property rights and provide guidance to businesses and the public about the agencies’ enforcement approach to intellectual property licensing. The agencies had announced the proposed update of the guidelines and made a draft available for public comment in August 2016. During a 45-day comment period, the agencies received comments from academics, industry, law associations and nonprofit organizations. After considering the comments, the agencies have revised and promulgated the Guidelines.

The 2017 guidelines embody three general principles for the purpose of antitrust analysis, stating that the agencies:

  • Apply the same analysis to conduct involving intellectual property as to conduct involving other forms of property, taking into account the specific characteristics of a particular property right;
  • Do not presume that intellectual property creates market power in the antitrust context; and
  • Recognize that intellectual property licensing allows businesses to combine complementary factors of production and is generally procompetitive.

The guidelines contain a number of substantive changes which reflect changes in the law since the 1995 guidelines were issued. In particular, they reflect a number of significant changes in statutory and case law, and intervening changes in enforcement and policy work, including the 2010 Horizontal Merger Guidelines promulgated by the Department of Justice and the Federal Trade Commission. Among other changes, the 2017 guidelines revise the treatment of resale price maintenance provisions in intellectual property licensing agreements, include updates concerning market definitions and market power, and contain changes relating to situations where an intellectual property license or transfer will be treated as a merger.

Continue Reading First Time in over 20 Years: The DOJ and FTC Have Updated their Antitrust Guidelines for the Licensing of IP

In determining whether an agency agreement between a family moving company, Ocean City Express, and an interstate moving company, Atlas Van Lines, is subject to the requirements of the New Jersey Franchise Practices Act (“NJFPA”), the federal district court in Newark (“Court”) held that a reasonable factfinder could conclude that this relationship falls within the requirements of the NJFPA in denying Atlas’ motion for summary judgment in Ocean City Express Co., Inc. v. Atlas Van Lines, Inc.

Here, Ocean brought suit against Atlas under the NJFPA for termination of a franchise without good cause after Atlas terminated the relationship effective January 2011. In response to this suit, Atlas filed a motion for summary judgment in its favor arguing that the NJFPA did not apply to this relationship because Ocean did not derive the requisite twenty percent gross sales from this relationship as outlined in the NJFPA.

Copyright: aprior / 123RF Stock Photo
Copyright: aprior / 123RF Stock Photo

In order to qualify for protection under the NJFPA, the franchise must be located or maintain a place of business in New Jersey, the gross sales of the franchisee must exceed $35,000 for the twelve months next preceding the lawsuit, and more than 20% of the franchisee’s gross sales are intended to be or are derived from the franchise relationship. Here, despite both parties admitting that Ocean actually derived less than three percent of its gross sales from the relationship with Atlas in the last fiscal year, under the NJFPA, the Court determined that it must also examine the intended revenues the parties expected to gain from this relationship.

At the outset of the relationship when the agency agreement was initially executed, Ocean earned more than $3 million in revenue from its relationship with Atlas primarily derived from its business with its largest client, Cartus. Thereafter, Atlas instituted certain policy directives that inhibited Ocean from gaining business from Cartus such that its revenues from Cartus business declined from 274 shipments in 2008 to 12 shipments in 2010. Based on this substantial decline in business Ocean derived from the relationship, the Court determined that a genuine issue of material fact existed as to whether the parties intended for Ocean to derive more than twenty percent of its gross sales from the relationship with Atlas. As such, the Court ruled that the mere fact that Ocean had not derived the requisite twenty percent floor was not enough to grant summary judgment in Atlas’ favor.

If you are a party looking to structure a deal to avoid inclusion under the NJFPA, it is important to consider not only the amount of gross sales the party is actually deriving from the relationship but the amount of gross sales the parties intend to be derived from the relationship.

The interpretation and enforcement of non-competition covenants is always a hot button issue and varies from state to state. In Our Town v. Michael Rousseau and Jennifer Rousseau, the United States District Court for the Middle District of Pennsylvania (“Court”) granted a temporary restraining order filed by a franchisor, Our Town, against its former franchisees to prohibit them from operating a competing business in direct violation of the terms of the franchise agreement.

