In a BIG win for brand owners, the U.S. Supreme Court has ruled that the plaintiff in a trademark infringement claim is not required to prove willfulness when seeking an award of a defendant’s profits under Section 1117(a) of the Lanham Act.

The high court’s unanimous decision in Romag Fasteners, Inc. v. Fossil Group Inc. settles a long-time split among the federal circuit courts regarding whether proof of a defendant’s willfulness is a prerequisite to securing a disgorgement of profits.

The Third, Fourth, Fifth, Seventh and Eleventh circuits, similarly to the Supreme Court, had not required a willfulness finding as a prerequisite to disgorgement of ill-gotten profits. However, the First, Second, Sixth, Eighth, Ninth, Tenth and District of Columbia circuits had applied a contrary rule. The Romag Fasteners decision settles the question for all trial courts, precluding a requirement that a brand owner show that the defendant acted willfully in the accused infringement.

Proving willfulness is particularly difficult for brand owners because it requires evidence of a defendant’s knowledge or intentions.

The legal question before the Supreme Court hinged on the precise text of several subsections of the Lanham Act.

For a trademark dilution claim §1125(c), the Lanham Act explicitly requires proof of willfulness as a precondition for a profits award. But it has never included such a requirement for a trademark infringement or unfair competition claim, such as the false or misleading use of trademarks under §1125(a).

In a trademark or unfair competition matter, under §1125(a), the Lanham Act creates a civil cause of action against any person who in the connection with any goods or services uses in commerce any word, term, name, symbol, or device, or any false or misleading description of fact, which is likely to:

  • cause confusion; or
  • cause mistake; or
  • deceive as to the affiliation, connection, or association of such person with another

The statutory text states that if a brand owner establishes likelihood of confusion, mistake, or deception under §1125(a), then the courts must look to §1117(a), which excludes any mention of willfulness and provides for the following types of monetary recovery: “(1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.”

At oral argument, Justices Ruth Bader Ginsburg and Neil Gorsuch questioned why, if Congress had wanted to impose a willfulness requirement, it did not simply write one into the Lanham Act. Justice Ginsburg noted that the legislature actually included “willfulness” in other parts of the statute, but failed to include it within the statutory text in §1125(a).

In the April 23, 2020 opinion, Justice Gorsuch declared that the Lanham Act’s remedies provision for trademark violations “has never required such a showing of willfulness to win a defendant’s profits.” He cautioned lower courts to resist the temptation of reading such a requirement into a law, especially when Congress “included the term in question elsewhere in the very same statutory provision.”

Justice Gorsuch wrote, “we do not doubt that a trademark defendant’s mental state is a highly important consideration in determining whether an award of profits is appropriate,” but that such a consideration “is a far cry from insisting on the inflexible precondition” of requiring a finding of willfulness.

Pursuant to the decision, the judgment of the court of appeals was vacated, and the case was remanded for further proceedings. The plaintiff, Romag Fasteners, will now be able to go back to district court and seek an award that included defendants profits, which were argued to be $6.8 million.

If you have any questions relating to this ruling or brand protection or enforcement, please feel free to contact the primary authors of this post, Patricia M. Flanagan at pflanagan@foxrothschild.com or Alex L. Braunstein at abraunstein@foxrothschild.com, or any member of our Franchise & Distribution Practice Group team.

Yesterday, legislation adding an additional $310 Billion to the Payroll Protection Program (PPP) and $50 Billion to the Economic Injury Disaster Loan (EIDL) funds  passed the Senate, and passage in the House is imminent. But the new funds will disappear quickly!

The original massive PPP and EIDL appropriations evaporated in less than two weeks. Although those funds were designed to keep small businesses alive in the face of the COVID-19 pandemic, publicly traded companies and those with strong lender relationships were reportedly pushed to the front of the line. The International Franchise Association (IFA) reports that although 98% of franchisees applied for the loans, only 12% received PPP funding – despite approval of over 61% of franchisee applications.

Addressing the funding disparity, the new authorization specifically sets aside funds for smaller businesses and minority businesses. Equally important it earmarks $60 Billion for community development financial institutions, which appears to be designed to overcome the gating processes employed by established institutions to prioritize loan applicants during the first round of funding.

