Franchise Articles

Legal Life after the Coronavirus Death for Small Businesses, Franchisees and Dealers By: Jeffrey M. Goldstein  www.goldlawgroup.com Second in a Series: COVID-19 HAS KILLED MY BUSINESS – MAY I LEGALLY TERMINATE MY CONTRACTS? Those who hope or believe that the consequences, effects, and sources of COVID-19 will soon be arrested and contained might be wondering whether their inability to have complied with their contracts, leases, and mortgages during this waiting period can lead to a subsequent termination of or suit under their agreements for failure to have fully complied with all of the contractual obligations in these contracts. Although I don’t anticipate that ‘other parties to your contracts’ individually or as a group are preparing or conspiring to terminate, default, or cancel anyone’s agreements, this does not rule out the high probability that when things return to normal (when market forces begin to work again unimpeded by the myriad current external shocks), every firm will naturally begin to focus again on ‘maximizing profits’ – the legitimate and necessary goal of individual suppliers in a free market economy. In general, whether you’re able to use COVID-19 as a legal ‘excuse’ for your inability to pay or otherwise perform during the coronavirus downtime is subject to whether the agreement in issue contains a provision or language that excuses your performance for unanticipated or unforeseen events. While many agreements contain such clauses, referred to as ‘force majeure’ clauses (clauses that excuse performance based on unexpected events such as floods, epidemics, riots, wars, etc.), […]

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When you bought your franchise, the last thing you expected was that you would end up in a dispute with your franchisor. You had a good relationship with the people you talked to, you were excited about the opportunity, and it seemed like everyone was on the same page. But now, the relationship has soured, you aren’t happy with your outlet’s financial performance, and you find yourself in need of a franchise dispute lawyer. What happens now? Coming to Terms with Your Franchisor There are a number of potential ways to resolve franchise disputes, and the options that are available depend on the specific facts and circumstances involved. For example, if you have received a notice of termination, you may need to act more quickly – and your options may be more limited – than if you were facing a dispute with regard to something like advertising approvals or adopting an expensive new point-of-sale system. 1. Attempting to Negotiate a Mutually-Agreeable Resolution Generally speaking, however, your first option will be to attempt to negotiate a mutually-agreeable resolution. Is there a misunderstanding that simply needs to be cleared up? Is it in both parties’ best interests to quickly find a way forward? If so, then your chances of negotiating an outcome that you can live with might be fairly good. Negotiating doesn’t have to mean sitting down in a board room and going toe-to-toe. In fact, in many cases, issues can be resolved with an email exchange or a few phone […]

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In January 2020, Franchise Direct published two articles, A Look at How Franchises Impact the Economy and Franchising by the Numbers, that provide a nice overview of the current state of the franchise industry. Here, franchise attorney Jeffrey M. Goldstein covers some of the highlights: 1. There are More than 750,000 Franchises in the U.S. with More than 8 Million Employees According to Franchise Direct, as of January 2020, “[i]n the United States, over 750,000 franchise establishments are operating and employ around 8.17 million people.” Franchise Direct also reports that another 13.3 million jobs are “supported by franchises.” Citing the most-recent economic data, Franchise Direct reports that gross revenue from franchisees topped $868 billion in 2016, compared with $675 billion a decade earlier. 2. Food Continues to Dominate the Franchise Industry Across all sectors, food establishments accounted for the most employment in franchising, providing just under 473,000 jobs across the country. Based on global sales data, the three most-successful U.S.-based franchises are McDonalds, 7-Eleven, and KFC. 3. Franchise Ownership Demographics are Shifting It used to be that the majority of franchise owners were middle-aged or older, and typically seeking to transition out of an unfulfilling job or use their career experience to build their own business. While this is still the case today, Franchise Direct reports that 12 percent of franchisees are now 34 years of age or younger, and more than half of franchisees (54 percent) own two or more outlets. 4.  Franchising is Expected to Continue Its Upward […]

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The Sale of a Franchise System May Imperil Franchisees’ Existing Exclusive Territories By: Jeffrey M. Goldstein      The sale of a franchise system to a new third party frequently raises the anxiety of existing franchisees on a broad array of business support issues, specifically including the potential encroachment on existing franchisees’ exclusive territories. In the instance where the new franchisor is already operating its own separate competing franchise system, the merger or acquisition can create an existential threat to those existing franchisees who, after the franchise system sale, are forced to compete with third party branded franchisees owned by the purchaser, or new franchisor. A Florida Supreme Court from 1998, prompted by a question to it from the federal appellate court in Florida, addresses an interesting permutation of this issue under Florida tortious interference law. Gossard v. Adia Servs., 723 So. 2d 182 (Fla. 1998). The case remains good law in Florida. The claim of tortious interference is interpreted broadly in Florida. The franchise business in Gossard began in 1974, when Larry Carr began operating an independent business which provided temporary nurses to health care facilities and individuals. Within a few years, Carr began selling franchises under the name Nursefinders.  In May of 1986, Richard Gossard became a franchisee when he purchased a franchise which covered, among other areas, Florida’s west coast. In 1987, Carr sold Nursefinders to Adia, and the following, year, Adia purchased Star-Med, a company also in the field of temporary nursing help business. Gossard’s franchise […]

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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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Salute to Richard Solomon This is a short tribute to Richard Solomon, Esquire, who was a great franchise lawyer. Before his passing, Richard practiced in the franchise and antitrust law areas for almost fifty years. Although Richard did not limit his representation to only franchisees, he did vigorously represent many franchisees and dealers during his career. If nothing else, Richard’s views regarding the motives and abilities of participants in the franchise world were always honest and blunt. Many times, my views were in tune with his. Richard’s articles that had been published on his firm’s old website www.franchiseremedies.com no longer publicly exist. However, some of his writings are still found on www.Bluemaumau.org  Below, I’ve taken a few interesting excerpts from the prolific writings by Richard; right below each one, I’ve set forth my brief thoughts.   The Great Conflict of Protecting Markets or Franchisees Richard Solomon October 10th, 2012 …. When the time comes to read and sign a franchise agreement, if the executives read the contract at all – and many later testify that they didn’t read any of it – they find clauses that say that the franchisor never gave any financial performance information that was not contained in Item 19 of the FDD; that no one is authorized to provide financial performance information on the part of the franchisor; that no one did provide any financial performance information about this franchise; and that if anyone did provide financial performance information, the investing executive did not rely upon […]

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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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