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Each year the ABA Forum on Franchising Annual Meeting offers a regulatory roundup on state disclosure and registration issues consisting of a panel of franchise examiners from some of the most difficult registration states. This past year in Palm Desert regulators from California, Maryland and Washington offered their tips, tactics and recommendations for preparing and registering franchise disclosure documents compliant with federal and state law.   Some of the most interesting takeaways to keep in mind while you prepare your FDD include:

  1. Item 3. For any litigation matter that must be disclosed in Item 3 of the FDD make sure you include all pertinent facts even if the franchisor entered into a settlement agreement with the franchisee where the parties promise confidentiality. The franchisor must disclose the settlement terms regardless of any nondisclosure agreement.
  2. Item 5. Do not forget the 14 day rule requires that no money be paid or any agreements be signed until 14 calendar days pass. California regulator, Theresa Leets, panned the surprising number of FDDs that include territory deposit agreements, option agreements or other agreements requiring the payment of a fee that is not disclosed in Item 5 of the FDD and is collected even before an FDD is distributed.   Make it clear in Item 5 when you require any payment and make sure it does not run afoul of the 14 day rule or you will get comments from state regulators.
  3. Item 10. Be mindful of indirect financing to franchisees by affiliates if you are registered in California. Although franchisors are exempt from California’s Finance Lender Law when offering direct financing to franchisees, the same exemption does not apply to affiliates.
  4. Item 13. Be sure to include a description of all intercompany license agreements In Item 13.
  5. Item 21. Conduct due diligence on your accountant. Maryland Deputy Commissioner, Dale Cantone, reminds franchisors that just because someone has a shingle, you cannot assume he or she is licensed to perform audits. During the past year eager newly hired regulators in Maryland took it upon themselves to check the license status of franchisor’s financial statement auditors and found many were unlicensed. This causes huge issues for franchisors. Use a licensed certified public accountant.

Even seasoned practitioners and franchise systems can face pitfalls when registering with states so hopefully these tips should help speed that process along!

Michelle Webster, a franchise financial legal examiner with the State of Washington Department of Financial Institutions, took a few minutes at the start of the ABA Forum on Franchising’s Annual Meeting seminar on disclosures to discuss the registration of franchise brokers in Washington. The main takeaway? If you sell franchises in Washington, then there is a good chance you need to register.

27168210 – vintage stamp with text the evergreen state written inside and map of washington, vector illustration

Third parties selling franchises on behalf of a franchisor must register as franchise brokers. The Washington Franchise Investment Practice Act prohibits a franchise broker from offering or selling franchises in Washington unless the seller is registered separately with the Washington Securities Division.    Franchisors, subfranchisors and their respective officers, managers, members, directors and employees are excluded from the broker registration requirements.   However, Ms. Webster reminded attendees that employees of an affiliate “no matter now integrated the franchisor and its affiliated companies may be.”  She explained the common example of where a franchise system offers multiple brands operated under separate legal entities, then employees of an affiliate, subsidiary or parent of the franchisor must be registered with the Washington Securities Division as a broker for all of the brands where the seller is not employed.

Remember that if you, as a franchisor, engage franchise brokers in the State of Washington, then make sure they are separately registered or else you will receive a comment letter.  The Revised Washington Code declares it unlawful for any franchisor, subfranchisor, or franchisee to employ a franchise broker unless the franchise broker is registered.  Therefore, it is important to make sure that anyone selling on behalf of your franchise system is registered or exemption.  The initial application fee is $50 and there is a $25 annual renewal fee.  The standard form can be accessed here [PDF] or you can apply online here.

International franchisors inbound into the U.S. face a complex set of business decisions and legal regulations.  Even seemingly simple tasks–like properly executing a franchise registration application–can become a time-consuming and expensive endeavor (especially where the franchisor does not have an authorized signatory in the U.S.).  Knowing how and when to request waivers can save time and money.

Notary public working on a document with stamp and padsFranchise registration applications must be signed by the franchisor’s authorized representative. In addition, some of the signatures must be notarized.  Generally speaking, satisfying this requirement requires having the signature notarized at a U.S. embassy or obtaining an apostille. U.S. embassies will have policies regarding scheduling appointments, what documents to bring, and how to prepare documents to be notarized. In addition, notarial services can be significantly more expensive at the embassy than stateside. Finally, embassy representatives are not used to seeing standard franchise applications and disclosure documents, which can cause confusion and delays.

Alternatively, the franchisor can obtain an apostille, a specialized certificate that verifies that a document is legitimate and authentic. Apostilles are only effective between countries that are parties to the Hague Apostille Convention (which is many). First, the franchisor must translate the documents into the local language so they can be notarized under local law. Then the franchisor must obtain an apostille, which ensures the documents and signature are accepted by the U.S. examiner.