But this opportunity for franchisee and small businesses to reach PPP funds won’t last for long. It’s likely that the previously-approved borrowers will get the PPP funds first, so new applicants must ACT FAST! The newly-appropriated funds may disappear in 48 hours. And Senate leader McConnell has indicated that he does not intend to ask the Senate to consider additional rescue funds until sometime in May at the earliest.

With most non-essential businesses closed across the country, it is easy to forget we are two weeks away from the April 30th Franchise Disclosure Document (FDD) update deadline for franchisors with a calendar fiscal year end.   Some franchise systems are delaying the preparation and issuance of an updated 2020 FDD and corresponding state renewal registrations. However, we found most of our clients are updating their FDD consistent with past practice and filed renewals in those states requiring registration.

One of the trickiest issues to address this year is the inclusion of Item 19 Financial Performance Representations (FPRs). On one hand, the financial data used to prepare the FPRs is based on past performance in 2019 and prior years. Therefore, compiling Item 19 FPRs consistent with past practice and in compliance with the FTC Franchise Rule and NASAA guidance, should be business as usual. On the other hand, the COVID-19 pandemic is likely to impact unit operations in the coming months, maybe years.  Some hospitality and food based concepts may never fully recover. Should any franchise system include a FPR in its 2020-2021 FDD?  We discovered one state regulator already weighing in on the issue by providing the following comment to a renewal filing:

In Item 19, we note that the Franchisor presents a financial performance representation based on the past performance of outlets prior to the COVID-19 pandemic. We further note that to slow the spread of COVID-19, many businesses have been closed or are operating on a limited basis this year. These events may significantly impact the potential performance of the franchised business. In your response letter, please explain why the Franchisor believes that it is reasonable and not misleading to present a financial performance representation based solely on results from a period prior to the COVID-19 pandemic.

This comment raises a lot of questions.  We recommend a franchise system base its approach to FPRs this year on all pertinent factors applicable to that particular system. For example:

  • What industry does the franchise system operate?  Is it likely that the system can revert to pre-COVID-19 performance levels? If it is a childcare or healthcare based concept, then consumers will likely have a need to resume patronizing the franchised units. However, non-critical entertainment concepts where people socially gather in close quarters may not recover as quickly.
  • How long does it take from signing the franchise agreement to opening? If the average time from signing to opening is over 12 months, then it is possible that COVID-19’s impact on the economy when the franchise commences operations may be less severe.
  • What is consumer profile patronizing the units? Will these consumers have discretionary income in a post-COVID 19 economy?

However, it is impossible to predict the future and know how people are going to react once society resumes. Will people rush to resort hotels for respite? Can most afford to do so? Franchisors need to make the most logical decision based on the information they have now.

It may be reasonable to include a statement that addresses the issue without slipping into prohibited disclaimer territory. For example, a statement like “the financial data was compiled prior to the time of the COVID-19 pandemic and the temporary local and state governmental restrictions on operations” may be appropriate. This reminds the prospective franchisees of the origin of the data without renouncing the performance representations. Based on our experience with state regulators, language beyond this factual statement (for example, stating that the franchisor is unable to predict how COVID-19 may impact future unit performance) is unlikely to pass regulator scrutiny.

However, a blanket conclusion that all FPRs based on accurate data from 2019 are unreasonable or misleading in the COVID-19 pandemic era is problematic. My view is that (in most cases) a lot of value remains in providing FPRs to prospective franchisees. If FPRs are made in good faith and in compliance with the FTC Rule and NASAA Guidelines, then this historical data is more useful than hurtful for a franchisee. Further, it may help in reigning in a sales broker or agent who may have a tendency to make unlawful or misleading earning statements without proper Item 19 FPRs. A complete prohibition on inclusion of FPRs does not benefit these franchisees or provide them with the information to make an informed decision. Hopefully, state regulators will craft a uniform approach to this issue to avoid potential conflicting comments and requests.

Need and speed can be a dangerous combination. Just ask Peter “Maverick” Mitchell. That’s a lesson that lenders and borrowers are discovering with CARES Act Payroll Protection Program (PPP) loans. The CARES Act’s PPP provisions promise accessible liquidity support for franchises and small businesses. Indeed, Treasury Secretary Mnuchin said PPP or Emergency Income Disaster Loans and Grants might be paid the day after applying. The early reality is proving to be far more challenging.

