Franchise Lawyer Blog

Many business owners in and around New York City are concerned with theft. From shoplifting to timecard theft to being overbilled by vendors or contractors, theft can significantly impact a business's bottom line. Recently, many business owners also find themselves dealing with a very elusive type of theft: the data breach.

Franchises have become a major target of data thieves, according to a recent news report. Restaurant franchises appear to be taking the most hits and several prominent chains have been victims of data theft in just the past month or so.

It was reported last week that the tea shop chain Teavana may have been subject to a data breach, with thieves making off with customer information that included credit card details. Earlier this month the grocery chain Snucks announced that a data breach led cybercriminals to access 2.4 million customer credit cards. And, back in January a Georgia-based chicken restaurant chain reported that malware-which is used to steal customer credit card and debit card data--was found on computers in more than 100 of its locations.

Cyber thieves prey on franchisee customer information in a number of ways. Some might hack into computer services by figuring out passwords; other methods include using malware or installing software onto point-of-sale machines in order to steal information from magnetic credit card strips.

This type of theft is very problematic for a number of reasons. Data theft exposes customers to identity theft and financial fraud, and this in turn can sour customers' opinions of the business from which their information was stolen. In addition to this, franchisees can be left with liability issues and fines after a data breach. In fact, Franchising.com has reported that many small businesses that experience data theft find themselves shuttered within 12 months of the breach.

It is in the best interests of franchisors and franchisees to protect against data theft. In general, the way to do this is to build and maintain a secure network. Of course, that is much more complicated than it sounds. Franchisees should be sure to do their due diligence when entering into a franchise, and be sure to learn what type of Internet training, support and security will be offered by the franchisor. Franchisors and franchisees may also benefit from discussing cyber theft concerns and data security requirements when working on the business formation process with their franchise law attorneys.

Sources:

Atlanta Journal-Constitution, "Restaurant franchises on guard against data thieves," March 3, 2013

TechNewsDaily.com, "Tea Chain Teavana Possibly Hit by Data Breach," April 23, 2013

Quiznos franchisees accuse franchisor of fraud, misdealing

Anyone who opens a business here in New York or anyplace else will likely encounter a legal dispute at some point or another. Franchise disputes tend to involve disclosure or contract issues, or an actual or perceived failure of a franchisor to properly support a franchisee.

Quiznos is currently facing at least 10 lawsuits from its franchisees, who have accused the franchisor of engaging in fraud and misdealing by way of its supply system. The franchisees say that Quiznos raked in hundreds of millions of dollars by improperly marking up food and supplies that franchisees were forced to purchase due to contractual obligations. Several years ago, about 8,000 current and former Quiznos franchisees cited similar allegations in multiple lawsuits, resulting in an estimated settlement of more than $200 million.

Quiznos did not admit to any of the claims alleged in those earlier suits, and the company is reportedly continuing to run its supply system in the same manner.

Quiznos also recently announced cuts to a franchisee benefit that has further upset franchisees. The company has ended a program through which franchisees were able to earn a 4 percent rebate on their food costs if they hit certain benchmarks.

Quiznos officials say that money that was being spent on that program will be shifted to marketing, another area in which franchisees say they need support.

The future of these lawsuits is unknown as the chain continues to lose locations and struggles to compete against more successful sandwich chains. These disputes illustrate how business relationships can become strained between franchisees and franchisors. In ideal situations, both sides are forthright and reasonable, but when fraud or misrepresentation may exist, it is wise to seek legal counsel to protect one's interests.

Source: Nation's Restaurant News, "Quiznos faces new wave of franchisee lawsuits," Lisa Jennings, March 11, 2013

Tags: franchise litigation, franchise dispute, fraud, misdealing

We have written recently about the efforts of American franchisors to franchise their businesses globally. New Yorkers who have traveled abroad know that it is often possible to find a taste of home in faraway lands. In Paris, we can grab a latte at Starbucks. In Hong Kong, we can have lunch at McDonald's. In Stockholm, we can stop at a 7-Eleven for a Slurpee-although they reportedly call them Slush Puppies there.

In recent decades, international growth has been on the rise for these U.S.-based brands and others. Franchise brands often tap into new markets beyond U.S. borders because the domestic markets have been saturated, or simply because a franchise brand's domestic success may be replicable abroad. There are considerable challenges when it comes to global franchising, however, and it is essential to have partners here in the U.S. as well as in the target market in order to develop and realize a vision for this type of expansion. 