Unfortunately, both options can be costly and time-consuming. Therefore, inbound international franchisors and their counsel should inquire whether the U.S. examiner will grant a waiver if obtaining an apostille or notarization will create a financial hardship and undue delay. Examiners understand there are specific difficulties to international franchising and may waive the notary requirement or permit the signatory to obtain notarization when he or she is next in the U.S.  Franchisors or counsel should contact examiners to determine how to properly make the request.  Some examiners will accept requests made in a cover letter to the application or in a preliminary email exchange.

International franchising inbound to the U.S. can be very complex. Obtaining a waiver of the notarization requirement is one less headache, which allows franchisors and their counsel to focus on the substantive issues.

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Maybe you are an international company with a successful brand that sold a master franchise or area representative right in California without knowing the robust state franchise registration laws. Maybe you are an up-and-coming pizza joint operating in Los Angeles that decide to sell a business associate the right to operate a location under you brand with your recipes in exchange for a fee without considering if it was a “franchise.”

You did not mean to violate the California Franchise Investment Act but it turns out you did. What can you do? Is there any way to “fix” your violation? The answer is yes. Although, California has a very robust and stringent state registration and disclosure process, it also provides a fair remedy for curing these non-compliance issues. The state wants to encourage self-reporting and rewards a franchisor’s attempt to do so by offering a process to bring finality to an illegal sale.

If you or your franchise system client sold a franchise in California without pre-registering with the California Department of Business Oversight, then you will need to prepare a Notice of Violation.   Instructions on preparing a compliant Notice of Violation can be found here. This is a separate application than the general application for registering the franchise offering.   Once approved, you will submit the Notice of Violation to the franchisee.  The Notice of Violation will describe to the franchisee the nature of the violation and the franchisee’s rights under the law.   However, delivery of the Notice of Violation will also start a 90 day statute of limitations clock running shortening the statute of limitation of 4 years from the illegal act or 1 year from when the franchisee discovers the violation.

In most cases, this is a much better option for a franchise system rather than waiting to see if a franchisee becomes disgruntled and reports the system to the California regulators.

Fox Rothschild LLP has deployed a new mobile app to assist companies, including franchisors, as they rush to comply with the European Union’s General Data Protection Regulation (GDPR) – a complex set of new data privacy rules with major implications for businesses.  The app – GDPR Check – helps businesses catalog their data management practices and policies to determine necessary steps to comply with GDPR when it takes effect in May.

“The pending implementation of GDPR will impact all companies that process or control the personal data of any EU citizen,” said Mark G. McCreary, chief privacy officer at Fox Rothschild and co-creator of GDPR Check.  “Every business, regardless of where it is headquartered, will be responsible for complying with these sweeping new data privacy rules when collecting or processing Personal Data,” said Daniel L. Farris, co-chair of the Fox’s Technology Group and co-creator of GDPR Check.

Even if a business does not collect personal data from EU citizens, the GDPR requirements apply to that business if it provides services to another business that must comply with GDPR.  Failure to comply with the regulations can result in fines of up to €20 million (approx. US$24.7 million) or 4 percent of global annual revenue in the prior year.

GDPR Check maps an organization’s data management practices in 17 areas that are key to determining compliance, including:

  • Types of data collected
  • Privacy policies (external and internal)
  • Consent
  • Data retention
  • Breach readiness

The app produces a report for each key area that a company can share with its attorneys and compliance team.

GDPR is intended to protect the rights of EU citizens to control the use of their personal data, including customer data such as birthdates, mailing addresses, IP addresses, product purchases and payment information, as well as supplier data, employee data and “sensitive data” such as health information, race, and sexual orientation.

This is the second app Fox Rothschild has launched in the data privacy space. The firm also maintains Data Breach 411, which provides easy access to applicable state statutes and breach notification rules to enable in-house counsel and compliance professionals, in the midst of a data breach crisis, to quickly identify controlling law and relevant guidance.

GDPR Check is available for free download in the Apple App Store and Google Play stores.

As we head into Tuesday night’s State of the Union Address, our thoughts at Fox Rothschild return to last year at the ABA Forum on Franchising Annual Meeting in Palm Desert, California.  One of the most interesting seminars was entitled “What’s New and What’s Next: The New Administration and Beyond.” In addition to reviewing updates on joint employer issues, SBA lending rules and changes to accounting rules, the session provided an interesting update on whether the FTC Franchise Rule will succumb to the Trump administration’s mandated review of all regulations.

70035381 – president holding shredded federal regulations isolated on white.

The short answer (drumroll please) is probably not, at least not anytime soon. The Federal Trade Commission was scheduled to review its 66 rules and regulations (including the FTC Franchise Rule) to determine whether they should be modified, expanded or repealed in 2018. However, the FTC decided it will not proceed with the review. Further, the administration clarified that the FTC is not subject to the Executive Order requiring that two regulations be discarded for every new regulation.   For now, it appears there may not be any immediate changes to the FTC Rule.