The overarching issue is the urgent need for funds to be released. Accomplishing that goal required quick action by the SBA, lenders and potential borrowers. The SBA had to establish rules and issue guidance; lenders needed to gear up for an avalanche of applications; and borrowers had to sift through shifting guidance from the SBA and Treasury Department to determine eligibility and to decide whether to apply. Although SBA guidance on PPP loan eligibility, process and terms issued on April 3rd, the guidance was incomplete. Lenders and borrowers are acting urgently in a very murky environment, before the $349 Billion dedicated to PPP loans runs out.

Predictably, anecdotal evidence reveals an overtaxed application system, lenders reciting requirements that are not in the Act, an SBA that had to withdraw and reissue the PPP loan application, and borrowers trying to zig-zag their way through the minefield. Apparent differences between the CARES Act and the SBA’s PPP loan guidance only add confusion to the situation.

The SBA’s PPP loan guidance assumes, often explicitly, that business recovery will be rapid and will return expeditiously to pre-virus levels. A short term and less flexible approach than might have been expected under the CARES Act is the result. For instance:

  • The Act allows flexible use of the loan to sustain business payroll, utilities, mortgage, rent and other expenses; the SBA mandates that at least 75% must be used for payroll.
  • The Act provides for loan forgiveness, with the amount being reduced proportionally in accordance with a borrower’s reduction in number of employees or salaries; SBA guidance provides that no more than 25% of forgiveness can be attributable to permitted non-payroll uses (in other words, 75% must be used for payroll).
  • The Act provides for a loan term of up to 10 years; the SBA selected a much shorter period, 2 years, with the extremely optimistic statement that “a two year loan term is sufficient in light of the temporary economic dislocations caused by the coronavirus,” and that “the considerable economic disruptions caused by the coronavirus is expected to abate well before the two year maturity date.”
  • The Act allows for deferred payments on unforgiven portions of PPP loans for up to one year; the SBA only granted a six month deferral, providing as rationale that a shorter six month deferral “is appropriate in light of the modest interest rate . . . and loan forgiveness provisions.”
  • The Act allows for an interest rate of up to 4%; the SBA selected a lower 1% (loans up to $350,000, and lower rates of ½ and ¼ % for larger loans), favorable to borrowers, expressing optimism that lenders would find the rate on a short term loan attractive.
  • The SBA also appears to have adopted rules that may discourage, rather than encourage, lenders to participate in the PPP loan program. Although the SBA afforded lenders some comfort on liability issues (e.g., instances of fraud and reliance on lender statements and documents), other aspects of SBA guidance tend to operate in the opposite direction. For example:
  • Will lenders be attracted by the 1% interest rate when the lender: (a) will need to marshal staff resources to quickly process PPP loans; (b) will be required to pay agent fees; (d) must wait for 7 weeks after providing the loan for the SBA to reimburse the expected forgiveness amount of the loan, leaving lenders to bear the risk of bad loans; and (e) may not be reimbursed for the full amount of the loan?
  • Will lenders be willing to underwrite PPP loans with the minimal guidance issued by the SBA, particularly given that the SBA document requires lenders to comply with Bank Secrecy Act (BSA) requirements?
  • Will lenders and borrowers be willing to move forward, notwithstanding that the SBA guidance is incomplete and only temporary? Additional SBA guidance on application of affiliation rules, loan forgiveness particulars, remedies for borrower violations and fraud, as well as other issues, are yet to be completed.

Will the CARES Act accomplish what Congress intended, as quickly as it intended and for as long as intended? We’re already hearing about the next funding package. How long will it take and, in the meantime, will the multitude of issues constraining PPP loans be resolved?

As franchisors, franchisees and small businesses mull their difficult choices, it’s worth noting that some states (including Florida, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minneapolis, New Mexico, Pennsylvania, Rhode Island and Wisconsin) and cities (Atlanta, Birmingham, Chicago, Denver, New York City, Philadelphia, Sacramento, San Diego, San Francisco, Seattle and Syracuse) have established emergency loan programs. Several private organizations have done likewise, often targeted at specific industry sectors but sometimes more generally directed, e.g., Main Street Lending Program, Main Street Emergency Grant Program, Amazon (benefitting Seattle), Bacardi (for restaurants and bars), FaceBook, Goldman Sachs, Google, the James Beard Foundation (food industry), JP Morgan, Kiva, Yelp (restaurants and nightlife), Wefunder, Restaurant Workers’ Community Foundation, the National Restaurant Association in Education Foundation, Opportunity funds, and Revel Systems.

