The Renaissance Franchise Lawyer

In Kilpatrick Townsend & Stockton, franchise law is now part of the trademark team, which is in turn part of the intellectual property department. For more than 25 years, however, it was part of the business practice team. Even there, it had an uneasy presence due to the nature of the franchise practice ' it straddled the line between contentious and commercial work. The problem is that franchising as an area of law means different things to different people.

The ABA's View

The quandary is not only one that has puzzled law firms, but it is one that has confounded the American Bar Association as well. In the early 1970s, franchising was not a recognized discipline because franchising within the business community was still in its infancy. The antitrust, business, and possibly the intellectual property sections of local bar associations had committees or subcommittees focused on franchising. It was not until the Forum on Franchising was formed in the late 1970s that franchising received more formal recognition from the ABA. Even then, it was still treated differently. (The five “forums” in the ABA were created to deal with areas where the jurisdiction within the ABA sections was unclear.) Being a “forum,” rather than a section, made it a second-class citizen: One had to be a member of a section even to join a forum. And rather than having elected officers, as do the sections, the officers of the five forum committees were appointed by the ABA president.

Key Hypotheses

The question remains: Why is franchising, as a legal discipline, out of the mainstream? This article presents several hypothetical responses.

Hypothesis Number 1

Franchising has a borderless definition. There is an FTC definition, 14 definitions taken from state sales disclosure laws, and approximately 20 definitions from what franchise lawyers characterize as “relationship” laws. (The latter are very diverse in their coverage, but generally regulate conduct relating to franchise terminations and non-renewals, assignments of franchises, freedom of franchisees to associate with other franchisees, sourcing of products and services, encroachment by franchisors on franchisee territorial rights, and discriminating among franchisees.) In addition, there are exemptions from some definitions of “franchise” for large sectors of the economy: The difference between a distributorship and a franchise can often be minimal. But when the world created the framework for franchise regulation, it exempted systems where the putative franchisee paid nothing up front or along the way to its franchisor during the relationship other than for purchases of inventory. Had this exemption not been created, the number of franchise systems would have increased exponentially. The creators of franchise law also have in part exempted petroleum dealers and automotive suppliers from the franchise disclosure and registration laws. Yet when one examines statistics about the scope and effect of franchising on the economy, these sectors are typically included when the purpose is to impress upon others the breadth of franchising.

Hypothesis Number 2

Franchising is not an industry. Franchising is a method of distribution that is used in over 85 industries, perhaps considerably more, to bring goods and services to the marketplace. The needs of these industries differ, and perhaps how franchising is regulated in each should be correspondingly customized as well.

Take, for example, the hotel industry and compare it with a home repair franchise. Hotels cost lots of money to build, so in many, but not all, cases, the franchisees are sophisticated business people. In the home service industry, a very successful entrepreneur may only own half a dozen franchises, each operating out of a truck. Many of the franchisees have been home repairmen for most of their lives and know considerably less about business than the owner of a single hotel. There are, of course, exceptions in both industries.

Hypothesis Number 3

Franchising is, in fact, a multi-discipline field and requires knowledge of multiple areas of the law. As noted above, at least three of the ABA sections claim a stake in the field of franchising. None of the claims is without merit.

Furthermore, most attorneys who like to describe themselves as “franchise lawyers” in reality do have knowledge beyond the franchise regulatory system. In addition, the nature of franchising disputes, as well as the nature of business generally, has morphed over time, thus requiring franchise lawyers to be flexible as their careers develop. In the 1970s, for example, franchising issues were considerably affected by antitrust considerations ' that is less true today. The relationship between franchising law and trademark law was even slower to develop. This was odd because trademark affiliation became an intricate part of the definition of a franchise. Today, franchising agreements more precisely define what the franchisor's rights and the franchisee's obligations are on the subject of trademark ownership and use, and, for that matter, on intellectual property ownership generally.

Finally as we have seen over the years, knowledge of litigation, M&A, real estate, bankruptcy and general commercial law has been very helpful for the true Renaissance franchise lawyer. With the ever-increasing complexity of the law, the well-rounded attorney must either have skills in more than one area, or access to such skills, and at least a basic law school knowledge of some, if not all, of these tangential areas, so that, in the case of an in-house lawyer or the outside general counsel to a franchise company, the attorney can put up his or her antenna when s/he senses that a problem in one of these related fields is heading toward the client. As for what will be the next frontier: technology and social media are the likely direction.

Hypothesis Number 4

Franchising has only recently been judicially recognized as an area requiring expertise. There are probably one or two cases, involving attorneys' fees, where a court may have acknowledged that a lawyer skilled in franchise law was entitled to a higher attorney's award because of his expertise. But the groundbreaker in this field is State v. Orr, 759 N.W. 2d 702 (Neb. 2009), where a generalist from Nebraska was sanctioned by the Nebraska Supreme Court for practicing franchise law, an area in which he was described as being unqualified. Orr, which was decided only three years ago, has yet to make an impact in the wide world of franchise law, and may never have a great impact, but it has a pleasing effect on those of us who have focused much of our careers on franchise clients and franchise problems. To us, it says, “Yes, we are different.”

