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
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 such information in making his decision to invest in the franchise.
All of these clauses, plus the merger clause that says there were no promises not actually stated in the written agreement, are absolutely false. They represent a total fiction. The investing executive knows that they are false and that he did get the financial performance information and relied heavily on it in making his investment decision. But he signs the contract anyway. He also in many cases fills out a questionnaire just before the deal closes in which he is asked in writing whether he received financial performance information and if so from whom. He fills out the questionnaire saying that he received no financial performance information and signs his name to that document as well as to the franchise agreement. He has just screwed himself royally.
How will he be believable when he later claims he was defrauded through the giving of false financial performance information to induce him to buy the franchise? He won’t be. It’s that simple. Most judges wouldn’t even allow such testimony to be given in the face of his having signed those documents.
Jeff Goldstein comment on Solomon excerpt above: The Merger or Integration Clause is a major legal impediment to franchisees’ fraud claims. In some states, however, it is possible for franchisees to sidestep these case-killing clauses.
Resisting the Formation of an Independent Franchisee Association
June 24th, 2011
Independent franchisee associations vary in quality from system to system. Where they are successful and their establishment does not result in all out warfare that tends to make reconciliation unlikely, the system usually performs better for the franchisees. In most of those systems the performance of the franchisor is also healthy in the sense of long term health. The franchisor’s short term profit maximization ambitions, however, are aborted when an independent franchisee association gets going and is effectively supported and competently led/administered.
The most obvious immediate point of impact is the supply chain. The franchisor’s revenue stream from designated vendors from whom the franchisees must purchase tends to diminish, as the franchisees move to obtain competitive multi source purchasing arrangements.
Other than the extraordinary franchisee associations like the successful ones I mentioned, the normal impetus for the establishment of an independent franchisee association is to enable mass litigation/arbitration against the franchisor. It is never said in that way. It is always stated as an effort to “improve things”, to make the franchise relationship a “win win” situation. That is largely franchisee association theater. Subliminally the hope is that a sufficiently angry large group of people can experience so much frustration that they will finance large litigation/arbitration or enable some form of class action case. In the mind of the lawyer representing the franchisees, this situation will probably not reconcile amicably, and the franchisees need to become conditioned to accept ultimate confrontation as the way to success. All too often franchisor management ego plays right into the hands of that scenario. Often that is how it eventuates if the association does survive its infancy.
There are some sissy lawyers who really believe they can talk a franchisor out of revenue streams. They are few, far between and delusional. A ridiculous organization that called itself the AAFD pushed something called fair franchising standards, a California touchy feely notion of Pollyanna nonsense that no one ever took seriously. After giving Franchisor of the Year awards to a couple of scoundrels … it seems to have collapsed.
As you can see, this is not going to be a politically correct article. This is a discussion of probable realities depending upon how the events are dealt with.
There are three kinds of franchisors in this context. There is the franchisor that is openly predatory and is not in the slightest interested in anyone else’s views on what is being done or how it is being done. What the franchisees consider to be abusive and predatory, this kind of franchisor characterizes as being an example of short term profit maximization. On the other extreme is the franchisor that believes its franchisees are given every advantage that they are entitled to and that there is no predation or abuse whatsoever. What is done is permitted by the franchise agreement; is accurately disclosed in the FDD materials; and is carefully watched by the franchisor to assure that the practices are not preventing franchisee profitability. In the middle is the franchisor that is aggressive and can be seen to be insensitive and uncaring, but believes itself not to be abusive or predatory and really is not interested in being told how to run its company by a group of its licensees.
To be sure, one may come up with other categories, but this is just for the purpose of illustrating the point of this article. The point is that in each and every variable the common thread is opposition to the formation of independent franchisee associations. Frustrating them is a specialty in itself, and is not work for sissies.
How these franchisors should be represented is the theme of this article. It is not the lawyer’s job to preach or scold. It is the lawyer’s job to assure compliance with applicable laws, and, having satisfied that requirement, to seek out and raise options for consideration by franchisor management. When the options are sorted out and prioritized, it is then the advocate’s assignment to develop tactics and strategy to deal with the dissent.
