Social Media: The Legal Implications on Franchise Systems

While social media does not necessarily introduce many new legal theories or issues, it does create new scenarios for existing legal issues. The traditional solutions to those issues may not always be appropriate. Good examples of such new scenarios arise in privacy torts and defamation. Social media site operators offer a medium for exchange of views and opinions and usually have little control over the content posted by third-party users. Nonetheless, under the traditional notions of copyright law, social media site operators could be considered “publishers,” rather than “distributors,” and as such be liable for third-party content posted on their sites. (See Stratton Oakmont, Inc. v. Prodigy Servs. Co., 1995 WL 323710 (N.Y. Sup. Ct. May 24, 1995) (not published), in which the operator of an online message board was held liable for not deleting certain defamatory messages.) Also, traditional notions of copyright law are not well-adapted to the opportunities for publication and exchange that the Internet provides.

The Communications Decency Act

The Communications Decency Act (the “CDA”) was enacted to “promote the continued development of the Internet,” “encourage the development of technologies which maximize user control over what information is received by individuals ' who use the Internet ' ” (47 U.S.C. 230(b). The CDA provides that “ no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider” 47 U.S.C. 230(c)(1).) Information content providers, however, are not protected by the CDA. As a basic premise, neither the operators of social media sites, nor users of the sites, should be liable for third-party content posted on such sites.

But the distinction between publisher and content provider is not always obvious, which may have implications for certain social media use by franchisors. An interesting example is online consumer contests in which participants submit content as part of the contest. One such contest that led to litigation was a Quiznos campaign claiming that its sandwiches had twice the amount of meat as Subway sandwiches (Doctor's Associates v. QIP Holder LLC, 2010 WL 669870 (D. Conn.) Slip copy). The advertising campaign at issue consisted of TV commercials comparing the two brands, but also included an online competition that solicited videos from consumers and, to some degree, instructed consumers about what the videos should say and show: The participants were instructed to create a video showing why they thought Quiznos was superior to Subway. Subway took issue with the campaign, questioning the truthfulness of the TV commercials, asserting claims against Quiznos including false and deceptive advertising in violation of the Lanham Act and commercial disparagement in violation of the Connecticut Unfair Trade Practices Act. Quiznos brought a motion for summary judgment to dismiss the claims that were based on the content of the entrant videos. The court dismissed Quiznos' motion, presumably because the directions provided by Quiznos to the entrants regarding the solicited video content may be sufficient to make the franchisor an “information content provider” and therefore not protected by the CDA. The lesson: If franchisors want to enjoy the benefits of the CDA they need to be careful not to interject themselves into the content stream from third parties, be they franchisees or customers, or the CDA may not protect them from liability for third-party activities.

An issue that remains to be tried is whether the CDA can be used as a defense by a franchisor facing vicarious liability claims for its franchisees' online activity. The CDA does not address this issue, and to date there is no case law on point. However, several cases address employers' liability for their employees' online activities. Those cases apply traditional vicarious liability and agency analysis, and they mostly conclude that the employers are not liable. For example, an employer was not liable for an employee's anonymous threatening e-mails to two individuals, even though the messages were sent from the employer's computer system (see Delfino v. Agilent Technologies, Inc., 145 Ca. App. 4th 790 (6th Dist. 2006), review denied, (Feb. 28, 2007) and cert. denied, 128 S. Ct. 980 (U.S. 2007)). However, such cases will always be fact-specific, and franchisors should be cautious not to get overly involved in franchisees' online postings.

Copyright Infringement

The general rule under copyright law is that copyrights in any content belong to the person who created the content (see 17 U.S.C. 201 (a), (b)). The most common exception to this rule is “works for hire” created by an employee within the scope of his or her employment. The employer is deemed to be the owner of such works.