Denny's recently announced that it has cancelled a deal with Great China International Group to develop franchise restaurants in China. It has not been reported why the deal fell apart, but Denny's had planned to open the first restaurant there this year, with 50 more opening in southern China within the next 15 years.

Denny's is reportedly still planning to expand its brand in China, and it is looking for another partner that will help it open as many as 45 franchise restaurants in the coming years.

In order to introduce a U.S. franchise to a foreign market, it is important to study a number of factors to determine whether the expansion makes both business sense and legal sense. This includes learning whether there is a demand for the brand's products or services, and whether the products or services need to be tweaked to better fit the local culture. The initial cost of entry as well as plans for sourcing supplies and vendors also need to be evaluated. The local economy, as well as local laws regarding small business operations, franchise licensing, contract law and labor must be understood as well.

One of the most fundamental components of franchise expansion-either domestically or internationally-is to enlist the right partners who can help the franchisor navigate the various legal, economic and cultural barriers. Seeking legal counsel from an experienced U.S. franchise law attorney can be the first step in this process, and such a professional may be able to identify and enroll additional partners.

Source: Wall Street Journal, "Denny's Drops Franchise Plans with China Investment Group," Debbie Cai, March 11, 2013

As the economy continues to pick up, many entrepreneurs and investors here in New York as well as all over the country may look to expand their portfolios. For multi-unit franchisees, this might mean it is time to think about adding another brand. In fact, multi-brand franchising is a way not only to diversify one's investments, but also to build a stronger business organization.

Multi-brand franchising is exactly what it sounds like-a business person or entity operating several brands, often in different industries. For example, one might be a franchisee with an ice cream brand as well as a shoe brand. While multi-brand franchising offers numerous opportunities, it is not without risk and as such it is wise to seek legal counsel prior to taking such a leap.

The main benefit of multi-brand franchising is diversification, or spreading out the risk of negative market factors. Multi-brand franchising also allows franchisees to gain leverage when it comes to shopping center leases, as well as generate economies of scale. For example, an owner may be able to obtain reduced rates by using the same contractor for multiple outlets, as well as the same payroll company, human resources staff, etc.

Another significant perk of multi-brand franchising is the flexibility this can give a business owner when it comes to geography. Some multi-unit franchisees may be unable to grow in their current locality, but adding another brand allows one to expand without travel or relocation.

With all of these advantages, why wouldn't a franchisee want to venture into multiple brands? Each industry has its own nuances, and it is important to have a sufficient understanding of a business before investing in it. Additionally, if a franchisee does not have reliable management staff to oversee the existing outlets, it may not be the best time to concentrate on expansion. Of course, it is also necessary to make sure multi-brand efforts will not conflict with existing franchise contracts and obligations. Existing agreements should be scrutinized to be certain that such activities are permitted by franchisors and landlords.

In the end, the franchisee must decide whether it is feasible to run multiple businesses, and if so it will be beneficial to work with a franchise law professional to ensure one is set up to achieve short- and long-term multi-brand objectives.

Source: Franchising.com, "Building Brands: How To Expand From Multi-Unit to Multi-Brand Franchisee," Kerry Pipes, 2013

● Our business law firm has extensive experience in franchise law, offering legal services for both franchisees and franchisors. To learn more about multi-unit and multi-brand franchising, please visit our firm's Multi-Unit Franchisees & Area Developers page.

So I was reading Blue Mau Mau this morning, thinking about some of our franchisee clients. There is an article about franchise protection laws being proposed in California. We have recently written about legislature in Ohio designed to provide additional protections for franchisees. But it caused me to step back and think about the entire dichotomy of looking at this industry and this business model, from the perspective of franchisor vs. franchisee.

If you don't know, Blue Mau Mau is a website devoted to providing news for franchise and small business owners. It is a recognized source of information concerning the state of the franchise world from a franchisees' point of view. From a franchisor's point of view, it might be viewed as biased or a troublemaker, but franchisees swear by it and the intelligent franchisor could view it as a useful insight into an important segment of their business.

Lawyers practicing in the franchising space have jokingly referred to franchisors and franchisees as "zors" and "zees," and the lawyers historically associate themselves exclusively with one or the other. Most franchise lawyers are franchisor lawyers. A smaller segment of the bar holds themselves out as being franchisee lawyers. A few firms, such as ours , have managed to carve out practices in both zones. Our firm has found that experience in one area compliments a practice in the other. The hard part is getting other lawyers and clients to shake themselves free of the preconception that a lawyer must be one or the other.