Copyright: jossdiim / 123RF Stock Photo
Copyright: jossdiim / 123RF Stock Photo

Here, on the same day that the former franchisees sent a letter to Our Town in November 2016 to inform Our Town that it was terminating the franchise relationship, Our Town learned that the former franchisees were operating a similar publication called “Home Town” in the same geographical region as its former franchised business.

As such, Our Town filed for a temporary restraining order to prevent such competitive conduct because it violation of the franchise agreement. In interpreting non-competition covenants in franchise relationships in Pennsylvania, courts look to the rule in Piercing Pagoda, Inc. v. Hoffner, which provides that non-competition clauses will be upheld in Pennsylvania if the clause relates to a contract for the sale of goodwill or other proprietary interests, the clause is supported by sufficient consideration, and the restriction is reasonably limited in time and scope. The Court first determined that the covenant is ancillary to sale of a business interest (the Our Town franchise and its goodwill) and that the $3,800 franchise fee was sufficient consideration.

Next, the Court analyzed the language of the franchise agreement in connection with the Piercing Pagoda standard, which provided that the former franchisees could not operate any business that is similar to the former franchised business for a period of three years after the termination or expiration of the franchise agreement either at the franchise location or within fifty miles of any Our Town franchised location. Further, the franchise agreement provided Our Town with the right to seek injunctive relief for violations of the non-competition covenant. The Court held that these restrictions were reasonable because other courts in Pennsylvania had also held three-year time limits and 50-mile geographical limits to be reasonable. However, please note that the Court did not specifically rule on whether the entire geographical restriction was reasonable; only that part which applies to the operation of a competing business in the same location as the former franchised business. As such, in granting the temporary restraining order, the Court held that Our Town was likely to succeed in showing that the former franchisees acted in direct violation of the franchise agreement and that such provisions of the franchise agreement were enforceable. Further, the Court held that Our Town will suffer irreparable injury in the absence of this relief because Our Town’s legitimate business interests will be affected and the harm to the non-moving party, former franchisees, weighs in favor of granting the injunction due to the self-inflicted nature of the harm.

With that said, drafting an enforceable non-competition covenant is a very complicated task and should be approached with care. It is important to keep in mind that all restrictions must be reasonable in geography, time and scope of activities. Lastly, it is important that a franchise agreement contain language that provides a franchisor with the immediate right to obtain injunctive relief to stop such behavior.

Many franchisors have experience with the U.S. Small Business Association (“SBA”) as numerous franchisees utilize the SBA’s loan programs for small businesses. Previously, franchisors could send an application to the SBA to get on the Franchise Registry. During this process, the SBA reviewed the franchise agreement and drafted an addendum to revise the franchise agreement to avoid inclusion under the SBA’s “affiliation” rule (“SBA Negotiated Addendum”). This process was time-consuming and costly to all parties involved.

On November 22, 2016, the SBA issued an information notice to streamline the process for loan programs for franchised businesses (“Information Notice.”) The Information Notice became effective January 1, 2017. First, the SBA announced a revision to the principles of affiliation with respect to franchise programs. The SBA now focuses on whether the franchisee “has the right to profit from its efforts and bears the risk of loss commensurate with ownership.” 13 CFR 121.301(f)(5). This is the key factor in ensuring that the franchisee maintains its eligibility status as a “small business” .

Copyright: belchonock / 123RF Stock Photo
Copyright: belchonock / 123RF Stock Photo

In the Information Notice, the SBA stated that it would no longer review franchise agreements. Instead, the parties falling under the definition of a “franchise” (under the FTC Rule on Franchising) would be required to execute the new standard addendum (“SBA Standard Addendum”). Further, the SBA removed the Franchise Registry and SBA Franchise Findings List.

