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On February 7, 2020, the International Franchise Association (IFA) published an article expressing its strong opposition to the Protecting the Right to Organize (PRO) Act (H.R. 2474), which passed in the U.S. House of Representatives on February 6. The PRO Act proposes to codify the National Labor Relations Board’s (NLRB) joint-employer standard adopted in its highly-controversial Browning-Ferris decision from 2015. It would also adopt certain aspects of the California state court decision of Dynamex Operations West v. Superior Court, which created a so-called “ABC” test for determining whether an individual should be classified as an independent contractor or an employee. According to the IFA: “This bill would pose a massive threat to America’s 733,000 franchise businesses and the 7.6 million workers they employ. Already, the joint employer standard that this bill seeks to codify has cost the franchise industry $33.3 billion per year and led to a 93% increase in joint employment litigation. . . . [The PRO Act] could have the detrimental impact of turning every franchise owner into a de-facto employee of the brand.” The Protecting the Right to Organize (PRO) Act (H.R. 2474) In its current form, the PRO Act, if enacted, would create a new standard for joint employment that follows the NLRB’s Browning-Ferris decision. In pertinent part, H.R. 2474 states: “Section 2(2) of the National Labor Relations Act (29 U.S.C. 152(2)) is amended by adding at the end the following: ‘Two or more persons shall be employers with respect to an employee if each such […]

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A recent article on 1851franchise.com discusses three ways that artificial intelligence (A.I.) has already made its way into the franchise industry, with a particularly-high adoption rate in the restaurant sector. Start-ups and well-established franchised brands are utilizing A.I. in a variety of ways—and they are forcing their franchisees to utilize A.I. as well. As a current (or prospective) franchisee, what do you need to know about the franchise industry’s acceptance of A.I. as a business development tool, risk mitigation tool and go-to-market strategy? Here are answers to some commonly-asked questions from national franchise attorney Jeffrey M. Goldstein: Q: How are Franchisors Requiring Franchisees to Make Use of A.I.? While artificial intelligence as something other than a sci-fi fantasy is still difficult for many people to grasp, the truth is that many companies are already using A.I. in many different ways. Within franchising, companies are utilizing A.I. for everything from tracking (and responding to) consumer sentiment to taking orders in-person and online. Q: Who Bears the Cost of Adopting New A.I. Technologies? Predictably, franchisors are forcing franchisees to bear the cost of adopting new A.I. technologies. Franchisors almost universally reserve the right to require franchisees to adopt system “updates” at their own expense, and most franchise agreements do not place any limits on the nature, frequency or cost of updates franchisors can require. Q: Can Franchisors Force Franchisees to Abandon Old Technologies in Favor of A.I.? In most cases, yes. Uniformity and “standards” are hallmarks of the franchise system, and franchisors […]

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Lots of franchisors claim to offer “recession-proof” franchises. The basic idea behind this claim is that the products or services their franchisees offer either: (i) are so essential that people will need to pay for them no matter what, or (ii) come into even higher demand when the economy takes a downturn. While both of these make sense in theory, it is important not to lose sight of the fact that no franchise opportunity guarantees success. Even if your business is capable of surviving during a recession, this does not mean that it will survive during a recession (or even during more prosperous times). Recession-Resistant Franchise Sectors Perhaps, then, the term “recession-proof” isn’t quite as apt as “recession-resistant.” A recent article on Entrepreneur.com uses this term to describe five franchise sectors that might be less susceptible to economic contraction: Restoration Services – “[C]ompanies in the restoration business will always have customers. . . . Plus, much of the work is paid for through various types of insurance so the bulk of the bill may not fall to the homeowner.” Senior Home Care – America is getting older . . . [and] [s]enior home care allows . . . non-medical caregivers to come to seniors’ homes and help them with everyday chores they aren’t able to do themselves for a fraction of what senior living communities would charge.” Hair Care – “People may cut back on some personal grooming services, but hair care is rarely one of them. . . . […]

