When was the last time you visited a Starbucks franchise? You might be surprised to learn that the answer is, “Never.” Starbucks is among the largest chains in the world not to franchise, and CEO Howard Schultz had this to say about why all Starbucks locations are company-owned: "To me, franchisees are middlemen who would stand between us and our customer… If we had franchised [as some executives wanted to in the 1980s], Starbucks would have lost the common culture that made us strong.” So, are franchisees really just “middlemen” who get in the way of providing quality service to the customer? The Value Franchisees (Can) Bring to the Table I know quite a few people who would disagree with Mr. Schultz’s assessment of the franchise model. Some would even say that it demonstrates a lack of familiarity with the nature of franchising and the franchise relationship. Franchisees are independent business owners, but this does not mean that they have any less interest in seeing their businesses succeed. If anything, their independence provides even more incentive to make sure that they meet, if not exceed, their customers’ expectations. Mr. Schultz continued: “We teach baristas not only how to handle the coffee properly but also how to impart to customers out passion for our products. They understand the vision and value system of the company, which is seldom the case when someone else's employees are serving Starbucks coffee.” Of course, franchisees, like franchisors, rely on their employees to sell their products […]

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While sharing certain similar characteristics, licenses and franchises are different relationships that, by law, must also have certain key distinctions. If you are considering a franchise or another business opportunity that involves a license, it is important to have at least a basic understanding of the unique features each type of relationship entails. The Legal Definition of a Franchise We’ll start by looking at the definition of a franchise. Under the Federal Trade Commission (FTC) Franchise Rule, a business relationship must have three essential elements in order to be deemed a franchise: The franchisee must receive, “the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark;” The franchisor must “exert or ha[ve] authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation;” and, The franchisee must “make [] a required payment or commit [] to make a required payment to the franchisor or its affiliate,” as a condition to opening for business. Certain states’ franchise laws include slightly-modified definitions, but they generally incorporate some variation of these same three key elements. In order for a business relationship to constitute a franchise, all three elements must be present. So, what happens if one is missing? In most cases, the would-be franchisee receives a license. The first element of a franchise (“the right to […]

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You own a franchise, and everything is going reasonably well. You have begun to turn a profit after a couple of years, you are getting repeat business, and you are finally starting to think that this could be something you could do successfully for a long time. Then, you get a site visit from your franchisor. It seems like it goes well, but a short time later you receive a notice identifying all of the ways that you are out of compliance with the franchisor’s current system standards, and stating that you need to make numerous costly updates in order to avoid defaulting under your franchise agreement. You make a call to another franchisee a few ZIP codes over, and she says that her outlet is a lot older than yours, and she’s sure her business is far more “outdated” than yours. So, what gives? When Franchisors’ System Standards Are Not Uniform As it turns out, there are a number of reasons why franchisors may choose to treat different franchisees differently. Despite franchisees’ expectations (and, in some cases, franchisors’ representations) that system standards will be uniformly enforced, it is not at all unusual for some franchisees to face more-onerous obligations than others. Here are just some of the reasons why: Different Franchise Agreements – When trying to figure out why your franchisor is treating you and other franchisees differently, one of the first questions to ask is: When did each of you sign your franchise agreements? Franchisors frequently update their […]

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For several years now, the franchise model has been growing in popularity as a way for established businesses to expand into new markets.  With Franchise Times publishing a list of the “Top 200 Franchise Systems,” there are many, many more franchise systems out there – with hundreds, if not thousands, of franchise systems registered in various states nationwide. You know some of the most-established franchise systems well: Subway, McDonald’s, 7-Eleven and Dunkin’ Donuts are perennially among the largest franchise chains in existence. Then, there are national chains, regional chains, local chains, all the way down to the independently-owned business with one location that is seeking to sell its first franchise opportunity. So, if you are thinking about purchasing a franchise, which way should you go? Should you buy into a big franchise system where you will be one of hundreds (or thousands) of franchisees; or, should you join the ride for a fledgling system that is seeking to expand? Three Factors Affecting Your Choice of Franchise Opportunity 1. Brand Recognition When it comes to choosing between different sizes of franchise systems, one of the most important factors can be brand recognition. The ability to instantly benefit from a known brand is a key benefit for many new franchisees, and this benefit will generally be stronger with a larger, more-established franchise system. On the other hand, maybe a beloved, local business has decided to franchise. In this scenario, you could still benefit from brand recognition without being perceived as a part […]