On February 14, 2017, the SBA issued a new policy notice outlining temporary changes to the new process for loans to franchisees (“Policy Notice”). Specifically, if a franchisor developed a SBA Negotiated Addendum with the SBA during 2015 or 2016, the franchisor can continue using that form of SBA Negotiated Addendum instead of the new SBA Standard Addendum. With that, the franchisor also has to sign the required form of certification (“Certification”), which is attached to the Policy Notice. The Certification certifies, among other things, that the SBA previously approved its SBA Negotiated Addendum and determined that the franchise relationship did not create an affiliate relationship. It also certifies that the franchisor has not revised the franchise agreement with respect to the terms that relate to affiliation.

Many franchisees utilize the SBA loan programs and it is important for franchisors and their legal counsel to be well-versed in this process to expedite the loan process . The Policy Notice expires on February 1, 2018, so franchisors must review and revise their process for franchisees seeking SBA loans.

In Gessele v. Jack in the Box, Inc., the franchise world got a win in the joint employer battle when the United States District Court for Oregon (“Court”) held that Jack in the Box, Inc. (“JIB”) was not the joint employer of certain employees of its franchisees as a matter of law using the economic reality test in granting summary judgment in JIB’s favor.

Here, several employees brought a putative class action lawsuit against JIB for violation of the minimum-wage and overtime provisions of the Fair Labor Standards Act (“FLSA”) and various other Oregon wage-and-hour laws as a joint employer. After a long litigation history that involved dismissing the first suit and the employees re-filing this suit, JIB moved for summary judgment arguing that it did not violate the FLSA or any other law with respect to the employees because it was not a joint employer.

Copyright: bluedarkat / 123RF Stock Photo
Copyright: bluedarkat / 123RF Stock Photo

In analyzing whether JIB was a joint employer of the employees, the Court utilized the “economic reality” test which outlines on four main factors including whether the alleged employer: (i) had the power to hire and fire employees; (ii) supervised and controlled employee work schedules; (iii) determined the rate and method of payment; and (iv) maintained employment records.

Pursuant to the factors listed above, JIB argued that it did not have any power to hire and fire employees, control employee work schedules, determine employee pay rate or maintain employment records citing relevant portions of the franchise agreement which state that franchisees are solely responsible for hiring and firing decisions, employee decisions and the day-to-day operations of the restaurant. Further, JIB relied on the testimony of JIB’s legal department, JIB’s franchisees and the employees themselves, which provided that the franchisees determine all conditions of employment for employees of the restaurant, are in charge of all hiring and firing decisions. Further, in actual practice the franchisees and its managers were in charge of all employment matters. The employees argued that while JIB did not have the specific authority to control these employment matters, JIB still fulfilled the economic reality test because JIB imposed very specific requirements for who the franchisees were allowed to hire, made franchisees’ employees use the designated time-keeping software and scheduling system, and maintained a collection of franchisees’ employee’s data through its required software.

In making its decision, the Court was unconvinced by the employees’ arguments and noted that the Ninth Circuit had previously found that franchisor/franchisee relationships with similar circumstances failed to surpass the requirements of the economic reality test. The Court utilized these cases as guidance for ruling in favor of JIB’s motion for summary judgment noting that the power to terminate a franchise alone is insufficient to create a joint employment relationship.

The Takeaway. It is of utmost importance to ensure that both the franchise agreement and franchise disclosure document contain language to protect the franchisor in the context of a potential case of joint employment. Best practices include making sure the franchise documents provide that all employment matters and day-to-day decisions are the sole responsibility of the franchisee. Additionally, please be aware that any court will examine the conduct of the parties and all circumstances surrounding the relationship in making a joint employment determination. As such, it is important not only to ensure that the franchise documents adequately protect a franchisor but that your actions are not in contravention to the explicit terms of the franchise documents, and that your training of franchisees and employees–especially regional staff–reflect this reality.

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

The attorneys of Fox Rothschild’s Franchising, Licensing & Distribution practice are excited to welcome associate Megan Center as she joins Fox’s franchise practice group.  Prior to joining Fox Rothschild, Megan spent four years at a well-recognized franchise boutique law firm in Philadelphia where she focused her practice on business transactions in the franchise context with an emphasis on state franchise registration and regulatory compliance.  Megan will work with the attorneys in the franchise practice group to provide general corporate and franchising counseling to start-up, emerging and established national and international franchise systems.   Moreover, as eagle-eyed readers may have already noticed, Megan will also be a frequent contributor to the Franchise Law Update.