Much of the appeal of social media comes from “user-generated content” (“UGC”), which is only sometimes a work for hire by an employee. Many (or even most) people who share content through social media do not understand that content found in social media may be subject to copyrights ' making the risk of inadvertent copyright infringement great. Franchisors should educate both their own employees and their franchisees who post content to the web about authors' rights under copyright laws and the consequences of infringing on third-party copyrighted materials (17 U.S.C. 501-506).

Defamation and Privacy Torts

“Think before you speak” is a motto that social media users often forget. Social media postings have proven to be the source of many defamation and privacy lawsuits. Defamation lawsuits often involve individuals, and most franchisors and franchisees (it is hoped) are not posting potentially defamatory information about individuals. However, businesses too may bring a claim for libel if a defamatory statement puts in doubt the honesty, efficiency or prestige of the business. One such example is Neidicht v. Acar, No. 09119783 (N.Y. Sup. Ct., July 28, 2009), in which an apartment building administrator brought a libel suit against residents and former employees because of Twitter postings regarding the involvement of the administrator in the death of a building manager. In Horizon Group Management LLC v. Bonnen, No. 09-8675 (Ill. Cir. Ct. July 20, 2009), another apartment-management company brought suit against a tenant who had referred to her apartment as “moldy” in a tweet. Of course, not every negative statement on a social media site will constitute libel. The Bonnen case was dismissed with prejudice because the particular tweet ' “Who says sleeping in a moldy apartment is bad for you? Horizon really thinks it's okay.” ' was deemed to be too vague to be actionable as libel.

Advertising Laws

Advertising laws generally apply to advertisements through social media just like they do to other types of media, though advertising in social media sometimes takes a different form. For example, bloggers frequently write about products and services they like or dislike. Those types of third-party endorsements may have consequences for the company whose products or services are being reviewed.

Under the FTC Guides Concerning Use of Endorsements and Testimonials in Advertising (16 C.F.R. 255 (2010), the “FTC Guides”), liability attaches not only to a blogger (the “endorser”) but may also attach to a company (the “advertiser”) providing the blogger with free samples of the product (“product” is defined in the FTC Guides to include “any product, service, company, or industry”). An endorsement is “any advertising message ' that consumers are likely to believe reflects the opinions, beliefs, findings or experiences of a party other than the sponsoring advertiser.” (16 C.F.R. 255.0 (b)).

However, not every endorsement made by bloggers may lead to responsibility. If a consumer independently writes a positive blog post about a product on a social media site or a blog without any involvement of the advertiser, there would likely not be any liability. The FTC Guides use the example of a consumer buying different dog food for her dog and writing about her views of the different brands on her blog. If the consumer bought the new dog food independently and wrote about it, the FTC Guides conclude that it would not be deemed an endorsement. However, if the consumer is part of a network marketing program under which she receives products with the expectation that she will blog about the products, it would be an endorsement. (16 C.F.R. 255.0 Example 8).

It is advisable for franchisors who believe it is likely that bloggers will write about them to provide the bloggers with policies to follow. A policy should require the blogger to only express his or her honest opinion and only write about products if he or she actually used them (16 C.F.R. ' 255.1 (a) and (c)). Policies should also make sure that bloggers are not allowed to make representations as part of their endorsements that would be deemed deceptive if made by the advertiser directly, and require bloggers to disclose connections between them and the franchise system (16 C.F.R. ' 255.1(d)).

Franchise Disclosure on Social Media Sites

Some legal issues that arise in connection with franchisors and franchisees using social media sites are unique to franchising. For example, franchisors looking to use social media as part of their franchise sales tactics must consider how federal and state disclosure regulation affects their social media presence.

Disclosure

Federal and state disclosure laws do not prohibit disclosure through social media, though the FTC Franchise Rule requires the disclosure document to be delivered in a format that the prospect can store, download, print or otherwise maintain for future reference (16 C.F.R. ' 436.6(b)). The FTC Franchise Rule does not set any earliest time when a franchisee can be disclosed. Therefore, the mere presence on a social media site, or the making of an offer to buy franchises made on such sites would not in of itself constitute a violation of the FTC Franchise Rule. State franchise disclosure laws, however, often require registration before offering franchises in the state.

