News Briefs

Virginia Franchise Law Moves Toward Uniformity with Other Registration States

New laws scheduled at FBLA's press time to take effect on July 1, 2007 bring Virginia's Retail Franchising Act closer to conformity with laws in other franchise registration states.

'Virginia had a good reputation for its franchise regulations,' said Steven Maxey, the former director of the Securities and Retail Franchising Division of the Virginia State Corporation Commission, which writes rules for franchisors and reviews franchise applications. 'But we were very particular about the financial strength of franchisors seeking to register in the state. We turned down about 20% of franchisor applications ' which is a high number ' and it almost always was because of the finances of the applicant.'

However, while the strict financial rules were intended to protect franchisees from buying into precarious franchise systems, Maxey said the rules had the unintended consequence of making it difficult for startup or small franchise systems to register in Virginia. A franchisor that had sold numerous franchises that had not yet opened, for example, would have large obligations on its balance sheet that made it look weak financially, when in fact the franchise sales might indicate that it was a highly promising operation.

'If a franchisor's balance sheet showed a deficit or weak finances, we could not let them in, unless they obtained a guarantor,' said Maxey, who now owns a franchise consulting firm, The Maxey Group LLC (Richmond, VA). 'But sometimes, the balance sheet looked weak for very good reasons ' and we had no discretion.'

Under the new law, Virginia will match how other states handle the situation: A franchisor can place franchisee fees in escrow or defer receipt of the fees, in order to present a stronger balance sheet that is more reflective of its current business prospects.

At press time, state officials were weighing input from a public comment period this spring and a public hearing on May 29 that might generate one or two tweaks to the regulations. Speaking at the hearing, Jim Wilson, partner with Wilson Stoyanoff, PLC (Richmond, VA), observed that the 'sophisticated investor' exemption is misnamed, as it assumes that a person able to make a $1 million initial investment in a franchise is sophisticated. Recognizing that the state is not in a position to actually analyze the sophistication of every prospective franchisee with $1 million to invest, Wilson suggested changing the exemption to match that of an 'accredited investor' under securities law. 'The accredited investor standard isn't perfect, either,' Wilson told FBLA, 'but at least it has a net worth and an income provision.'

Others who commented at the hearing suggested that Virginia reduce the threshold for the 'seasoned franchise investor' exemption from the proposed $15 million to $10 million, in order to match other registration states, said Maxey. Virginia officials at the hearing said they selected $15 million in anticipation that other states will increase their threshold fairly soon.

Those who commented also suggested that funds held in escrow should not have to be escrowed in soarate trust account 'with a national bank located in Virginia or a Virginia state chartered bank or trust company,' but could be escrowed with any national bank.

Domino's Franchisees Win Right to Select Hardware, Software Vendor

In highly contentious litigation, Domino's Pizza Inc. franchisees were granted the ability to purchase a computerized sales system from a vendor of their choice. The ruling by the U.S. District Court for the District of Minnesota apparently thwarts Domino's requirement that franchisees buy the point-of-sale system from IBM and the software from Domino's. The litigation is Kevin Bores, et al. v. Domino's Pizza, LLC.

Plaintiffs, six multi-unit franchisees, argued that their contract with Domino's required them to purchase computer systems that met specifications set by Domino's, but not to purchase from a supplier that Domino's dictated. Judge Richard H. Kyle agreed, and he cited the following passage in Item 8 of the UFOC as crucial:

We will provide you with specifications for pizza, other authorized food and beverage preparation, dispensing, storage and display equipment, delivery and related motor vehicles, other equipment, fixtures, furniture, computer hardware and software, exterior and interior signs and decorating required by the Store. You may purchase items meeting our specifications from any source. [Emphasis made by court.]

Judge Kyle rejected Domino's claim that its point-of-sale system was a specification, and he called it a completed system. Kyle also rejected Domino's claim that references elsewhere in the UFOC to its ability to require franchisees to purchase computer equipment and to 'refurbish' restaurants could lead to a requirement to purchase a computer system from its designated supplier. And he rejected the updates to Domino's UFOC that franchisees signed in 2003 and more recently, in which Domino's removed franchisees' permission to buy computer equipment 'from any source.'

The judge left intact Domino's requirement that an approved point-of-sales system be installed by each franchisee by June 30, 2008. But he ruled that Domino's must supply the specifications for the system to the franchisees.

Responding to the ruling, Domino's issued a press statement: 'We stand behind our plan and intend to enforce our standard. We disagree with the judge's ruling, but we respect it and are now working on a way to comply.'

Kyle criticized both parties for engaging in 'more than a year of
protracted (and contentious) discovery' that turned 'little more than a garden-variety breach-of-contract dispute,' into a dispute with 'frequent name calling and invective.' He also declared that the individual owners of the franchisee corporations did not have standing to sue and threw out all of their claims.