On the Zor side, you need to look no further than the International Franchise Association or IFA, whose website and organization is the industry spokesman from the franchisor perspective. It seems to us that a franchisee could benefit from the perspective and information offered by the IFA, just as a franchisor might benefit from reading Blue Mau Mau, but most franchisees distrust the IFA as the unapologetic spokesman for the franchsor industry. The voice of the zors.

More on this to come.

The State Legislature of Ohio recently amended the Ohio Business Opportunity Law. The new version aims to increase the protections for Ohio franchisees from abusive franchising practices, including those relating to franchise disclosures by franchisors.

The Ohio Business Opportunity Law was passed in an effort to "protect prospective purchasers of business opportunity plans by requiring that sellers provide the purchasers with the information necessary to make an intelligent decision about the business opportunity plan being offered..."

According to the general assembly, "the offer and sale of business opportunity plans is a matter affected with a public interest."

Under the law, franchisees are given the right to sue franchisors for violation of franchise disclosure laws without proof of fraud. This includes errors (except non-typographical errors) within Franchise Disclosure Documents.

The amended language of the law is intended by Ohio to essentially level the playing field and help franchisees defend their rights against violations of franchise laws by franchisors who are presumably larger corporate entities with access to more money and more resources.

One amendment to the law relates to choice of law. Presently, provisions in the Ohio Business Opportunity Law stipulate that purchasers of franchises within the state who have been wronged can seek remedies that include rescission, triple damages and attorney fees.

Previously, however, franchisors located outside of the state of Ohio facing lawsuits by franchisees in Ohio could avoid these penalties under Ohio law by indicating contractually that a different state's law applies to the case.The amended language of the law now stipulates that franchisors won't be allowed to "forum shop" and that Ohio law will apply when there is a sale of a franchise both within the state and outside of the state.

Essentially, even if a franchise agreement stipulates that a franchisor's out of state laws supersede Ohio law, Ohio law will still prevail.

Another amendment to the Ohio Business Opportunity Law relates to arbitration. Typically, franchise agreements include provisions that indicate disputes between parties be resolved through arbitration in a specified state.

However, the new language says that arbitrations between franchisors and Ohio franchisees are required to take place within the state of Ohio regardless if the franchisor's main office is located outside of the Ohio state line.

Overall, the legislative intent of the new language is clear: Ohio law will dictate when it comes to resolving disputes between franchisors and franchisees who do business within state borders.

It remains to be seen how the law will evolve or whether it will trigger other states to follow suit. Other states have addressed the franchisor-franchisee relationship as well and we will comment on some of those statutes in future posts.

As with any other particular corner of the business world, the franchising business generates a fair amount of litigation. That litigation is comprised of many cases that are at least partially unique to the franchising sphere in terms of the issues that are most frequently in controversy. 

Many of these cases involve the enforcement of non-competition clauses. Einbinder & Dunn has been recently involved in two such cases, one on the franchisee side and the other on the franchisor side (but the prevailing side in each instance). These cases were most recently discussed in the Franchise Times under the heading  Competitive Clauses. Anti-competition clauses are designed to protect the franchisor from unfair competition by a franchisee who has received valuable and/or confidential information from the franchisor. From a franchisee's perspective, they must be reasonable in terms of term and scope. Franchisors must be certain to enforce these provisions or they may lose their rights. We will be blogging about those cases in more detail in the immediate future.

Other franchise related litigations often involve disgruntled franchisees. In fact, there is even a website/zine called unhappy franchisee, dedicated to that constituency. 

Our firm has been involved in many of these cases and is uniquely situated to assist franchisees in their claims and franchisee lawsuits.

We have found that there is strength in numbers and frequently assist franchisees assembled to collectively increase their strength in dealing with franchisors, through franchisee associations and groups. We have handled litigations on behalf of these associations and groups against franchisors. We will provide further commentary on these claims in future blog postings.

Are you on LinkedIn? 

I am, but I am just getting the hang of it. However, it is worth noting here that there appears to be much activity and locations on LinkedIn of interest to a person interested in franchising. 

I have joined the following groups on LinkedIn:

• ABA Forum on Franchising
• The Franchise Forum
• Franchise Association Franchisee Group
• Franchise Association Franchisor Group
• Franchise Association Attorney Group
• Franchise Networking
• Franchise Professionals
• Franchise Startups
• IDFLN

A quick overview of the content being posted in these groups reveals the problem endemic to LinkedIn: too much content and not enough time to separate the wheat from the chaff. Some of it looks good, some of it duplicative and some of it obviously filler. I will keep you advised of what I find of interest. Does anyone have a particular group they find worthwhile?