Hypothesis Number 5

Franchising has been for the most part ignored by the law schools. This brings me full circle to my opening point. Nobody goes to law school to become a franchise lawyer. If s/he did, the odds are about one in 20 that the law school s/he attends has a course to teach him/her the basic skills of being a franchise lawyer. S/he will not get an introduction to the basics of franchise law because it is only taught academically at a handful of law schools. There is only one textbook on franchise law, and I am not sure how widely it has been accepted in the classrooms. The ABA has been working on a textbook for the better part of a decade, but it has yet to emerge.

Fundamentals of Franchising, (Rupert Barkoff and Andrew Selden, “Fundamentals of Franchising” (3d. ed. 2009)), an edited collection of the basics in various aspects of franchise law (disclosure, registration, structuring, and relationship issues), as well as two of the key tangential areas (trademarks and antitrust) for franchise lawyers, is now used in whole or in part in several law school programs, but Fundamentals was created primarily to be a quick start for those interested in franchising. It was not intended to stimulate critical thinking, nor does it address, directly or indirectly, policy issues (remember MacPherson v. Buick Motor Co., 111 N.E. 1050 (1916), a famous New York Court of Appeals case frequently examined in the first year of law school).

Conclusion

The bottom line is that franchise law, even after 40 years, is still a new kid on the block. It has gained prominence during these four decades and we are beginning to get a better image of what the “Superman” franchise lawyer looks like. Nevertheless, “franchise lawyer” still does not become the answer when the rookie lawyer is asked: What do you want to do when you grow up?

Rupert M. Barkoff is a partner in the Atlanta office of Kilpatrick Townsend & Stockton, where he chairs his firm's franchise group. He is co-editor-in-chief of “Fundamentals of Franchising,” a primer on franchise law. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.

How many attorneys entered law school wanting to be a franchise lawyer when they graduated? To my knowledge, one. He is an exception because he worked in the department that regulates franchise law in the State of Maryland before making the plunge into legal academics. Thus, he was no stranger to franchising, as is normally the case.

What Is Franchise Law?

Franchise law might be symbolized by the proverbial red-headed stepchild: There is something that seems different about it, but nobody is exactly sure what that difference is. This viewpoint is exemplified by the various ways in which law firms categorize their franchise “departments” in their organizational structure. In some firms, franchising is housed in the corporate or business section of the firm, likely reflecting the fact that the practice of franchise law in those firms consists primarily of drafting agreements and disclosure documents, and the purchase and sale of franchises and franchise systems. In other firms, their practices focus on contentious matters; thus their franchise practice is lumped into the litigation department.

In Kilpatrick Townsend & Stockton, franchise law is now part of the trademark team, which is in turn part of the intellectual property department. For more than 25 years, however, it was part of the business practice team. Even there, it had an uneasy presence due to the nature of the franchise practice ' it straddled the line between contentious and commercial work. The problem is that franchising as an area of law means different things to different people.

The ABA's View

The quandary is not only one that has puzzled law firms, but it is one that has confounded the American Bar Association as well. In the early 1970s, franchising was not a recognized discipline because franchising within the business community was still in its infancy. The antitrust, business, and possibly the intellectual property sections of local bar associations had committees or subcommittees focused on franchising. It was not until the Forum on Franchising was formed in the late 1970s that franchising received more formal recognition from the ABA. Even then, it was still treated differently. (The five “forums” in the ABA were created to deal with areas where the jurisdiction within the ABA sections was unclear.) Being a “forum,” rather than a section, made it a second-class citizen: One had to be a member of a section even to join a forum. And rather than having elected officers, as do the sections, the officers of the five forum committees were appointed by the ABA president.

Key Hypotheses

The question remains: Why is franchising, as a legal discipline, out of the mainstream? This article presents several hypothetical responses.

Hypothesis Number 1

Franchising has a borderless definition. There is an FTC definition, 14 definitions taken from state sales disclosure laws, and approximately 20 definitions from what franchise lawyers characterize as “relationship” laws. (The latter are very diverse in their coverage, but generally regulate conduct relating to franchise terminations and non-renewals, assignments of franchises, freedom of franchisees to associate with other franchisees, sourcing of products and services, encroachment by franchisors on franchisee territorial rights, and discriminating among franchisees.) In addition, there are exemptions from some definitions of “franchise” for large sectors of the economy: The difference between a distributorship and a franchise can often be minimal. But when the world created the framework for franchise regulation, it exempted systems where the putative franchisee paid nothing up front or along the way to its franchisor during the relationship other than for purchases of inventory. Had this exemption not been created, the number of franchise systems would have increased exponentially. The creators of franchise law also have in part exempted petroleum dealers and automotive suppliers from the franchise disclosure and registration laws. Yet when one examines statistics about the scope and effect of franchising on the economy, these sectors are typically included when the purpose is to impress upon others the breadth of franchising.