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If you are considering a particular franchise opportunity and have been through the franchise sales process, you probably have lots of expectations of your potential franchisor. On-site support, system-wide marketing, big-time promotional campaigns to get customers through the door – these are just a few of the benefits many franchisors tell prospective franchisees they will receive once they sign on the dotted line. But, in reality, new franchisees’ expectations are often overblown. If you thinking about buying a franchise, here are five things not to expect from your franchisor: 1. Marketing Dollars Directed to Your Territory While you may be required to make weekly or monthly contributions to a system-wide marketing fund, you are not guaranteed to see any benefit from your contributions. Take a look at your franchise agreement. What does it say about what the franchisor is actually required to do with marketing fund contributions? If you don’t see anything, it’s probably because it isn’t there. Franchisors typically retain broad control over how they choose to conduct system-wide marketing, and as a result, franchisees generally should not rely on their franchisor’s marketing efforts to promote their products or services. 2. Consistency Franchisees need to get used to inconsistency. Not all franchisees are subject to the same obligations (franchisors regularly modify their franchise agreements, and some franchisees may negotiate more favorable terms than others), and not all franchisors treat all franchisees alike. In addition, your franchise agreement may require you to make updates and adapt to system changes over […]

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If you have been researching different franchise opportunities online, you may have come across references to the term, “business format” franchise. You might even be – in fact, you probably are – considering a business format franchise opportunity. So, what exactly does this mean? Business Format Franchising 101 Most franchise opportunities today are what are known as, “business format” franchises. When you put all of the pieces together, this is ultimately a lot like it sounds. With a standard business format franchise, franchisees receive: A License to Use the Franchisor’s Principal Trademark – A license to use the franchisor’s principal trademark is a key component of the business format franchise. As a business format franchisee, you operate under the franchisor’s principal trademark—which is typically the name, or “brand,” you use to identify your business. Subway, Motel 6, RE/MAX, UPS Store – these are all examples of business format franchises. Access to the Franchisor’s System and Standards – As a business format franchisee, you also receive the right (and obligation) to use the franchisor’s system and standards to operate your business. This typically includes initial training, standard buildout plans, access to an “operations manual,” some level of ongoing support, and instructions for use of point-of-sale (POS) systems and key functionalities. The Right (and Obligation) to Sell the Franchisor’s Products or Services – The third major aspect of a business format franchise is the right to sell the franchisor’s products or services. This may include branded items, food recipes, suites of services, […]

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We are pleased to announce that the Goldstein Law Firm was recently named North America’s “Franchise Law Firm of the Year” in the 2016 edition of the Finance Monthly Global Awards. We are extremely proud of this recognition, and we are excited to share this news with our colleagues, clients and friends. About Finance Monthly Finance Monthly is a respected global publication that delivers “news, comment and analysis to those at the centre of the corporate sector.” Through multiple platforms, Finance Monthly reaches nearly 200,000 readers on a monthly basis. Finance Monthly’s headquarters are located in Lichfield, England, approximately midway between Manchester and London. About Finance Monthly’s 2016 Global Awards Winners of Finance Monthly’s 2016 Global Awards were selected through a nomination process which included client and peer research focused on “identifying the most successful organisations and advisors from around the globe.” In announcing the 2016 award winners, Finance Monthly released a statement saying: “[W]e are excited to present you a publication which contains some of the most successful and trusted firms operating in the dynamic financial sector, which will undoubtedly continue to experience growth through their commitment to excellence in 2016 and beyond.” Goldstein Law Firm’s Recognition in the 2016 Global Awards The Goldstein Law Firm was the only franchise law firm to be recognized among the approximately 130 winners worldwide. As published in the 2016 Global Awards: “Although Jeff Goldstein and the Goldstein Law Group are known as exceptional negotiators, they are also recognized as commanding litigators in […]

