Law.com Subscribers SAVE 30%
Call 855-808-4530 or email GroupSales@alm.com to receive your discount on a new subscription.
Court Watch
Court Confirms Power of KFC Advertising Cooperative to Modify Corporate
Advertising Plans
In 1997, as part of the settlement of a class action lawsuit between Kentucky Fried Chicken Corporation (“KFCC”) and its franchisee association, a new Certificate of Incorporation dealing with the governance of the KFC National Council and Advertising Cooperative (“NCAC”) was filed. The NCAC is a Delaware non-stock corporation that was founded more than 40 years ago to oversee the spending of the $150-million-plus in advertising funds collected annually from both company-owned and franchised KFC stores. The new Certificate of Incorporation divided various advertising duties and responsibilities between KFCC and the NCAC. The NCAC governing Committee has 13 franchisee members and four KFCC-appointed members. Under the agreement represented by the new Certificate, KFCC has the right to hire and fire the national advertising agency that develops and implements the annual KFC advertising program. KFCC also has the right under the Certificate to “develop national advertising, public relations and media plans and strategy.” However, among the powers of the governing committee of the NCAC is the power “to plan and approve each ensuing year's advertising program.” Over the years, KFC's advertising agency developed each year's advertising plan, the NCAC would approve or disapprove it, and then the agency would implement it. On occasion, prior to the system specified in the new Certificate, the NCAC would modify the plan before approving it.
In 2009, KFCC presented an advertising plan that the NCAC substantially modified to redirect the amount of advertising money to be devoted to the company's newer products back to its traditional fried specialties. KFCC claimed that the NCAC was not empowered by its Certificate of Incorporation to modify KFCC's annual advertising plan, but could only approve or disapprove it. KFCC maintained that if the plan were not approved, and if KFCC could not modify it to satisfy the NCAC governing committee, brand advertising would come to a halt ' to the great detriment of both KFCC and its franchisees. The NCAC maintained that its powers under the Certificate authorized it to plan and approve each year's advertising program, impliedly authorizing it to modify the plan proposed by KFCC. Since neither party would agree to the other's position, a suit for declaratory relief was filed in which the NCAC sought a declaration that it could modify the annual advertising plan proposed by KFCC, and KFCC sought to have the court declare that it alone could modify the plan it proposed.
In KFC National Council and Advertising Cooperative, Inc. v. KFC Corporation, Bus. Franchise Guide (CCH) '14,542 (Del. Ct. of Chancery, Jan. 31, 2011), the court examined the words of the Certificate of Incorporation, the history of the parties' relationship, and parol evidence as to the intention of the parties in determining that the NCAC did, indeed, have the power to revise KFC's advertising proposals before approving them. The seemingly contradictory terms of the Certificate giving both KFCC and the NCAC the power to “plan” advertising programs allowed the court to examine the circumstances giving rise to the disputed terms in order to determine the intent of the parties in arriving at the agreed-upon provisions.
The court partially relied on the general corporate principle that, in the absence of specific language to the contrary, a corporate instrument should not be interpreted to give certain board members preferential powers or rights over other board members. Here, the franchisee board members greatly outnumbered the KFCC board members. As such, to allow the KFCC board members to veto the will of the majority of the board could not be permitted without specific authority in the governing documents.
In discussing the history of the development of the NCAC Certificate, the court pointed out that language suggested by KFCC that would have given it the control it sought was removed from the Certificate as part of the negotiations that settled the class action lawsuit. Also, the NCAC's operating history contained examples of changes made by the NCAC that were implemented by KFCC, which showed a “course of performance” in the relations between the parties.
KFCC did retain some control over the final advertising output, however, since the agreement between KFCC and the NCAC that allowed the use of the KFC names and marks in advertising requires that all advertising be in good taste. Also, since franchisees can only sell products approved by KFCC and KFCC retains control of the national advertising agency, the court felt KFCC still had the power to protect its brand and its positioning in the market.
The powers retained by each party make KFC advertising a virtual partnership between KFCC and the NCAC, and partnership relations can be difficult. However, cooperation between KFCC and the NCAC is essential to keep the flow of KFC advertising going. One wonders about the consequences if KFCC and the NCAC became seriously estranged and each side wanted to play “chicken” with the other. Why did KFCC agree to the overlapping terms of the Certificate of Incorporation? Probably because the settlement of the long-running class action lawsuit, which contained issues in addition to advertising, was paramount. As so often happens, there is a price to pay for expediency, and this may be it as far as KFC advertising is concerned.