For franchisors that use social media to offer and sell franchises, two North American Securities Administrators Association (“NASAA”) policies are relevant. In a “Statement of Policy Regarding Offers of Franchises on the Internet,” adopted May 3, 1998, NASAA explained that franchisors do not have to be registered in a state if the offer indicates that the franchise is not offered to residents in the state, is not directed to any person in that state, and no sales are made in the state until the franchisor's FDD has been registered in the state. Thus, a franchisor who is only registered in a few states can still offer franchises through social media, as long as the proper disclaimer is included. In a policy statement issued in 2001, NASAA explained that Internet advertisements to sell franchises do not need to be registered if: 1) the advertisement is not directed to any person in a state requiring prior registration, and 2) the URL address for the website where the advertisement appears is disclosed on the cover page of the franchisor's franchise disclosure document. NASAA's policies can be found at www.nasaa.org/ under Industry Resources, in the Franchise Resources link.

Financial Performance Representations

Postings on social media sites may sometimes be as casual as the proverbial paper napkin with sales numbers jotted down, and may be just as illegal. Generally, the FTC Franchise Rule prohibits the making of financial performance representations (“FPR”) to prospective franchisees unless the FPR is in the franchisor's FDD. The definition of an FPR is broad, including any oral, written or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits.

In this context, “general media” should be interpreted broadly, including advertisements placed on the franchisor's website as well as websites operated by third parties (See the FTC's “Franchise Rule Compliance Guide,” p. 132). Whether financial information disseminated through social media is an FPR is a function of the intended audience for the communication. Information directed to the general public is not an FPR. Information directed to prospective franchisees or placed in a location where it is more likely to be accessed by prospective franchisees (i.e., the investor section of a franchisor's website), will likely be considered an FPR within the scope of the FTC Franchise Rule. To date, the FTC has not provided specific guidance for FPRs in social media. Thus, determining whether financial information constitutes an FPR may be a function of the franchisor's social media strategy. If the general strategy is to sell franchises, the likelihood increases that financial information shared through social media is deemed an FPR; but if the strategy is to increase brand awareness and connect with customers, the same information may not be an FPR.

Franchisors also must consider unsolicited FPRs made by franchisees. Franchisees are not restricted by the FTC Franchise Rule from sharing their financial information with others. However, franchisors usually don't encourage franchisees in this regard because they fear they will be perceived as making financial performance representations indirectly through the franchisee. Since social media is such a casual mode of communication, franchisors should consider restricting franchisees from sharing financial data through social media, or franchisors might request that the franchisee include a disclaimer that the information is not being provided by the franchisor.

Advertising Disclosure

To the extent that social media is part of a franchise system's customer advertising program, the franchisor should disclose information regarding the same in Item 11 of its FDD. Likewise, franchisors should consider whether their social media policy warrants other changes to Item 11 and their franchise agreements. For example, most franchisors traditionally have included language in their franchise agreement and in their franchise disclosure documents requiring franchisees to submit all advertising to the franchisor for approval before the franchisee starts using it. (As required pursuant to 16 C.F.R ' 436.4(k)(4)(ii).) While not all franchisee content posted through social media constitutes advertising, some probably will, such as franchisee posts about local offers or promotions.

Conclusion

Social media is here to stay, and at this point most franchise systems are participating in one way or another. While it is a medium that offers great advantages and opportunities to franchisors and franchisees, it is a public space where franchisors and franchisees alike need to practice caution.

Beata Krakus is an associate in the Chicago office of Greensfelder, Attorneys at Law. She can be contacted at [email protected].

Do you know what it means to get dooced? Is a social media troll ugly? What is crowdsourcing, the blogosphere, and UGC? It is clear by now that social media is not going to be a fad and that it will instead be a significant part of everyday life. (To end the suspense, to get “dooced” means to lose one's job because of statements made on a blog. A “troll” is a person who posts negative comments on a social media page to cause disruption and argument. “Crowdsourcing” means giving an assignment traditionally performed by employees or consultants to a large, generally unorganized group of people. “Blogosphere” is a reference to the collective blog community. “UGC” means user-generated content. See www.urbandictionary.com.)

