Overview of Franchise Agreements and Legal Issues Leslie Pujo Plave Koch PLC

Wesley Hurst Polsinelli

Introduction • What is a Franchise? FTC definition: – A continuing commercial relationship or arrangement under which: • Franchisee obtains the right to operate a business or to sell goods or services that are identified or associated with franchisor’s trademark; and • Franchisor exerts significant degree of control over franchisee’s business or must provide significant assistance; and • Franchisee must make a required payment to franchisor. FTC Rule, 16 C.F.R. § 436.1(h)

Introduction • U.S. Legal Framework – Federal Trade Commission and 15 States regulate pre-sale disclosure and/or registration – Approximately 23 states and territories regulate franchise “relationship” (transfers, renewals, terminations, etc.)

• International Legal Framework – Over 35 countries regulate pre-sales disclosure, including 6 Canadian provinces – Other international laws may apply

Introduction • Typical Franchisor Role: – – – – – – – –

Develop and Establish Brand and System Standards Provide Operating Manual Provide Initial and Ongoing Training and Assistance Provide Reservations System Maintain Marketing Program Develop Supplier Relationships Develop and Test New Products/Services Maintain Compliance Program

Introduction • Typical Franchisee Role: – Research and Understand Local Market – Identify and Develop Site – Hire and Manage Employees – Follow System Standards – Maintain Confidentiality – Avoid Competing with Franchisor and other Franchisees

Anatomy of Franchise Agreement and Supporting Documents • Franchise Disclosure Document (“FDD”) • Purpose – Inform prospective franchisees – Snapshot of franchisor, franchise system and offering as of FDD date

• 23 “Items” and Exhibits – Detailed Guidelines

• General Categories – Franchisor background and experience (Items 1-4, 20-21) – Franchise Offering (Items 1, 5-7, 10, 12-16) – Contractual Obligations of the Parties (Items 8-9, 11, 17, 22) – Financial Performance Representation (Item 19)

Anatomy of Franchise Agreement and Supporting Documents • The Franchise Agreement – Generally long-term with renewal rights – Establishes rights and obligations of parties – Detailed provisions – may affect “exit strategies”: • • • •

Renewal terms Transfer by Franchisee Default and Termination Post-termination obligations, including non-competes

– Flexible provisions – contemplate modifications to system/changes in industry: • • • •

System standards Ongoing training Marketing Technology

Anatomy of Franchise Agreement and Supporting Documents • Industry and Technology Changes May Affect Franchise Agreements – – – –

Electronic Cash Registers 800 Call Centers Counter pick-up of cars Credit Card Charge Plates

– Print and Yellow Pages

Computer Systems Online Reservation Systems Carsharing Electronic Processing and Mobile Payment Websites and Social Media

Anatomy of Franchise Agreement and Supporting Documents • Legal and Regulatory Changes: – NLRB position on “joint employment” • Provisions clarifying that the franchisee is the sole employer of its staff and has sole control over operations of the franchised business

– Data privacy, data breach, and crisis management • Allocating responsibility for compliance

– Litigation, arbitration, and class action waivers

Anatomy of a Franchise Agreement and Supporting Documents • Reservation Services Agreement • Software and other technology license agreements • Subleases • Confidentiality and Non-Competition Agreements

Legal Issues • • • •

Vicarious Liability Financial Disclosure Accidental Franchisor Post-Termination Competition

Vicarious Liability (Risk to Franchisor based on conduct of Franchisee)

• Patterson v. Domino’s Pizza, LLC (Calif. Supreme Court 2014) • Brunner v. Liautaud, Jimmy John’s (Ill. District Court 2015)

Financial Disclosure (Read the Documents) • Fabbro v. DRX Urgent Care (U.S. Court of Appeals, Third Circuit 2015 • Serves as reminder: Read the documents

The Accidental Franchisor • Cycle City, Ltd. v. Harley-Davidson (U.S. District Court, Hawaii 2014

Post-Termination Competition (Recent Cases) • Meincke Car Care Centers, LLC v. ASAR Incorporated (U.S. District Court, WD North Caroline 2014) • Grout Doctor v. Groutman, Inc. (U.S. District Court, ED North Carolina 2014) • Mister Softee, Inc. v. Tsirkos (U.S. District Court, SD New York 2014)

Suggested Best Practices • Remember the role of the “System” and the Brand in the franchise relationship • Review franchise agreements and supporting documents regularly to understand rights and obligations in light of legal and industry changes • Review franchise agreement before taking steps to exit a franchise system or terminate/nonrenew a franchisee

Business Approach to Litigation • • • •

Cost of litigation Assessment of claims/risk Active role Evaluate options

Contact Leslie Pujo Plave Koch PLC 12005 Sunrise Valley Drive, Suite 200 Reston, Virginia 20191-3404 Tel: 703.774.1210 Fax: 703.774.1201 Email: [email protected] www.plavekoch.com

Wesley D. Hurst Polsinelli LLP 2049 Century Park East, Ste. 2900 Los Angeles, CA 90067 Tel: (310) 203-5337 Fax: (310) 556-1802 Email: [email protected] www.polsinelli.com