Like Maverick, we see a continuing “need for speed.” Alternate funding sources will be quickly depleted. The Pennsylvania COVID-19 Working Capital Access program, for instance, has already reached lending capacity. And, while Congress is already working on additional funding for CARES Act programs, including the PPP, there’s no ETA on CARES II.

On April 3, 2020, banks commenced taking applications for the Small Business Administration’s (“SBA”),  Paycheck Protection Program (the “PPP”) loans, as provided in the Coronavirus Aid, Relief, and Economic Security Act aka the CARES Act.  At the highest level, the PPP allows eligible businesses to borrow up to 2.5x average monthly payroll costs from the last year, subject to a $10 million cap.

The SBA issued guidance with respect to the Affiliation Rules applicable to the PPP.  Affiliation determinations are significant under the PPP because the applicant and each “affiliate” is viewed as one business for purposes of calculating the number of employees.  Subject to certain exceptions, only businesses with 500 or fewer employees residing in the United States and in operation on February 15, 2020 are eligible to borrow under the PPP.

Under the SBA’s PPP guidance, entities are affiliates when one controls or has the power to control the other, or a third party has the power to control both.  It does not matter if control is exercised, just that it may be exercised.  The types of control that the guidance describes goes beyond majority ownership, but to the actual power to make significant decisions for a business – through ownership, control of a board of directors or other contractual means.

So, the good news? The affiliation rules are waived for “any business concern operating as a franchise that is assigned a franchise identifier code by the SBA”.  So, though franchisees, through their franchise agreements, system standards set by their franchisor in the franchise agreement and operating manuals, the employees of the franchisor (and potentially other franchisees) will not be counted with those of the franchised business to determine if the business has less than 500 employees, so long as the franchise has been listed on the SBA franchise registry.

Importantly, the exemption for franchised businesses listed on the SBA Franchise Registry merely means that the affiliation rules to not apply.  Under the guidance, a franchised business is eligible for a PPP loan, but if the franchise system has over 500 employees and the franchisor is not listed on the Registry, it is possible the SBA may apply the affiliation rules.  At this point, it is not certain.

Let’s face it—COVID-19 has decimated the franchise industry, along with the rest of the economy. The food service, hospitality, travel and the service sectors had very tough decisions to make almost instantly, with very little guidance. Questions persist: Can or should franchise businesses continue to operate? How can workers be protected? How can business be supported and bills paid? How long will it last, and how quickly can the industry get back on its feet?

We still don’t know the answer to the last two questions. But the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed on March 27, 2020 should help staunch the financial bleeding. CARES offers franchise businesses a liquidity lifeline in the form of loans (which can become grants), deferred payments, and tax relief. CARES is targeted to small businesses (fewer than 500 employees) but in a coup for franchising, franchises, specifically “any organization operating as a franchise that is assigned a franchise identifier code by the SBA,” are exempted from the size eligibility requirements. This is especially significant for multi-unit franchisees, whose multiple locations when combined would have exceeded the 500 employee limit. In an earlier parallel move, Congress enacted the Families First Coronavirus Response Act (FFRCA) to protect liquidity for individuals and families. The overarching intent of these massive spending bills, unprecedented in our nation’s history, is to help businesses and individuals weather the challenge of COVID-19. Neither law is intended to be a stimulus.

CARES poses tough choices to businesses that are already in shock, the result of an abrupt closure or dramatic sudden catastrophic decline in income. Should employees be laid off or retained? Is it better to off-load employee expense, normally a business’ greatest expense, or keep them employed and bear the potential burden of the increased sick pay and family medical leave payments mandated by FFRCA? If a business opts to maintain employees, will it be able to survive financially? If employees are laid off, how quickly will they return to the workplace in light of the greatly expanded and very generous unemployment benefits mandated by CARES? When the virus struck, the workforce was fully employed; there was no excess of workers. Thus, workers who are financially dissuaded from returning to work when the virus emergency ends may dampen or delay the economic recovery that is the goal of CARES.