One thing of which I am certain is that counterinsurgency is a myth. Counterinsurgency is that ridiculous doctrine that we used in Nicaragua, Viet Nam, Iraq and now in Afghanistan – making the indigenous population appreciate that we are really there to help them so that they adopt us as their own and hate the opposing forces. As we have seen in these other countries, the locals do not like us and would much prefer their own brand of oppressors than some foreign group known historically to have been working against their interests. The villagers will shoot at you as soon as they can get their hands on weapons, including any weapons you are stupid enough to provide for them or that they can steal because your security isn’t what you thought it was. Franchising is no different. So we don’t waste our time and resources on trying to become likable. This is business, and when the conflict has been resolved in your favor you can then start campaigning for adulation if you like. If you weren’t all touchy feely before the fight don’t expect to be believed about how much you care about them once the fight has been started. It only makes you look like a fool. Their hearts and minds will follow when you have reconfirmed your grip upon the governance of your system. Then you can waste money on popularity contests if you are still in the mood.
Jeff Goldstein comment on Solomon excerpt above: I agree with Richard that the AAFD (American Association of Franchisees and Dealers) seems not to have achieved almost any of its initial goals, and I also concur with his general sense that only a very few independent franchisee associations have been truly successful; this is despite the millions of dollars that regularly flow to the same few franchise attorneys who ‘specialize’ in representing franchise associations.
Abusive Franchises, Freedom Is Not Free
May 28th, 2011
There is a mistaken belief that what franchisees really need in order to facilitate rationalizing franchise relationships into harmonious mutual peace and profit making is a collective voice competently expressing franchisee needs to a “reasonable” franchisor. The reasons that is a mistake in so many instances is that the abusive franchisor isn’t interested in being reasonable, believing that the terms of his franchise agreement relieve him of any such obligation; what the franchisees want (what seems reasonable to them) would represent a reduced revenue from the relationship for the franchisor; and, finally, franchisors believe that once the franchisees sign contracts that provide for franchisor top down configuration of the business model, they are not required to “let the inmates run the asylum”.
In these – all too frequent these days – situations, “reasonable accommodation” is not to be found anywhere in the franchise agreement; anywhere in the law applicable to franchise agreements; or anywhere in the “art of the possible” as seen through the eyes of educated ladies and gentlemen possessed of law licenses. There are a very few exceptions.
If franchisee existence is to become rationalized, resort will have to be had to leadership that is not parlor trained, church manners, play by the rules as they are written, ladies and gentlemen. Freedom isn’t free. Running your mouth on Internet blog sites, screaming epithets at the franchisor, never accomplishes anything positive. Moreover, it so poisons the atmosphere that in response to each epithet blogged, the recalcitrant franchisor only digs in his heels that much harder.
Today there are a few misled franchisee groups running their mouths on www.BlueMauMau.org, providing us with typical examples of impotent whining and name calling on the part of disgruntled, cowardly franchisees who either do not have a clue (nor does their leadership) about how to get to YES; are too cheap to provide resources to retain competent leadership for this kind of confrontation; who believe, incredulously, that all they have to do is keep on whining and cursing and eventually the franchisor will “see the light” and come to Jesus on the subject of giving them what they want; or all of the above. These groups are doomed to failure. In their insistence that they are entitled to better circumstances by some impelling notion of fundamental fairness, they are bogged down in an impossible regimen. They believe that intractable dictatorships of franchise abuse can be brought to “justice” by whining and hurling epithets, and that some divine or quasi divine power, God or the government, will come to their aid. Could there be anything on this planet less realistic?
Leadership to facilitate rationalizing the existence of franchisees who bought into bad deals and are living with abusive franchisors is different from leadership to facilitate rationalizing life in a good business model run by a franchisor with a long view to the future viability of the system.
The tough guy punk franchisors who couldn’t care less if their franchisees go on line and call them bad names – at least not enough to change anything – must be dealt with differently.
There is a long human history of victims having to try to overcome terrible circumstances in which the situation is extremely unjust, and the rules are drastically skewed against them. None of these vignettes of history apply to the matter of solving an immediate problem of having bought into a bad deal with a bad franchisor who really – no matter what he may say about it – doesn’t give a damn. These guys are in it for present tense interests only. They didn’t form the franchise system for long terms durability in the first place. Had they considered long term interests, the franchise business model would perform in a way that enables long term durability.
Most of the people who seek to be retained by disgruntled franchisee groups are believers in the gentlemanly art of rational persuasion. They play by the rules. They espouse irrelevant notions like franchise fairness standards. No tough franchisor will ever give a damn about franchise fairness standards, and franchisees lack the resources to enthuse any government agency to come to their rescue. If it were otherwise, life would be better for these victims. This isn’t a recent phenomenon.