Since most consumers today expect social media to be part of the online presence of the retailers and businesses that they frequent, franchisors have to figure out how it fits into their and their franchisees' businesses, and franchise lawyers have to figure out the legal implications of their clients' choices and actions. Social media usage can touch on many different legal issues affecting a franchise system. This article will not attempt to cover them all, but rather focus on general social media legal issues that may be new to franchisors, as well as critical franchise-specific legal issues.

Legal Issues Specific to Social Media Usage

While social media does not necessarily introduce many new legal theories or issues, it does create new scenarios for existing legal issues. The traditional solutions to those issues may not always be appropriate. Good examples of such new scenarios arise in privacy torts and defamation. Social media site operators offer a medium for exchange of views and opinions and usually have little control over the content posted by third-party users. Nonetheless, under the traditional notions of copyright law, social media site operators could be considered “publishers,” rather than “distributors,” and as such be liable for third-party content posted on their sites. (See Stratton Oakmont, Inc. v. Prodigy Servs. Co., 1995 WL 323710 (N.Y. Sup. Ct. May 24, 1995) (not published), in which the operator of an online message board was held liable for not deleting certain defamatory messages.) Also, traditional notions of copyright law are not well-adapted to the opportunities for publication and exchange that the Internet provides.

The Communications Decency Act

The Communications Decency Act (the “CDA”) was enacted to “promote the continued development of the Internet,” “encourage the development of technologies which maximize user control over what information is received by individuals ' who use the Internet ' ” (47 U.S.C. 230(b). The CDA provides that “ no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider” 47 U.S.C. 230(c)(1).) Information content providers, however, are not protected by the CDA. As a basic premise, neither the operators of social media sites, nor users of the sites, should be liable for third-party content posted on such sites.

But the distinction between publisher and content provider is not always obvious, which may have implications for certain social media use by franchisors. An interesting example is online consumer contests in which participants submit content as part of the contest. One such contest that led to litigation was a Quiznos campaign claiming that its sandwiches had twice the amount of meat as Subway sandwiches (Doctor's Associates v. QIP Holder LLC, 2010 WL 669870 (D. Conn.) Slip copy). The advertising campaign at issue consisted of TV commercials comparing the two brands, but also included an online competition that solicited videos from consumers and, to some degree, instructed consumers about what the videos should say and show: The participants were instructed to create a video showing why they thought Quiznos was superior to Subway. Subway took issue with the campaign, questioning the truthfulness of the TV commercials, asserting claims against Quiznos including false and deceptive advertising in violation of the Lanham Act and commercial disparagement in violation of the Connecticut Unfair Trade Practices Act. Quiznos brought a motion for summary judgment to dismiss the claims that were based on the content of the entrant videos. The court dismissed Quiznos' motion, presumably because the directions provided by Quiznos to the entrants regarding the solicited video content may be sufficient to make the franchisor an “information content provider” and therefore not protected by the CDA. The lesson: If franchisors want to enjoy the benefits of the CDA they need to be careful not to interject themselves into the content stream from third parties, be they franchisees or customers, or the CDA may not protect them from liability for third-party activities.

An issue that remains to be tried is whether the CDA can be used as a defense by a franchisor facing vicarious liability claims for its franchisees' online activity. The CDA does not address this issue, and to date there is no case law on point. However, several cases address employers' liability for their employees' online activities. Those cases apply traditional vicarious liability and agency analysis, and they mostly conclude that the employers are not liable. For example, an employer was not liable for an employee's anonymous threatening e-mails to two individuals, even though the messages were sent from the employer's computer system ( see Delfino v. Agilent Technologies, Inc. , 145 Ca. App. 4th 790 (6th Dist. 2006), review denied , (Feb. 28, 2007) and cert. denied , 128 S. Ct. 980 (U.S. 2007)). However, such cases will always be fact-specific, and franchisors should be cautious not to get overly involved in franchisees' online postings.