Continue Reading CARES ACT – A LIQUIDITY LIFELINE (With tough choices for franchising)

There’s a big insurance company that uses the tag line:  Life Comes at You Fast.  I sure feel that life is coming at me very fast in this Brave New World of COVID-19.  Congress seems to agree, as it worked in record time to enact the $2 Trillion Coronavirus Aid, Relief and Economic Security or CARES Act.  We provided a quick overview of the immense new law on Friday.

The Act provides financial support for small businesses and targeted sectors of the economy, along with direct cash payments to many Americans and enhanced resources for medical support.

A really excellent chart comparing the differences in, and advantages and disadvantages of, the new SBA loan programs can be found here.

Fox Rothschild has assembled a multidisciplinary team of attorneys to guide clients in securing the assistance made available through this massive new law. Our extensive knowledge of corporate financing and lending, and specific experience in advising on Small Business Administration loans, enable us to direct clients to the smartest, most strategic options.

Visit our Coronavirus Resources page for links to free webinars, articles and charts with practical guidance for leaders of companies of all sizes. Fox attorneys are closely tracking legal and regulatory developments to help clients solve their COVID-19 challenges.  As soon as we have our franchise-specific analysis complete, we will have that posted here as well.

As the effects of the COVID-19 outbreak evolve, we here at Fox Rothschild continue to update our Coronavirus Resource Center. Today, we’ve been hard at work reviewing the historic CARES Act and its over 800 pages of provisions.

Learn what’s contained in the $2.2 trillion CARES Act stimulus package and how it will affect businesses and individuals in an alert by Lauren McKenna.

Diana Palecek and Paul Edelberg provide an overview of the financial bailout options for businesses impacted by the pandemic via the CARES Act and existing SBA programs. We continue to drill down on these provisions and expect to provide even greater detail early next week.

If you missed our March 26 webinar, The COVID-19 Financial Crisis: A Survival Guide, access the slides and audio from the presentation with Mette Kurth and Brian Shaw.

Get details on how the FDA is loosening regulations to help laboratories and commercial manufacturers expedite the development of COVID-19 testing in an alert by Margaret Davino and Nawa Lodin.

And, as appropriate, we are updating the Fox resource page and our blog with franchise specific information, including a franchise survival guide and updates to the status of state regulators. Moreover, our own Tami McKnew is working on a review of the CARES Act just for the franchising community.

Visit our page regularly and look for the “NEW” tag, which highlights the latest updates offering practical advice on how businesses and individuals can respond effectively to the pandemic.

Stay well, and stay well distanced. We want to see you soon!

This was updated on April 15, 2020, to reflect changes issued by Illinois and Indiana.

This was updated on April 6, 2020, to reflect changes issued by Virginia.

This has been updated to reflect changes issued by Florida, Hawaii, Indiana, Minnesota, New York, and Washington.

Good things come to those who wait … except when you are referring to state franchise registration timelines.  This is one of the busiest times of year for franchisors with fiscal year ends that coincide with the calendar year, as the Franchise Disclosure Document (“FDD”) for those franchisors must be updated no later April 30 of each year. This is compounded by the fact that certain franchise registration states, New York, Minnesota and Illinois to name a few, also align their franchise renewal registration timelines with the same 120-day fiscal year end. This is (likely) further compounded by deadlines for other franchise registration states generally coinciding with this timeline.

So what is a franchisor to do when a global pandemic arises during the height of franchise registration season? Thankfully, many of the franchise registration states have issued guidance extending deadlines for submissions. Because certain of the state regulatory bodies are continuing to work remotely, however, some regulators are not extending any deadlines but may be making other concessions. As such, we have put together a list, current as of March 30th, with the guidance proffered by each state regulator thus far:

California No extensions but will accept DocuSign documents, waive late fees and franchisors are strongly encouraged to submit filings through online filing system. Any paper filings must include a waiver of the automatic effectiveness.
Florida Deadlines are tolled 45 days from original date of expiration if the expiration falls within March or April.
Hawaii Deadlines extended to April 30, 2020. Online filings are encouraged.
Illinois Any franchisor that is currently and properly registered or exempted under the Illinois Franchise Disclosure Act, whose registration or exemption is due to expire between April 1, 2020 and June 1, 2020, is automatically granted an extension of 60 days from their anniversary date to file their franchise renewal application without penalty.
Indiana

Deadlines will not unilaterally be extended by the Division. The Indiana Securities Portal is fully operational and a majority of registrations can be submitted electronically. If filing through the Portal, and an item cannot be completed because of impact to business operations due to the COVID-19 pandemic, a franchisor must contact the Division for assistance. The Division is receptive to requests for certain regulatory relief.