FTC Shuts Down Netvertise, Bans Owner from Selling Franchises

Web design firm franchise Netvertise has been shut down, and its CEO Elliot Krasnow has been banned for life from selling franchises, under a settlement announced by the Federal Trade Commission ('FTC') on May 11. The FTC alleged that the franchisor violated earnings claims rules, and Krasnow did not disclose to prospective franchisees that he had agreed to a court-ordered repayment in 1990 of $400,000 for misrepresenting the value of rare coins.

The U.S. District Court for the Southern District of Florida approved the settlement, which also includes the return of at least $160,000 to franchisees and prospects.

Netvertise sold franchise systems that offered 'search engine optimizers' that would allegedly generate high rankings on Google and other Web search engines. The franchises were sold for $20,000 to $100,000, and franchisees were told to target small and medium-size businesses in their territories that could benefit from better search engine results. Netvertise's advertisements claimed that a franchise could be 'worth a million [dollars] to your grandchildren tomorrow,' according to the FTC. Customers were told that they could make money 'on holidays, weekends, even while you are on vacation. You'll make money at every turn.'

Baskin-Robbins and Franchisees Nabbed for Allegedly Shortchanging Customers

Baskin-Robbins will pay dearly for allegedly shortchanging consumers across the state of California. An investigation by the California Department of Weights and Measures ('Weights and Measures') found that many Baskin-Robbins stores were not filling pint-size ice cream containers with enough ice cream. The settlement approved by the San Diego Superior Court prohibits Baskin-Robbins and its franchisees from delivering lesser quantities of its products than is advertised.

In inspections at 188 locations in 29 counties in California, Weights and Measures investigators found that 83% of the 416 containers they purchased (343) were underfilled. On average, the containers were four ounces short by volume, or 25%, according to Weights and Measures.

Baskin-Robbins will pay $343,000 in penalties and $148,164 for expenses of the investigation. According to a news release from the San Diego District Attorney, Baskin-Robbins committed similar violations in 1985, when it was under different ownership.

In a written statement to FBLA, Baskin-Robbins replied: 'Baskin-Robbins' top priority is the satisfaction and enjoyment of our customers. Previously, Baskin-Robbins' employees hand-packed ice cream containers to meet the in-store weight advertised to our customers. Going forward, we have directed all Baskin-Robbins' franchisees to deliver hand-packed ice cream containers filled to the brim, which will exceed the advertised weight.'

Virginia Franchise Law Moves Toward Uniformity with Other Registration States

New laws scheduled at FBLA's press time to take effect on July 1, 2007 bring Virginia's Retail Franchising Act closer to conformity with laws in other franchise registration states.

'Virginia had a good reputation for its franchise regulations,' said Steven Maxey, the former director of the Securities and Retail Franchising Division of the Virginia State Corporation Commission, which writes rules for franchisors and reviews franchise applications. 'But we were very particular about the financial strength of franchisors seeking to register in the state. We turned down about 20% of franchisor applications ' which is a high number ' and it almost always was because of the finances of the applicant.'

However, while the strict financial rules were intended to protect franchisees from buying into precarious franchise systems, Maxey said the rules had the unintended consequence of making it difficult for startup or small franchise systems to register in Virginia. A franchisor that had sold numerous franchises that had not yet opened, for example, would have large obligations on its balance sheet that made it look weak financially, when in fact the franchise sales might indicate that it was a highly promising operation.

'If a franchisor's balance sheet showed a deficit or weak finances, we could not let them in, unless they obtained a guarantor,' said Maxey, who now owns a franchise consulting firm, The Maxey Group LLC (Richmond, VA). 'But sometimes, the balance sheet looked weak for very good reasons ' and we had no discretion.'

Under the new law, Virginia will match how other states handle the situation: A franchisor can place franchisee fees in escrow or defer receipt of the fees, in order to present a stronger balance sheet that is more reflective of its current business prospects.

At press time, state officials were weighing input from a public comment period this spring and a public hearing on May 29 that might generate one or two tweaks to the regulations. Speaking at the hearing, Jim Wilson, partner with Wilson Stoyanoff, PLC (Richmond, VA), observed that the 'sophisticated investor' exemption is misnamed, as it assumes that a person able to make a $1 million initial investment in a franchise is sophisticated. Recognizing that the state is not in a position to actually analyze the sophistication of every prospective franchisee with $1 million to invest, Wilson suggested changing the exemption to match that of an 'accredited investor' under securities law. 'The accredited investor standard isn't perfect, either,' Wilson told FBLA, 'but at least it has a net worth and an income provision.'

Others who commented at the hearing suggested that Virginia reduce the threshold for the 'seasoned franchise investor' exemption from the proposed $15 million to $10 million, in order to match other registration states, said Maxey. Virginia officials at the hearing said they selected $15 million in anticipation that other states will increase their threshold fairly soon.