Copyright Infringement

The general rule under copyright law is that copyrights in any content belong to the person who created the content (see 17 U.S.C. 201 (a), (b)). The most common exception to this rule is “works for hire” created by an employee within the scope of his or her employment. The employer is deemed to be the owner of such works.

Much of the appeal of social media comes from “user-generated content” (“UGC”), which is only sometimes a work for hire by an employee. Many (or even most) people who share content through social media do not understand that content found in social media may be subject to copyrights ' making the risk of inadvertent copyright infringement great. Franchisors should educate both their own employees and their franchisees who post content to the web about authors' rights under copyright laws and the consequences of infringing on third-party copyrighted materials (17 U.S.C. 501-506).

Defamation and Privacy Torts

“Think before you speak” is a motto that social media users often forget. Social media postings have proven to be the source of many defamation and privacy lawsuits. Defamation lawsuits often involve individuals, and most franchisors and franchisees (it is hoped) are not posting potentially defamatory information about individuals. However, businesses too may bring a claim for libel if a defamatory statement puts in doubt the honesty, efficiency or prestige of the business. One such example is Neidicht v. Acar, No. 09119783 (N.Y. Sup. Ct., July 28, 2009), in which an apartment building administrator brought a libel suit against residents and former employees because of Twitter postings regarding the involvement of the administrator in the death of a building manager. In Horizon Group Management LLC v. Bonnen, No. 09-8675 (Ill. Cir. Ct. July 20, 2009), another apartment-management company brought suit against a tenant who had referred to her apartment as “moldy” in a tweet. Of course, not every negative statement on a social media site will constitute libel. The Bonnen case was dismissed with prejudice because the particular tweet ' “Who says sleeping in a moldy apartment is bad for you? Horizon really thinks it's okay.” ' was deemed to be too vague to be actionable as libel.

Advertising Laws

Advertising laws generally apply to advertisements through social media just like they do to other types of media, though advertising in social media sometimes takes a different form. For example, bloggers frequently write about products and services they like or dislike. Those types of third-party endorsements may have consequences for the company whose products or services are being reviewed.

Under the FTC Guides Concerning Use of Endorsements and Testimonials in Advertising (16 C.F.R. 255 (2010), the “FTC Guides”), liability attaches not only to a blogger (the “endorser”) but may also attach to a company (the “advertiser”) providing the blogger with free samples of the product (“product” is defined in the FTC Guides to include “any product, service, company, or industry”). An endorsement is “any advertising message ' that consumers are likely to believe reflects the opinions, beliefs, findings or experiences of a party other than the sponsoring advertiser.” (16 C.F.R. 255.0 (b)).

However, not every endorsement made by bloggers may lead to responsibility. If a consumer independently writes a positive blog post about a product on a social media site or a blog without any involvement of the advertiser, there would likely not be any liability. The FTC Guides use the example of a consumer buying different dog food for her dog and writing about her views of the different brands on her blog. If the consumer bought the new dog food independently and wrote about it, the FTC Guides conclude that it would not be deemed an endorsement. However, if the consumer is part of a network marketing program under which she receives products with the expectation that she will blog about the products, it would be an endorsement. (16 C.F.R. 255.0 Example 8).

It is advisable for franchisors who believe it is likely that bloggers will write about them to provide the bloggers with policies to follow. A policy should require the blogger to only express his or her honest opinion and only write about products if he or she actually used them (16 C.F.R. ' 255.1 (a) and (c)). Policies should also make sure that bloggers are not allowed to make representations as part of their endorsements that would be deemed deceptive if made by the advertiser directly, and require bloggers to disclose connections between them and the franchise system (16 C.F.R. ' 255.1(d)).