However, the NASAA’s Franchise Project Group chaired by Dale Cantone, Maryland Deputy Attorney General, is forging ahead with a number of initiatives. According to the session presenters, such projects include:

  1. Working with state franchise regulators to implement the new FPR Commentary [PDF];
  2. Revising the NASAA state cover page;
  3. Revising the 2008 Franchise Registration and Disclosure Guidelines [PDF];
  4. Making Risk Factors requirements uniform among states; and
  5. Developing one electronic filing system for all states to use.

Although, there may be little action on the federal level, it appears that the NASAA Franchise Project Group will continue to make strides to eliminate conflicting applications of franchise disclosures among the states and work towards standardization.  An action plan that all franchise regulatory attorneys likely endorse.

The New York State Department of Labor published proposed regulations to the Miscellaneous Industries and Occupations Wage Order in the New York State Register addressing so-called “just in time,” “call-in” or “on-call” scheduling demands facing employees. The proposed regulations, published on November 22, are subject to a 45-day comment period.

According to Governor Andrew M. Cuomo and the NYSDOL, employers sometimes schedule or cancel a worker’s shift a few hours before the shift begins, or just after it starts, which “often leave[s] workers scrambling to find child care and forces them to miss appointments, classes or important family commitments.” The proposed regulations aim to create fairness for employee pay and flexibility for employers scheduling unpredicted shifts by modifying only the Minimum Wage Order for Miscellaneous Industries and Occupations (the “Miscellaneous Wage Order”) for non-exempt employees at for-profit and certain nonprofit institutions. Importantly, the proposed regulations would not affect businesses subject to the Wage Orders for the hospitality industry, building services industry or agricultural industry. That said, they will still affect many franchised businesses.

The proposed regulations would revise the Miscellaneous Wage Order’s call-in pay requirement to create the following circumstances where non-exempt employees will be eligible to receive call-in pay:

  • Reporting to work– an employee who reports for work on any shift shall be paid for at least four (4) hours of call-in pay.
  • Unscheduled shift– an employee who reports to work for any hours that have not been scheduled at least 14 days in advance of the shift shall be paid an additional two (2) hours of call-in pay.
  • Cancelled shift– an employee whose shift is cancelled within 72 hours of the shift’s beginning shall be paid for at least (4) hours of call-in pay.
  • On-call– an employee who is required to be available to report to work for any shift shall be paid for at least four (4) hours of call-in pay.
  • Call for schedule– an employee who is required to be in contact with the employer within 72 hours of the shift’s beginning to confirm whether to report to work shall be paid for at least four (4) hours of call-in pay.

Calculation of Call-In Pay

Under the proposed regulations, call-in pay for actual hours worked (i.e. when an employee reports to work for a scheduled or unscheduled shift) shall be calculated at the employee’s regular or overtime rate of pay, whichever is applicable, less any allowances (i.e. credits) permitted by law. However, call-in pay for hours not actually worked (i.e. when an employee’s shift is cancelled or the employee is on-call or must call in for his/her schedule) shall be calculated at the basic minimum wage (based on the employer’s geographic area and size). Call-in pay for hours not actually worked will not count as payments for time worked or work performed and, therefore, need not be included in the regular rate of pay for purposes of calculating overtime. The proposed regulations also include a provision eliminating the offset amount that is currently permitted for pay exceeding the minimum wage, and also prohibiting any offset to pay from the required use of leave time.

In certain situations, the four (4) hours of call-in pay normally owed to an employee for reporting to work or for a cancelled shift may be reduced to the lesser number of hours that the employee normally works for the regular shift, as long as the employee’s total hours worked—or scheduled to work—for that shift do not change from week-to-week. The proposed regulations also contain four exceptions to the call-in pay requirements, details of which can be viewed in the accompanying Alert.

The NYSDOL insists these proposed regulations help protect minimum wage employees from unpredictable work schedule practices. For employers, the regulations offer flexibility with scheduling new shifts without a premium during the first two weeks of a worker’s employment, permit worker shift swaps and substitutions without penalty and allow for weather-related cancellations without penalty at long as 24-hours’ notice is given. As long as employers are diligent in giving employees advance notice of any schedule changes, they can avoid the call-in pay requirements imposed by the regulations.

If employers would like to submit a comment during the remainder of the 45-day comment period, they may do so by submitting any such comments to hearing@labor.ny.gov.

Employers should anticipate that the proposed regulations will be finalized without any substantial changes and plan accordingly. All managers responsible for scheduling should become familiar with the regulations’ requirements and exceptions, and employers should re-examine their scheduling practices. Employers should inform employees that scheduling changes will likely be made at least 14 days in advance in order to comply with the new regulations.