Those who commented also suggested that funds held in escrow should not have to be escrowed in soarate trust account 'with a national bank located in Virginia or a Virginia state chartered bank or trust company,' but could be escrowed with any national bank.

Domino's Franchisees Win Right to Select Hardware, Software Vendor

In highly contentious litigation, Domino's Pizza Inc. franchisees were granted the ability to purchase a computerized sales system from a vendor of their choice. The ruling by the U.S. District Court for the District of Minnesota apparently thwarts Domino's requirement that franchisees buy the point-of-sale system from IBM and the software from Domino's. The litigation is Kevin Bores, et al. v. Domino's Pizza, LLC.

Plaintiffs, six multi-unit franchisees, argued that their contract with Domino's required them to purchase computer systems that met specifications set by Domino's, but not to purchase from a supplier that Domino's dictated. Judge Richard H. Kyle agreed, and he cited the following passage in Item 8 of the UFOC as crucial:

We will provide you with specifications for pizza, other authorized food and beverage preparation, dispensing, storage and display equipment, delivery and related motor vehicles, other equipment, fixtures, furniture, computer hardware and software, exterior and interior signs and decorating required by the Store. You may purchase items meeting our specifications from any source. [Emphasis made by court.]

Judge Kyle rejected Domino's claim that its point-of-sale system was a specification, and he called it a completed system. Kyle also rejected Domino's claim that references elsewhere in the UFOC to its ability to require franchisees to purchase computer equipment and to 'refurbish' restaurants could lead to a requirement to purchase a computer system from its designated supplier. And he rejected the updates to Domino's UFOC that franchisees signed in 2003 and more recently, in which Domino's removed franchisees' permission to buy computer equipment 'from any source.'

The judge left intact Domino's requirement that an approved point-of-sales system be installed by each franchisee by June 30, 2008. But he ruled that Domino's must supply the specifications for the system to the franchisees.

Responding to the ruling, Domino's issued a press statement: 'We stand behind our plan and intend to enforce our standard. We disagree with the judge's ruling, but we respect it and are now working on a way to comply.'

Kyle criticized both parties for engaging in 'more than a year of
protracted (and contentious) discovery' that turned 'little more than a garden-variety breach-of-contract dispute,' into a dispute with 'frequent name calling and invective.' He also declared that the individual owners of the franchisee corporations did not have standing to sue and threw out all of their claims.

FTC Shuts Down Netvertise, Bans Owner from Selling Franchises

Web design firm franchise Netvertise has been shut down, and its CEO Elliot Krasnow has been banned for life from selling franchises, under a settlement announced by the Federal Trade Commission ('FTC') on May 11. The FTC alleged that the franchisor violated earnings claims rules, and Krasnow did not disclose to prospective franchisees that he had agreed to a court-ordered repayment in 1990 of $400,000 for misrepresenting the value of rare coins.

The U.S. District Court for the Southern District of Florida approved the settlement, which also includes the return of at least $160,000 to franchisees and prospects.

Netvertise sold franchise systems that offered 'search engine optimizers' that would allegedly generate high rankings on Google and other Web search engines. The franchises were sold for $20,000 to $100,000, and franchisees were told to target small and medium-size businesses in their territories that could benefit from better search engine results. Netvertise's advertisements claimed that a franchise could be 'worth a million [dollars] to your grandchildren tomorrow,' according to the FTC. Customers were told that they could make money 'on holidays, weekends, even while you are on vacation. You'll make money at every turn.'

Baskin-Robbins and Franchisees Nabbed for Allegedly Shortchanging Customers

Baskin-Robbins will pay dearly for allegedly shortchanging consumers across the state of California. An investigation by the California Department of Weights and Measures ('Weights and Measures') found that many Baskin-Robbins stores were not filling pint-size ice cream containers with enough ice cream. The settlement approved by the San Diego Superior Court prohibits Baskin-Robbins and its franchisees from delivering lesser quantities of its products than is advertised.

In inspections at 188 locations in 29 counties in California, Weights and Measures investigators found that 83% of the 416 containers they purchased (343) were underfilled. On average, the containers were four ounces short by volume, or 25%, according to Weights and Measures.

Baskin-Robbins will pay $343,000 in penalties and $148,164 for expenses of the investigation. According to a news release from the San Diego District Attorney, Baskin-Robbins committed similar violations in 1985, when it was under different ownership.

In a written statement to FBLA, Baskin-Robbins replied: 'Baskin-Robbins' top priority is the satisfaction and enjoyment of our customers. Previously, Baskin-Robbins' employees hand-packed ice cream containers to meet the in-store weight advertised to our customers. Going forward, we have directed all Baskin-Robbins' franchisees to deliver hand-packed ice cream containers filled to the brim, which will exceed the advertised weight.'