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Whether you are seeking to sell your franchised outlet or buy an existing franchise as opposed to an independent business, it is important to understand that franchisors often exercise strict control over the transfer process. To a certain extent, this is understandable: Franchisors have a legitimate interest in controlling who operates under their brand and system, and as a result evaluating a transferee should involve much the same process as evaluating a completely new franchise prospect. However, for any of a variety of reasons, some franchisors take their control over franchise transfers too far. As a result, if you are considering buying or selling an existing franchised outlet, here are some key transfer provisions to keep in mind: Common Transfer Restrictions in Franchise Agreements 1. Franchisor Consent to Transfer First, you can be almost certain that the current franchise agreement contains a provision that requires the franchisor’s consent in order to transfer the business. If the current franchisee hired an attorney before purchasing the franchise, he or she may have negotiated a “reasonableness” limitation (i.e. “The franchisor’s consent to transfer cannot be unreasonably withheld”) into the agreement. In addition, state law may require the franchisor to exercise its contractual rights in good faith. However, these are both subjective standards, and obtaining franchisor consent can often be a significant hurdle in the franchise transfer process. 2. Transferee Approval Along the lines of a consent requirement, many franchise agreements also state that the transferee is subject to franchisor approval. Ideally, this approval […]

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Whether you are considering buying a franchise or you are facing a legal dispute with your franchisor, it is important to make an informed choice about your legal representation. While you certainly want an attorney who devotes his or her practice to franchise law and franchise-related issues, this shouldn’t be your only consideration. For a variety of reasons, it is also important that you hire an attorney who exclusively represents franchisees. Three Reasons to Hire a Lawyer Who Exclusively Represents Franchisees Here are three reasons why current and prospective franchisees should strongly consider choosing a lawyer whose practice does not include representing franchisors: 1. Focused on the Issues from the Franchisee’s Perspective. First, when an attorney splits his or her time between representing two different client bases, he or she is necessarily going to split time between protecting those client bases’ respective interests. This issue is magnified when each client base’s interests are diametrically opposed to the other’s. For example, let’s take the increasingly-complex issue of franchise renewal. If your lawyer only represents franchisees, he or she will consistently be approaching franchise agreement negotiations and renewal scenarios from the perspective of, “How can I make sure my client has the greatest amount of flexibility when it comes to choosing whether or not to renew?” On the other hand, an attorney who also represents franchisors will have to spend time focusing on ways to make their franchisor clients’ agreements more restrictive while maximizing franchisor control. 2. No Conflicts of Interest. Beyond […]

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Franchise and Distribution Litigants Seeking Damages Awards are in For a Rocky Ride – We Can Help You My article last month on franchise termination litigation set forth a somewhat detailed assessment of the law of damages in a franchise termination context, concluding in part that: In franchise and antitrust distribution law there is no more exasperating, elusive and esoteric issue than damages. This analytical muddle threatens franchisors and franchisees alike. Further, the doctrinal failure regarding franchise damages is so robust that it has extensively infected damages theory, methodology, and calculation. The Predictably Unpredictable Legal Morass of Franchise Termination Damages, Jeffrey M. Goldstein (August 2016) Within a month of publication of that article another franchisee litigant in Florida federal court, seeking about $7 Million, was unable to successfully run the franchise litigation damages gauntlet. HRCC Ltd. v. Hard Rock Cafe International et al., CA 6:14-cv-02004, U.S. District Court for the Middle District of Florida (September 13, 2016). In Hard Rock, the franchisee’s damages claim was categorically rejected by a federal district court judge granting the franchisor’s motion for summary judgment on the eve of trial. Background Facts of the Franchise Termination Abstracting from the numerous esoteric legal-entity distinctions associated with the many related corporate entities in the Hard Rock case, it appears that the franchisee, HRCC, LTD. (“HRCC”), which operated a restaurant in Nassau, the Bahamas, fell behind in paying its required royalties in 2013 and was terminated in 2014. As expected, the franchisor sued for purported lost future royalties and the […]

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