The content for this post was contributed by Fox Rothschild attorneys Glenn S. Grindlinger and Matthew C. Berger.

If your franchise–or your franchisees–operate a website that accepts user-generated content, NOW is the time to contact the Copyright Office.

Whether you realize it or not, your website probably accepts user-generated content. Examples of such content include e-commerce websites that accept product reviews, franchise-sponsored blogs that publish user comments on posted articles, and brand fandom sites that permit users to share photos or videos.

It can be very difficult for you to determine whether user-generated content posted to your brand’s website was created by the user who posted it, or whether the content infringes someone else’s copyright.

To protect your brand from being liable for copyright infringement resulting from user-generated content, since 1998 the Digital Millennium Copyright Act (DMCA) has provided a “safe harbor” from liability so long as you follow certain procedures, including:

  • not actually knowing about the infringement;
  • not financially benefiting from the infringement;
  • when gaining knowledge of infringement, acting quickly to remove or disable access to the infringing material; and
  • designating an agent to receive notifications of claimed copyright infringement, and providing the agent’s contact information to the Copyright Office.

As of December 2016, the procedures for designating a DMCA agent changed. Previously, DMCA agent designation was handled by completing a form and filing the form with the Copyright Office with a required filing fee.

Under the new DMCA agent designation procedure, all DMCA agent designations must be done online. Even entities that previously designated an agent must file an online designation to maintain their DMCA designations. Any entity that previously designated an agent with the Office will have until December 31, 2017 to use the online system to update their agent designation. You must create an account on the Copyright Office website and complete the agent designation form online.

The Copyright Office has published several video tutorials to help you understand how to use the new online designation system. Those tutorials are available on the Copyright Office website.

This lightly-edited post was drafted by my partner Jim Singer and originally appeared, in a slightly different form, on the IP Spotlight blog.

 

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Copyright: yarruta / 123RF Stock Photo

The Trump administration is moving forward with an Obama-era initiative requiring certain food establishments to list calorie information on menus and menu boards, including food on display and self-service food. The FDA recently released new draft recommendations to help affected businesses comply with the menu labeling rule.

The rule implements the nutrition labeling provisions of the Patient Protection and Affordable Care Act of 2010, which are intended to give consumers direct, point-of-purchase access to nutritional information, including the calorie content of foods. When the rule was originally published, we blogged about its impact on restaurants and followed up with a report on the Small Entity Compliance Guide, which explains the rule’s requirements in a question/answer format.

The rule has met stiff opposition and enforcement has been delayed multiple times. Most recently, just four days shy of implementation, the deadline for compliance was extended to May 7, 2018. The extension was intended to give the FDA time to consider how to reduce the rule’s regulatory burden and increase flexibility, while providing consumers with nutritional information.

The FDA’s recent guidance is non-binding and addresses stakeholder concerns regarding implementation of the rule, including:

  • Clarifying calorie disclosure requirements for self-service food, including buffets and grab-and-go food;
  • Addressing the need for flexible methods to provide calorie disclosure information;
  • Explaining the criteria for distinguishing between menus and marketing materials;
  • Addressing how the FDA will assist covered establishments to comply with the rule, and how it will enforce compliance;
  • Expanding upon the “reasonable basis” standard that covered establishments must meet when disclosing nutritional information; and
  • Explaining the criteria for determining whether establishments (including franchises) and menu items are subject to the rule.

The FDA invites public comment on the draft guidelines through January 8, 2018.  We will continue to monitor developments and the rule’s effect on franchise systems.

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

Just four days shy of the enforcement deadline, the FDA extended the date for restaurants and similar retail food establishments to comply with its menu labeling rule. The rule was originally published on December 1, 2014 and requires certain food establishments to list calorie information on menus and menu boards, including food on display and self-service food (the “Rule”). Enforcement was delayed multiple times, and the Rule was slated to go into effect on May 5, 2017. On May 1, 2017, the FDA extended the compliance deadline to May 7, 2018.

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. We’ve also reported on topics covered in the FDA’s Small Entity Compliance Guide, which restates the Rule’s requirements in plain language in a helpful question/answer format.

Intense lobbying in the final days before the compliance deadline prompted the FDA to again extend the Rule’s implementation. In the meantime, the FDA will consider how to reduce the Rule’s regulatory burden or increase flexibility, while continuing to provide consumers with sufficient nutrition information to make informed choices. The FDA has requested comment over the next 60 days, specifically inviting feedback with respect to:

  1. Calorie disclosure for signage for self-service foods, including buffets and grab-and-go foods;
  2. Methods for providing calorie disclosure information other than on the menu itself, including how different kinds of retailers might use different methods; and
  3. Criteria for distinguishing between menus and other information presented to the consumer.

We will continue to monitor the Rule’s progress and its potential effect on franchisors and franchisees.