Hypothesis Number 2

Franchising is not an industry. Franchising is a method of distribution that is used in over 85 industries, perhaps considerably more, to bring goods and services to the marketplace. The needs of these industries differ, and perhaps how franchising is regulated in each should be correspondingly customized as well.

Take, for example, the hotel industry and compare it with a home repair franchise. Hotels cost lots of money to build, so in many, but not all, cases, the franchisees are sophisticated business people. In the home service industry, a very successful entrepreneur may only own half a dozen franchises, each operating out of a truck. Many of the franchisees have been home repairmen for most of their lives and know considerably less about business than the owner of a single hotel. There are, of course, exceptions in both industries.

Hypothesis Number 3

Franchising is, in fact, a multi-discipline field and requires knowledge of multiple areas of the law. As noted above, at least three of the ABA sections claim a stake in the field of franchising. None of the claims is without merit.

Furthermore, most attorneys who like to describe themselves as “franchise lawyers” in reality do have knowledge beyond the franchise regulatory system. In addition, the nature of franchising disputes, as well as the nature of business generally, has morphed over time, thus requiring franchise lawyers to be flexible as their careers develop. In the 1970s, for example, franchising issues were considerably affected by antitrust considerations ' that is less true today. The relationship between franchising law and trademark law was even slower to develop. This was odd because trademark affiliation became an intricate part of the definition of a franchise. Today, franchising agreements more precisely define what the franchisor's rights and the franchisee's obligations are on the subject of trademark ownership and use, and, for that matter, on intellectual property ownership generally.

Finally as we have seen over the years, knowledge of litigation, M&A, real estate, bankruptcy and general commercial law has been very helpful for the true Renaissance franchise lawyer. With the ever-increasing complexity of the law, the well-rounded attorney must either have skills in more than one area, or access to such skills, and at least a basic law school knowledge of some, if not all, of these tangential areas, so that, in the case of an in-house lawyer or the outside general counsel to a franchise company, the attorney can put up his or her antenna when s/he senses that a problem in one of these related fields is heading toward the client. As for what will be the next frontier: technology and social media are the likely direction.

Hypothesis Number 4

Franchising has only recently been judicially recognized as an area requiring expertise. There are probably one or two cases, involving attorneys' fees, where a court may have acknowledged that a lawyer skilled in franchise law was entitled to a higher attorney's award because of his expertise. But the groundbreaker in this field is State v. Orr , 759 N.W. 2d 702 (Neb. 2009), where a generalist from Nebraska was sanctioned by the Nebraska Supreme Court for practicing franchise law, an area in which he was described as being unqualified. Orr, which was decided only three years ago, has yet to make an impact in the wide world of franchise law, and may never have a great impact, but it has a pleasing effect on those of us who have focused much of our careers on franchise clients and franchise problems. To us, it says, “Yes, we are different.”

Hypothesis Number 5

Franchising has been for the most part ignored by the law schools. This brings me full circle to my opening point. Nobody goes to law school to become a franchise lawyer. If s/he did, the odds are about one in 20 that the law school s/he attends has a course to teach him/her the basic skills of being a franchise lawyer. S/he will not get an introduction to the basics of franchise law because it is only taught academically at a handful of law schools. There is only one textbook on franchise law, and I am not sure how widely it has been accepted in the classrooms. The ABA has been working on a textbook for the better part of a decade, but it has yet to emerge.

Fundamentals of Franchising, (Rupert Barkoff and Andrew Selden, “Fundamentals of Franchising” (3d. ed. 2009)), an edited collection of the basics in various aspects of franchise law (disclosure, registration, structuring, and relationship issues), as well as two of the key tangential areas (trademarks and antitrust) for franchise lawyers, is now used in whole or in part in several law school programs, but Fundamentals was created primarily to be a quick start for those interested in franchising. It was not intended to stimulate critical thinking, nor does it address, directly or indirectly, policy issues (remember MacPherson v. Buick Motor Co. , 111 N.E. 1050 (1916), a famous New York Court of Appeals case frequently examined in the first year of law school).

Conclusion

The bottom line is that franchise law, even after 40 years, is still a new kid on the block. It has gained prominence during these four decades and we are beginning to get a better image of what the “Superman” franchise lawyer looks like. Nevertheless, “franchise lawyer” still does not become the answer when the rookie lawyer is asked: What do you want to do when you grow up?

Rupert M. Barkoff is a partner in the Atlanta office of Kilpatrick Townsend & Stockton, where he chairs his firm's franchise group. He is co-editor-in-chief of “Fundamentals of Franchising,” a primer on franchise law. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.