Effective period for franchise registration that was set to expire between March 16, 2020 and May 31, 2020 is automatically extended to June 30, 2020.

Maryland

Extension of deadlines for franchise renewal registrations and exemptions that expire during the “Coronavirus State of Emergency” (announced on March 5, 2020) for 30 days after the end of “Coronavirus State of Emergency” issued by the Governor of the State of Maryland.

Franchisors may offer under a FDD that is not registered with Maryland so long as: (a) the FDD has been updated in accordance with the FTC Rule on Franchising; (b) the franchisor does not enter into a franchise agreement with the prospect until the 2020 FDD is approved in Maryland; and (c) the franchisor follows proper re-disclosure requirements with respect to the Maryland-approved FDD (including provision of the changed pages in response to Maryland).

Online submission is unavailable.

Minnesota Deadlines extended to June 30, 2020. Online filings are encouraged. Notarization requirements are waived.
New York

Franchisors are granted a 90-day extension of renewal deadline to July 29, 2020 if such renewal deadline is between March 23, 2020 and April 30, 2020 (the “Relief Period”).

A franchisor that is filing a franchise registration renewal nor an amendment may offer franchises, but not sell, until the IPB reviews the application and notifies the franchisor in writing that its FDD has been accepted.

All filings can be submitted in email form in addition to the required paper copies. The emailed copies must include a copy of the front and back of the filing fee check and include the following statement: “I will cause this filing and payment to be mailed to the Department of Law forthwith.” The email submission should be sent to: IPBFRANCHISE@AG.NY.GOV.

After email correspondence with a representative from New York, we were informed that any submissions that arrived in NY before March 11, 2020 for which no response has been received, it will need to be “re-submitted” electronically. If the franchisor received an acknowledgment, the emailed submission should be sent directly to the applicable examiner along with the acknowledgment letter. This includes send the clean copy of the FDD, the red-lined pages of the FDD, and Form A in separate attachments. If the franchisor did not receive the acknowledgment, the franchisor would need to resubmit through the general submission email noted below.

Rhode Island No penalties for registrations due in March and April (per internal guidance).
Virginia

Deadlines are extended indefinitely during the Judicial Emergency Declaration (as defined in Executive Order No. 51).

Online submission is unavailable.

Washington Deadlines will not unilaterally be extended. Online filing system is fully functional and Division has been working remotely since March 12. Division is waiving requirement for notarized documents.
North Dakota and South Dakota No extensions but can discuss issues with examiner on case-by-case basis.
Wisconsin, Michigan Pending response from regulatory body.

We are wishing all of you safety and health during this tumultuous time. We will update this list as we receive further guidance from any state examiners.

A recession is coming, if it is not already here. But this won’t be a recession like 2008. Back then, the banks threw you under the bus so that they could survive. Today, they are stronger. More importantly, they know they must partner with you. So your strategy must be different now.

Bottom line? Flexibility and fast responses from both franchisors and franchisees to changing conditions are the keys to surviving. The advice in this post may have a short shelf life because the economic environment, and governmental restrictions and aid, may change abruptly. Nevertheless, franchisors and franchisees working together provides the best chance for success.

Governmental Action

The International Franchise Association is lobbying Congress as it finalizes the CARES Act to recognize both the special role that franchised businesses play in the economy and the unique vulnerabilities of franchised businesses. The priorities of the Act are small business funding, a business interruption insurance component and a possible “Employment Insurance “ provision in order to allow employees furloughed during the crisis to receive Unemployment Insurance but remain tied to their employers for health coverage among other benefits.

Survival requires close monitoring of relief and assistance packages that are under discussion at all levels of government. Just because something essential does not pass on the first legislative initiative does not mean wisdom will be ignored on the second legislative event. Provide support for those who are arguing for your interests before government. Industry leaders have been very vocal in communicating the critical needs of our industry, and the scope of the coming crisis means that new legislation will be announced serially in the near future.

Assist in Seeking Aid

Assist franchisees and employees in applying for available and likely ever changing benefits.  For employees you cannot keep, encourage them to apply for unemployment now. You may need them in the future, and you want to show them the love even if you cannot show them the money.