Megan has experience drafting franchise disclosure documents, franchise agreements, consents to transfer, non-disclosure agreements and mutual release and termination agreements.   Megan’s skill and expertise are well recognized within the franchise community and she was named a 2016 Franchise Legal Eagle by Franchise Times Magazine, a prestigious list that highlights attorneys who have made significant strides in franchise law.

 

It is January and that means we are already counting down the days until the deadlines for updating your franchise disclosure document (FDD) and filing state franchise renewals are here.    Many franchisors’ fiscal year ended on December 31st.   The FTC gives a franchisor 120 days to update its franchise disclosure document (FDD) but some state deadlines many come much sooner.   Franchisors should already be gathering the information needed to update their FDD and file state renewal applications (if applicable).  Below are some quick tips franchisors should follow to ensure they meet the deadlines:

  1. Begin compiling the additional information needed to update your FDD in an organized and complete manner. This includes changes to executive personnel, disclosure of new litigation, updated financial performance representations under Item 19, and current franchise sales data for the 2016 year. If your outside or in-house counsel does not provide you with a renewal questionnaire or list of needed information to easily compile this data, then request they do so.

    Copyright: vician / 123RF Stock Photo
    Copyright: vician / 123RF Stock Photo
  2. Make sure that the outside or in-house counsel responsible for overseeing the final updates or filing state renewals are provided with accurate draft documents and other information with ample time to review, revise, comment, and finalize. Seasoned franchise counsel should have a streamlined system in place for handling updates and renewals. The starting place to this process, however, is getting accurate information from the franchisor.
  3. Pay extra close attention to states that recommend or require a renewal registration be filed in advance of the expiration date, such as California [pdf] and Rhode Island.
  4. Keep in contact with your accountants or finance division and remind them that the audited financials must be completed before April 30th. Many delays in updating an FDD will be the result of auditors not having adequate time to prepare the financials. For franchisors filing state registration renewals the deadline for the audit may be sooner. Some states require that renewal registration applications be filed days or weeks in advance of the 120 day deadline as stated above.  If you are filing state renewal registrations make sure you get your Consents of Accountant forms returned with the financials.

Failing to update or file renewal registrations on time can impede a franchisor’s ability to offer and sell. Therefore, it is important to get a head start on the process to give all parties involved adequate lead time.

50924014 - class action lawsuit concept as a plaintiff group represented by many judge mallets or gavel icons coming down as a symbol for social litigation or organized legal legislation.

Last week, the Supreme Court granted petitions for certioriari in Epic Systems Corp. v. Lewis, Ernst & Young v. Morris, and NLRB v. Murphy Oil USA.  All three cases involve clauses in arbitration agreements that require employees to waive their rights to pursue class and collective actions.

In theory, the Supreme Court will resolve a split between federal circuits and determine if employees can be compelled to litigate claims individually rather than in a class or collective action. However, because Justice Scalia’s seat remains vacant, it is possible that the justices deadlock.  In that case, the decisions of the circuit courts will be affirmed in each case and the split between the circuits will remain.

President Trump has a short list of potential nominees, but has not yet put forward a nominee for Justice Scalia’s seat that has been vacant for nearly a year.  It is unclear whether President Trump’s eventual nominee will be confirmed before these cases are decided.

In light of the Republicans’ steadfast refusal to even consider President Obama’s nominee Merrick Garland, Democrats are vowing to fight any Trump nominee.  It’s possible that the fight will be drawn out in addition to being nasty.  In order to overcome a filibuster that could block a vote on the nominee, Republicans would need 60 votes.  There are only 52 Republican senators.  Assuming every Republican votes for the nominee, some Democrats will have to jump ship before the GOP can obtain the votes needed to defeat a filibuster.

We will be keeping an eye both on the composition of the Supreme Court and these cases.