Effective leadership of franchisee groups in this situation has to be able and willing to change the rules – to stretch them so far that they are not even recognizable anymore – without actually violating any of them.
One of the rules that must be pushed is the apparent requirement that you tell the franchisee group you may seek to represent that you agree with them totally. Much of what franchisees believe is “wrong” is actually not wrong at all. Many franchisee notions of what should and should not be permitted are simply misplaced. The examples of these wrongheaded notions include the basis for determining when a franchisor must approve a franchise resale. The reality is that a franchisor can blow up a resale opportunity with virtual impunity under the terms of the contract the franchisees signed. That the franchisees failed to recognize the reality of this when they signed on is not grounds for changing this game. Between the franchisor’s arbitrary right – arbitrary if for no other reason than the absence of an economically affordable remedy – to refuse consent to any resale, and the franchisor’s ability to change the rules of engagement with every new agreement, including increasing the cost of the relationship itself, the capital value of your business in any resale context is never going to be what you think it is. And aside from the legal/economic analysis of this dynamic, there is the fact that on a “visit” by your buyer to franchise HQ for a screening interview, any tough franchisor can poison any resale deal just by his conduct. Tough franchisors ask why they should approve a resale or buy you out if they can default you under the contract and just take your business back for next to nothing – at most the cost of a lawsuit or arbitration that they can afford and you can’t.
What does effective militancy require?
It requires that the franchisees recognize when they are dealing with an intractable franchisor in a business destroying mode. Those two essential factors mean – in reality – that hiring leadership to reason with the franchisor is a waste of time and money. These “frat boy” office gentlemen are no match for a street smart tough guy franchisor. All he has to do is tell them in some polite and politically correct manner to go to hell, and the game is over. How go to hell is expressed includes delay, promises of consideration, propagandistic pretense to the adoption of fairer methods of dealing, and other nonsense responses that will never see the day when the talk is actually walked. The history of the now defunct AAFD franchisor appeasement club is a vignette on the subject of frat boy nonsense and bestowing BS awards upon some of the worst tyrants and opportunists of franchising. The AAFD published carefully parsed standards of franchise fairness that had no affect whatsoever upon any tough guy franchisor.
Once franchisees recognize that they are in a situation like this, they have to seek out someone who can show them how to organize effectively militant resistance and who can protect the organizers from franchisor retaliation. One of the main barriers to effective franchisee group action is franchisor retaliation against franchisee leadership. Tough guy franchisors don’t have to destroy the ineffective leaders of nonsense franchisee groups. Why bother the impotent? But they will go after effective leadership, and that leadership has to be invulnerable.
Invulnerability involves the retained leadership resource having the ability and the sheer guts to make himself the group leader so that the only place heat can be applied by the franchisor is on him. That leadership must also be capable of protecting the identity of the group leaders who are franchisees. The ways in which tough guy franchisors try to find out who is behind the movement must be known, and methods to resist that must be mastered. Lessons must be taught about how to be militant, and they must be taught by someone who is good at it, not by someone who may have read some books on it but never done it.
The franchisees must be provided with avenues of protected communication that are impenetrable by the franchisor. The retained leadership must know how to accomplish that. Password protected channels of communication are useless. Some Judas franchisee will give the franchisor his password or forward the communications to the franchisor in the hope of some inside favoritism. There are Judas franchisees in every franchisee group, and how to prevent them from imploding the group is another subject in which the leadership must be adept.
The franchisees must be told at the outset that there will be no possibility of success unless there is pervasive membership in the group and financial resources to support what is required. Protestations about not being able to afford what is called for need to be stymied. The cost of a pervasively supported franchisee organization is rarely more than the price of a pack of cigarettes a day. If franchisees can’t handle $ 1,500 a year in simple annual dues, paid in advance, they are not salvageable and will simply be written off. The truth is that the cost of not joining is far more every year than the cost of joining. Franchisees who cannot recognize that will experience what franchisees who elect to go without effective leadership experience. You cannot do this on nickels and dimes.
The lesson is that tough situations must be met with tough solutions. Tough solutions cost money, but not a prohibitive amount of money. Franchisees have to have sufficient intestinal fortitude to do what is called for, and they must be teachable. When the tough confrontation stage of franchisee group action is completed and the franchisor has come to terms in conduct as well as in words, the group can always go hire some frat boy advisor who plays by gentlemen’s rules. But until that time comes, leadership that knows how to wage the right kind of confrontation, to get the tough franchisor to recognize what is going to happen to rationalize relationship management one way or another, is the only solution.