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As we recently discussed, franchisors typically reserve broad rights to require franchisees to adopt system changes at their own expense. A case filed in federal district court last year confirms that franchisors who include the necessary protections in their franchise agreements can mandate expensive system changes – even if the changes are undesirable to franchisees. JDS Group v. Metal Supermarkets Franchising Am., Inc. In the case of JDS Group v. Metal Supermarkets Franchising Am., Inc. (WD New York June 20, 2017), JDS Group challenged its franchisor’s requirement to replace outdated point-of-sale (POS) software with a new application it intended to implement system-wide. Despite three years of development and a total cost in excess of $1 million, JDS Group alleged that the new POS software did not function as it should. It also submitted declarations from six other franchisees complaining of serious issues with the software. Although JDS Group’s franchise agreement gave Metal Supermarkets Franchising Am., Inc. the right to mandate use of specific POS software applications, it alleged that the mandate to adopt ineffective software constituted a breach of the implied covenant of good faith and fair dealing and violated the Washington Franchise Investment Protection Act (FIPA). Under FIPA, franchisors have an obligation to deal with their franchisees in good faith, and they cannot require franchisees to adopt system changes unless the changes are justified on business grounds. The franchisor countered that the vast majority of its franchisees, “had not been forced to close their stores,” as a result of […]

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Buying a franchise is an expensive proposition. From the initial franchise fee to the reserve capital you will need for your first six to twelve months of operations, as a prospective franchisee, every penny matters. With this in mind, do you really need to speak with a franchise lawyer before you buy? If you have already made up your mind, what is the benefit of having someone review the Franchise Disclosure Document (FDD) and franchise agreement? Unfortunately, many prospective franchisees attempt to save money by foregoing a legal review, and their decision ends up costing them substantially in the years to come. 10 Reasons to Hire a Franchise Lawyer Before You Sign There are numerous reasons why all prospective franchisees should seek legal representation. Here are 10 examples: You Need to Make Sure You are Making an Informed Decision. Have you read and understood the entire FDD? What about the franchise agreement? Have you conducted adequate due diligence? Your Franchisor May be Providing Incomplete Information. Franchisors have sales funnels, and their goal is to get you to sign on the dotted line. Are you sure you have the complete story about your franchise opportunity? There Are Hidden Risks to Buying a Franchise. Is the franchisor at risk for bankruptcy or litigation? Could it lose the exclusive right to use its trademark? You Need to Know Your Obligations. Can you buy from any source you choose, or are you limited to approved products and approved suppliers? Your Franchisor Probably Has Broad […]

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There are a number of obvious risks involved in buying a franchise: Your business could fail. You could lose your investment. You could end up in litigation with your franchisor. But, along with these risks, there are a number of hidden risks as well. As a prospective franchisee, here are five important legal considerations to keep in mind: 1. The Franchisor Could Be Facing Bankruptcy or Costly Litigation. When you looked at your franchisor’s Franchise Disclosure Document (FDD), did you spend much time looking at Items 3 and 4? Probably not. These early Items are frequently overlooked, but they can provide critical insights into a franchisor’s solvency and financial stability. If your franchisor files for bankruptcy or incurs a substantial judgment in litigation, this could have devastating consequences for the franchise system as a whole. Unlikely as this may be, it is not a risk to be ignored completely. 2. The Franchisor’s Principal Trademark Could be in Jeopardy. If you are like most franchisees, one of your primary considerations in choosing a franchise was the recognizability of the franchisor’s brand. In legal terms, a brand is known as a “trademark,” and franchisors can lose their trademark rights under a variety of different circumstances. Ideally, your franchisor should have its principal trademarks registered with the U.S. Patent and Trademark Office, and it should be actively monitoring and enforcing its trademark rights. If your franchisor’s trademarks lose their exclusivity, you could lose the right to use them as well. 3. Your Territorial […]