Open Dedicated Lines of Communication

Communication will serve your brand best during this ordeal. Have a designated communications spokesperson and channels solely for COVID-19 issues. Set up phone meetings with your stakeholders, including key customers, suppliers and franchisees. Don’t keep them guessing or speculating. They may even offer constructive advice.

Talk to Your Suppliers, Landlords and Vendors

Reach out to your suppliers, landlords and vendors now. They are nervous and will accept your call because they know it is coming. Just like you, they are looking for information from the front lines and want to take your temperature. They want to understand the liquidity of the business and avoid surprises. They will want predictions and commitments, which are impossible in this environment. Make no commitments but communicate that we all need to work together, and when the fog clears, everyone will be back on track.

Have the Sometimes Difficult Discussion with Your Lender/Funder

Lenders and funders are poised to expect calls about debt relief, so get in line to talk with them. Then, talk to them early and often. Communications with lenders are a bit more formal than those with landlords and vendors so make sure you work with professionals and rehearse before you communicate. We anticipate that there will be a stampede for debt relief, so make sure you are at the front of the line and have positioned yourself as one of their favorites because you engage in direct, transparent conversations about liquidity. The typical deals available will be to go interest only, but if you need more, ask for more. The banks are strong, money is cheap and plentiful, and the legislation is intended to make everyone whole, so now is the time to ask for more if you need it. The federal government is singing a new tune and wants to be a friend to small business, and the banks are listening.

Liquidity Is Key, So Conserve Cash

Put new development, remodeling and re-branding plans, and other expensive projects on hold. Liquidity will be the key to survival and new facilities will mean little if you cannot exploit these expenditures right now. Same with development agreement obligations. These should be suspended, as they will be cash wasters until the business environment improves. Same with utilities and taxes. Likely no shutoffs and no heavy hand enforcement during a crisis. Make sure that you have counsel to navigate the tax issues, because you need to negotiate from a position of safety and not cross the line.

Be Flexible Respecting Royalties and Advertising Fees

Franchise royalties and advertising fees are being deferred or abated by many of the major franchisors. We have heard of total abatement for businesses that have been closed by state and/or local governmental order. For those operating on limited scope, such as takeout or drive-in only, the weekly payment of royalties and advertising have been deferred for as much as 45 days. If you are a franchisor, think in terms of good will and needed liquidity for hard hit franchisees. If you are a franchisee, ask for reasonable adjustments. Franchisors that reasonably accommodate franchisees will lead their franchisees’ other creditors into making necessary accommodations because those creditors will see that the franchisor is sharing the risk and the recognition that something must be done. Such accommodations will create good will and are necessary to maximize the likelihood of success after the COVID-19 war is over.

Check Your Insurance

Some of the proposed legislation has a business interruption component. That is no substitute for business interruption insurance coverage if you currently have it. Go to your broker and run this down. Usually this is a matter of interpretation and can require lawyering. Same with force majeure clauses in franchise agreements, leases and vendor contracts. These are pattern clauses allowing for contract performance to be suspended or cancelled in the case of war and other forces outside of the parties’ control. Particularly for cross-border contracts, these clauses will be the subject of dispute resolution and may ultimately provide the necessary leverage to avoid permanent closures. Contact the lawyers who provide help with these clauses, particularly those with international expertise where most of these clauses are interpreted, even for domestic disputes.

Restructuring Options

Franchisors should be poised to be proactive in franchisee restructuring. Franchisors can assemble a menu of governmental offerings and lead the way in discussions with key creditors. Franchisors can show how they will partner with key creditors, and maybe even subordinate royalties and advertising on a selected basis so as to maintain operations at particular sites. System wide relief should be considered in connection with workout professionals, whether they be lawyers or restructuring advisors.

Franchise companies grow through passion AND compassion for their brands,  customer needs and  franchisees. Passion and compassion is needed more than ever if operations are to survive and ultimately flourish in this economic environment. Perhaps your company should cocoon for the present so that it can come out strong when the coast is clear; maybe you need to be proactive and demonstrate how to lead the way. Each company will need to choose the best way to survive, maintain and build on brand equity. The companies that position themselves now, and which maintain their passion tempered by compassion, will be the post-war industry leaders.