Freedom is not free. Cowardice is incredibly expensive. It is bad enough if you bought into a really bad deal. But if you don’t do something about it by forming a militant independent franchisee association, it will eat uour guts out until you are in bankruptcy. FREEDOM IS NOT FREE!!
Jeff Goldstein comment on Solomon excerpt above: I agree with Richard that many lawyers who represent franchise groups have been retained for incorrect reasons based on unfulfillable promises, and that in the long run these groups rarely are successful. I would also add that some franchisee groups are misled by some lawyers regarding effective ways to make system progress. The problem of free-riding – both emotional and financial – inherently limits the achievement possibilities curve for franchisee groups. Out of the box intellectual lawyering is a scarce resource in the franchisee world.
The Moron’s View of Franchise Investment Risk, Fleecing the Sheep
May 16th, 2010
Year in and year out, people who understand almost nothing about small business investment risk and how to identify and assess it sign long term draconian franchise agreements, putting everything they have or will have on the line in impossible propositions.
One of their many miscalculations is an assumption that government regulations at federal and state levels are in place to protect them from being defrauded and to provide relief for them when/if they find they are in way over their heads and have been had.
Eventually they come to realize that there is no self executing relief from their predicament and that the way out – even without recovering the losses – costs a fortune; requires releasing all claims against the people who robbed them; agreement that they will not continue in the business under any other name as an independent; agreement that they will never say anything bad about those who screwed them (non disparagement clauses); and agreement that everything about the entire situation, start to finish will never be disclosed or discussed by them (confidentiality clauses).
The alternative is to hire a lawyer – which they no longer are able to afford – to seek redress. If they do have enough money for a lawyer, they often discover that (1) they waited too long to assert their claims; (2) the claimed misrepresentations were of the prospects for future financial performance and fraud is limited to misrepresentations about presently existing facts – not future predictions – and – very importantly, the misrepresentations about future financial performance ere not actually made in the FDD, but in sales and marketing materials and presentations on discovery day; (3) that they hired a cheap ass lawyer who failed to see that in their franchise agreements they were agreeing that they were never told the things they later claim to have been told that were false, and that they also agreed that if they had been told any porkies they did not rely on them in making their investment decision.
Frequently they signed agreements containing arbitration clauses, losing their potential rights to jury trial and agreeing that their “case” will be heard by a lawyer as arbitrator and that they are not allowed to ask the arbitrator if his practice or business includes doing business with franchisors whom the arbitrator expects to continue serve and would never find against in any dispute. You could ask the AAA to pose such bias clearing questions to arbitrator candidates under its Commercial Rule 16, but the AAA won’t do it. Your lawyer doesn’t even know in most instances to ask anyway as the refusal may give you an avenue of attack on an adverse award under the Federal Arbitration Act – which, by the way, does not provide as a basis to attack an arbitral award that the arbitrator failed to follow applicable law and even that the arbitrator’s rulings are contrary to controlling law/manifest disregard of applicable law. Manifest disregard is not even listed as grounds for vacating an award in the Federal Arbitration Act.
If these absurd, arrogant people had any snap at all, they would have accepted that in almost every instance none of them had ever evaluated a small business ownership investment opportunity, and therefore had no idea whatsoever how to go about sorting out the risks. They ridiculously believe that their “business plan” is a serious document and not some hoax cooked up to get a business start up loan approved. They would – before, not after subjecting themselves and their families to ruinous losses – have sought help from people who vet not only the legalities of franchise propositions, but also the business risks of franchise investing. They ignorantly assume that any business lawyer will do that for only a small fee, but in reality the small fee lawyer vets only the contract and disclosures from a compliance with rules perspective and won’t go near the business risks. They don’t have malpractice coverage for business risk analysis and wouldn’t know how to do that if they had to. When the bozo client asks the lawyer “Hey, do you think this is a good deal?” the response they are taught to make is “Well, it could be if what they told you is correct.”
But it is the business prospects quality of the transaction that puts you in the poor house, not whether someone said what a rule required him to say. DUH!!! Leaving that incompetently vetted is what kills you. Occasionally some of them may call a lawyer who does both the business and the legal analysis in a pre investment due diligence consultation, but when they find out that this level of assistance costs several thousand dollars while the bozo lawyer consult costs less than $ 1,000, they usually opt for the cheap seat.