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If your franchise agreement is set to expire in 2020, you need to make an important decision: Is it time to let your franchise rights expire; or, do you want to renew? Dealing with the expiration of your franchise agreement involves a variety of different considerations, and there are several important facts you need to know. Here is an overview of some of the key factors you will need to keep in mind: 6 Considerations for Dealing with Franchise Expiration and Renewal 1. You Need to Provide Advance Notice if You Intend to Renew If you want to keep your franchise for another term, you will need to provide your franchisor with advance notice of your intent to renew. The amount of notice you need to provide will be determined by the specific terms of your franchise agreement. 2. You Will Also Need to Satisfy the Conditions for Renewal As a franchisee, your “right” to renew is not guaranteed. Your ability to secure a renewal term is subject to various conditions (which, again, are spelled out in your franchise agreement), and you will need to satisfy all of these conditions in order to keep your franchise beyond 2020. 3. You Might Need to Deal with Your Lease as Well If you have a lease for a retail or commercial location, then you will also need to see what your lease says about term and renewal. Does your lease expire concurrently with your franchise agreement? If so, what are the conditions […]

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We saw a lot of change in the franchise industry in 2019, and all indications are that this trend will continue through 2020. Recently, Score.org published an article highlighting four trends that have the potential to have a significant influence on franchisees – and the franchise industry as a whole – in the New Year. 4 Franchise Trends Poised to Shape the Industry in 2020 Trend #1: Demographic Shifts are Influencing the Market According to Score.org, three major demographic shifts are each having their own unique impact on the franchise industry. First, the organization notes, consumer demand is now dominated by the Millennial generation. Second, Baby Boomers are buying franchises in record numbers by drawing from their long-term savings. Third, seniors are “aging out of the workforce,” and this is creating more alignment between franchise ownership and franchise patronage. Together, these three factors mean that sectors such as health and wellness may be poised to dominate the industry long-term. Trend #2: Multi-Unit Franchise Ownership is Going Mainstream “[M]ore than half of all franchise units in the U.S. are owned and run by multi-unit operators.” This has not always been the case, and Score.org attributes this shift to the growing desire among prospective franchisees to, “establish a small business empire.” While being a multi-unit owner isn’t for everyone (taking financial standing and various other considerations into account), as more prospective franchisees continue to express interest, franchisors may begin doing more to make multi-unit opportunities more accessible to all. Trend #3: Homeowners […]

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Whether you have made it your New Year’s resolution to buy a franchise or you have been planning to leave your job for years and are finally ready to take the plunge, there are some important facts you need to know if you are planning to buy a franchise in 2020. Here are five tips from franchise attorney Jeffrey Goldstein: Tip #1: Do Your Research There are more franchise opportunities available today than at any prior point in history. While several concepts that were “emerging” just a decade ago are now firmly entrenched among the industry’s leaders, there are many untested concepts out there, and franchisors’ reputations can shift dramatically in a very short period of time. So, before you settle on one particular franchise, make sure you do your research. Tip #2: Choose a Franchise Concept with Staying Power In the same vein, when buying a franchise, it is important to choose a concept with staying power. What we mean by this is that you need to try to avoid buying a fad franchise. You will be investing a lot of time and money in your new business, so you need to be reasonably confident that there will be adequate consumer demand throughout the duration of your franchise agreement. Tip #3: Focus on Technology In recent years, technology has changed the way that many franchise systems operate, and Forbes.com recently published an article on how technology will transform life as a franchisee in 2020. When you are buying a […]

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Technology has transformed the way franchisors and franchisees do business. From the introduction of electronic point-of-sale (POS) systems to the advent of social media, all types of technological innovations have made their way into the franchise realm. Recently, the rate of innovation has sped up significantly, and this means that franchisees are being asked (or forced) to adopt new technologies with increasing frequency. A recent article on Forbes.com examines six technological trends that are likely to have a big impact on franchising in 2020. While we have seen these innovations make their way into many franchise systems already, we expect even more franchisors to require franchisees to adopt these technologies in 2020 and beyond: 1. Artificial Intelligence (AI) While artificial intelligence used to be fodder for sci-fi movies, today it is an important tool for many different types of businesses. Franchisors and franchisees are utilizing AI for everything from managing inventory to anticipating market demand, and many are finding that it promotes efficiency while also providing a leg up on the competition. 2. Digital Payments Today, mobile franchisees can accept credit card payments on the go, and customers can pay at the register with a swipe of their phone. Making it easier and faster for customers to pay means that more customers are likely to buy and that the checkout process is quicker than it used to be. This is a win-win solution that we expect will become much more commonplace in 2020. 3. Delivery Apps Third-party delivery apps like […]

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