Court Finds That Rebates from Affiliates Need Not Be Separately Disclosed in Item 8
An issue raised in a continuing battle of motions to dismiss between a Maryland-based home cleaning franchisor and two of its South Carolina franchisees was decided in the franchisor's favor in The Cleaning Authority, Inc. v. Joanna Neubert, et al. (2011 WL 666892, D.Md.). Earlier issues were discussed at The Cleaning Authority, Inc. v. Joanna Neubert, et al., 739 F.Supp.2d 807; Bus. Franchise Guide (CCH) '14,465, (USDC Maryland, Sept. 7, 2010).
The franchisees unilaterally terminated their franchise agreements without the franchisor's consent. Litigation followed with a variety of claims and counterclaims. One of the claims made by the franchisees was that the franchisor did not comply with the requirements of Item 8 of the UFOC in effect at the time ' specifically, that it did not disclose that its affiliate, with which the franchisees were required to do business, paid over some of its proceeds to the franchisor. Since the pertinent requirements of Item 8 are the same under the UFOC and the current FDD disclosure format, the review and findings by the court are of present interest.
The franchisor did disclose that S&T Management, Inc. (“S&T”) was its affiliate and in Item 8 disclosed that its franchisees had to sign a Mailer Services Agreement with S&T to send advertising brochures to prospective customers in the franchisees' territory. The amounts that the franchisees had to pay S&T also were disclosed. The franchisees argued that since there was no disclosure that S&T made payments to the franchisor, the franchisor's statement in Item 8 that “we do not currently receive rebates from any of our approved suppliers” was in error and had the franchisees known the truth, they would not have purchased the franchise.
The court quickly dismissed the franchisees' claim that, at least based on their pleadings, the nature of the financial relationship between the franchisor and its affiliate was material to the franchisees' decision whether to purchase the franchise. It also found that there was a distinction between what was required to be disclosed concerning payments to a franchisor from approved third-party suppliers and those made by affiliated suppliers. The court concluded that as far as the Item 8 disclosure about payments to a franchisor by its affiliates was concerned, only the receipt of revenues from franchisee purchases by the affiliate is called for, not what the affiliate does with the money it receives from franchisees. The court cited the FTC's “Statement of Basis and Purpose” issued in connection with the UFOC, which lumped a franchisor and its affiliates together for purposes of the disclosure of rebates or kickbacks, distinguishing them from third-party suppliers and the payments they make to the franchisor or its affiliates.
Disclosure requirements in the UFOC, and now the FDD, are long and complex. Often minor, relatively immaterial, errors are made in compliance ' so-called “technical violations” ' which, as a practical matter, do not disadvantage a franchisee or which should not influence the decision of a reasonable franchisee whether to purchase the franchise. It can be argued that the court in this case took a practical view of the facts and disallowed a claim based on what may have been a technical violation, depending on one's view of the concerned Item 8 requirement at issue, of the disclosure requirements. There are real issues in this dispute. The court was wise to disregard the minutiae so that the basic contract issues could be dealt with.
Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. Charles G. Miller is a shareholder and director of the firm. Hart and Miller can be reached by phone at 415-956-1900.
Court Confirms Power of KFC Advertising Cooperative to Modify Corporate
Advertising Plans
In 1997, as part of the settlement of a class action lawsuit between
In 2009, KFCC presented an advertising plan that the NCAC substantially modified to redirect the amount of advertising money to be devoted to the company's newer products back to its traditional fried specialties. KFCC claimed that the NCAC was not empowered by its Certificate of Incorporation to modify KFCC's annual advertising plan, but could only approve or disapprove it. KFCC maintained that if the plan were not approved, and if KFCC could not modify it to satisfy the NCAC governing committee, brand advertising would come to a halt ' to the great detriment of both KFCC and its franchisees. The NCAC maintained that its powers under the Certificate authorized it to plan and approve each year's advertising program, impliedly authorizing it to modify the plan proposed by KFCC. Since neither party would agree to the other's position, a suit for declaratory relief was filed in which the NCAC sought a declaration that it could modify the annual advertising plan proposed by KFCC, and KFCC sought to have the court declare that it alone could modify the plan it proposed.
In KFC National Council and Advertising Cooperative, Inc. v.
The court partially relied on the general corporate principle that, in the absence of specific language to the contrary, a corporate instrument should not be interpreted to give certain board members preferential powers or rights over other board members. Here, the franchisee board members greatly outnumbered the KFCC board members. As such, to allow the KFCC board members to veto the will of the majority of the board could not be permitted without specific authority in the governing documents.
In discussing the history of the development of the NCAC Certificate, the court pointed out that language suggested by KFCC that would have given it the control it sought was removed from the Certificate as part of the negotiations that settled the class action lawsuit. Also, the NCAC's operating history contained examples of changes made by the NCAC that were implemented by KFCC, which showed a “course of performance” in the relations between the parties.