Later, when they realize that for a few thousand dollars they could have avoided losing everything they have in the world, they refuse to accept the responsibility for their stupidity and blame the government for not providing the protection they think they deserve. Some of them even go on the Internet and criticize the lawyers who charge the bigger fees for the complete pre investment work.
They demand to know why it is that franchisors can comply with what is essentially a consumer protection rule and rob hundreds of people blind with no fear of prosecution. They demand that the government provide them the protection that is provided for those who robbed them, and they don’t understand why it is that there is no equality before the law in small business investment.
The IFA has a political action committee (FranPac) that spends millions on lobbyists and spreads money and favors around legislators and enforcement people so that what appears to be a solid and effective prohibition against franchise fraud and abuse is in reality just theater, utterly transparent in its impotence. That costs money. The head franchise guy at the Federal Trade Commission used to work for the IFA and for a large franchisor law firm and expects to be welcomed back there when his stint in “government service” is done. When he is gone someone similar will replace him. If not such a person, then some academic who is so mired in theory and policy that nothing ever gets done. And in the end, if he wanted to do anything, he has no adequate enforcement resources to do it. Occasionally the FTC will act against some small fry crooked franchisor that lacks money to fight back and just rolls over. It never goes after anyone who can afford good legal representation.
Not that long ago – at least in my frame of reference – Congressman LaFalce (perfect name for this story) convened hearings looking at something called the Small Business Franchise Act, a numbers trick/charade in which the central plot was to bring good faith and fair dealing to franchising. Since franchisees failed to pony up appropriate levels of financial support and the IFA ponied it up in substantial quantities, nothing happened. It was a case history example of franchisee failure to understand government and how to participate constructively in government theater to protect franchisee interests.
People who make fortunes in apparently – but not actually – regulated business activity pay for these charades. In the first quarter of 2010 more than $ 900 million was spent on lobbying the federal government. At this rate, 2010 will end up as a banner year with $ 3.5 Billion spent on lobbying the feds. www.opensecrets.org .
One would think that franchisees would organize and build their own political and legal war chest to go out and buy the kind of protection that franchisors get. They won’t do that. They demand for free what the franchisor community has paid many millions to get. You can see them ranting and cursing on www.BlueMauMau.org and other franchise blog sites almost every week. There is an army of screwees ranting and whining about how badly they were mistreated and why doesn’t the government do something about it because that would be the right thing to do.
Government rarely does anything because it is the right thing to do. What you were taught in high school civics class and in your make believe political science courses in college is mostly fantasy. Government runs on money, not on morality. If you want something from the government you buy it, just like everything else in this world.
It isn’t your fault that governments work the way they do, and franchising isn’t the only area in which everyone thinks there is effective control when in truth there is only theater. The oil well disaster in the Gulf of Mexico is another perfect example of the appearance of effective controls under government agencies charged with assuring competent back up systems in drilling for oil and gas in that area. During the Bush administration, despite many warnings, the enforcement staff of the SEC was downloading porn on their government office computers while the sub prime securitized mortgage disaster, the Bernie Madoff disaster and the Stanford Financial Services disaster unfolded. And the list is much longer than this. Things aint what they seem.
But if you invest in a high risk activity without availing yourself of competent protective resources, that is your fault and that is your problem.
Since it is highly unlikely that franchisees will ever get together to buy themselves some government, their only practical resort is to buy really competent pre investment due diligence that vets the deal as well as the legalities. That is really the only alternative. But you are, of course, free to roll the dice with everything you have in this world and see what number comes up. Good luck.
Jeff Goldstein comment on Solomon excerpt above: I agree 100% with Richard’s view that franchisees, before purchasing a franchise, should obtain a franchise review from a competent franchisee lawyer. I also agree with his view that not all lawyers have equal abilities, and that superior lawyers charge more than their less talented peers. And, I also agree that the FTC provides almost no direct assistance to franchisees, and that it should. I would further add that franchisees looking for franchise reviews should not use price as the sole criterion of choice of lawyer – instead, number of years of legal practice, whether the lawyer is a litigator, whether the lawyer represents only franchisees, and whether the lawyer has practiced for part of his or her career at a large national law firm, should trump cost as the determining attorney-choice factors.
NOTE: The website franchiseremedies.com is now owned by the Goldstein Law Firm, PLLC; however, neither Jeff Goldstein nor GLF has any financial or professional connection to Richard Solomon, his firm, or any of their representatives.