KFCC did retain some control over the final advertising output, however, since the agreement between KFCC and the NCAC that allowed the use of the KFC names and marks in advertising requires that all advertising be in good taste. Also, since franchisees can only sell products approved by KFCC and KFCC retains control of the national advertising agency, the court felt KFCC still had the power to protect its brand and its positioning in the market.
The powers retained by each party make KFC advertising a virtual partnership between KFCC and the NCAC, and partnership relations can be difficult. However, cooperation between KFCC and the NCAC is essential to keep the flow of KFC advertising going. One wonders about the consequences if KFCC and the NCAC became seriously estranged and each side wanted to play “chicken” with the other. Why did KFCC agree to the overlapping terms of the Certificate of Incorporation? Probably because the settlement of the long-running class action lawsuit, which contained issues in addition to advertising, was paramount. As so often happens, there is a price to pay for expediency, and this may be it as far as KFC advertising is concerned.
Court Finds That Rebates from Affiliates Need Not Be Separately Disclosed in Item 8
An issue raised in a continuing battle of motions to dismiss between a Maryland-based home cleaning franchisor and two of its South Carolina franchisees was decided in the franchisor's favor in The Cleaning Authority, Inc. v. Joanna Neubert, et al. (2011 WL 666892, D.Md.). Earlier issues were discussed at The Cleaning Authority, Inc. v. Joanna Neubert, et al., 739 F.Supp.2d 807; Bus. Franchise Guide (CCH) '14,465, (USDC Maryland, Sept. 7, 2010).
The franchisees unilaterally terminated their franchise agreements without the franchisor's consent. Litigation followed with a variety of claims and counterclaims. One of the claims made by the franchisees was that the franchisor did not comply with the requirements of Item 8 of the UFOC in effect at the time ' specifically, that it did not disclose that its affiliate, with which the franchisees were required to do business, paid over some of its proceeds to the franchisor. Since the pertinent requirements of Item 8 are the same under the UFOC and the current FDD disclosure format, the review and findings by the court are of present interest.
The franchisor did disclose that S&T Management, Inc. (“S&T”) was its affiliate and in Item 8 disclosed that its franchisees had to sign a Mailer Services Agreement with S&T to send advertising brochures to prospective customers in the franchisees' territory. The amounts that the franchisees had to pay S&T also were disclosed. The franchisees argued that since there was no disclosure that S&T made payments to the franchisor, the franchisor's statement in Item 8 that “we do not currently receive rebates from any of our approved suppliers” was in error and had the franchisees known the truth, they would not have purchased the franchise.
The court quickly dismissed the franchisees' claim that, at least based on their pleadings, the nature of the financial relationship between the franchisor and its affiliate was material to the franchisees' decision whether to purchase the franchise. It also found that there was a distinction between what was required to be disclosed concerning payments to a franchisor from approved third-party suppliers and those made by affiliated suppliers. The court concluded that as far as the Item 8 disclosure about payments to a franchisor by its affiliates was concerned, only the receipt of revenues from franchisee purchases by the affiliate is called for, not what the affiliate does with the money it receives from franchisees. The court cited the FTC's “Statement of Basis and Purpose” issued in connection with the UFOC, which lumped a franchisor and its affiliates together for purposes of the disclosure of rebates or kickbacks, distinguishing them from third-party suppliers and the payments they make to the franchisor or its affiliates.
Disclosure requirements in the UFOC, and now the FDD, are long and complex. Often minor, relatively immaterial, errors are made in compliance ' so-called “technical violations” ' which, as a practical matter, do not disadvantage a franchisee or which should not influence the decision of a reasonable franchisee whether to purchase the franchise. It can be argued that the court in this case took a practical view of the facts and disallowed a claim based on what may have been a technical violation, depending on one's view of the concerned Item 8 requirement at issue, of the disclosure requirements. There are real issues in this dispute. The court was wise to disregard the minutiae so that the basic contract issues could be dealt with.
Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. Charles G. Miller is a shareholder and director of the firm. Hart and Miller can be reached by phone at 415-956-1900.
Major Differences In UK, U.S. Copyright Laws
This article highlights how copyright law in the United Kingdom differs from U.S. copyright law, and points out differences that may be crucial to entertainment and media businesses familiar with U.S law that are interested in operating in the United Kingdom or under UK law. The article also briefly addresses contrasts in UK and U.S. trademark law.
Strategy vs. Tactics: Two Sides of a Difficult Coin
With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.
The Article 8 Opt In
The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.
Removing Restrictive Covenants In New York
In Rockwell v. Despart, the New York Supreme Court, Third Department, recently revisited a recurring question: When may a landowner seek judicial removal of a covenant restricting use of her land?