Franchise Disclosure on Social Media Sites

Some legal issues that arise in connection with franchisors and franchisees using social media sites are unique to franchising. For example, franchisors looking to use social media as part of their franchise sales tactics must consider how federal and state disclosure regulation affects their social media presence.

Disclosure

Federal and state disclosure laws do not prohibit disclosure through social media, though the FTC Franchise Rule requires the disclosure document to be delivered in a format that the prospect can store, download, print or otherwise maintain for future reference (16 C.F.R. ' 436.6(b)). The FTC Franchise Rule does not set any earliest time when a franchisee can be disclosed. Therefore, the mere presence on a social media site, or the making of an offer to buy franchises made on such sites would not in of itself constitute a violation of the FTC Franchise Rule. State franchise disclosure laws, however, often require registration before offering franchises in the state.

For franchisors that use social media to offer and sell franchises, two North American Securities Administrators Association (“NASAA”) policies are relevant. In a “Statement of Policy Regarding Offers of Franchises on the Internet,” adopted May 3, 1998, NASAA explained that franchisors do not have to be registered in a state if the offer indicates that the franchise is not offered to residents in the state, is not directed to any person in that state, and no sales are made in the state until the franchisor's FDD has been registered in the state. Thus, a franchisor who is only registered in a few states can still offer franchises through social media, as long as the proper disclaimer is included. In a policy statement issued in 2001, NASAA explained that Internet advertisements to sell franchises do not need to be registered if: 1) the advertisement is not directed to any person in a state requiring prior registration, and 2) the URL address for the website where the advertisement appears is disclosed on the cover page of the franchisor's franchise disclosure document. NASAA's policies can be found at www.nasaa.org/ under Industry Resources, in the Franchise Resources link.

Financial Performance Representations

Postings on social media sites may sometimes be as casual as the proverbial paper napkin with sales numbers jotted down, and may be just as illegal. Generally, the FTC Franchise Rule prohibits the making of financial performance representations (“FPR”) to prospective franchisees unless the FPR is in the franchisor's FDD. The definition of an FPR is broad, including any oral, written or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits.

In this context, “general media” should be interpreted broadly, including advertisements placed on the franchisor's website as well as websites operated by third parties (See the FTC's “Franchise Rule Compliance Guide,” p. 132). Whether financial information disseminated through social media is an FPR is a function of the intended audience for the communication. Information directed to the general public is not an FPR. Information directed to prospective franchisees or placed in a location where it is more likely to be accessed by prospective franchisees (i.e., the investor section of a franchisor's website), will likely be considered an FPR within the scope of the FTC Franchise Rule. To date, the FTC has not provided specific guidance for FPRs in social media. Thus, determining whether financial information constitutes an FPR may be a function of the franchisor's social media strategy. If the general strategy is to sell franchises, the likelihood increases that financial information shared through social media is deemed an FPR; but if the strategy is to increase brand awareness and connect with customers, the same information may not be an FPR.

Franchisors also must consider unsolicited FPRs made by franchisees. Franchisees are not restricted by the FTC Franchise Rule from sharing their financial information with others. However, franchisors usually don't encourage franchisees in this regard because they fear they will be perceived as making financial performance representations indirectly through the franchisee. Since social media is such a casual mode of communication, franchisors should consider restricting franchisees from sharing financial data through social media, or franchisors might request that the franchisee include a disclaimer that the information is not being provided by the franchisor.

Advertising Disclosure

To the extent that social media is part of a franchise system's customer advertising program, the franchisor should disclose information regarding the same in Item 11 of its FDD. Likewise, franchisors should consider whether their social media policy warrants other changes to Item 11 and their franchise agreements. For example, most franchisors traditionally have included language in their franchise agreement and in their franchise disclosure documents requiring franchisees to submit all advertising to the franchisor for approval before the franchisee starts using it. (As required pursuant to 16 C.F.R ' 436.4(k)(4)(ii).) While not all franchisee content posted through social media constitutes advertising, some probably will, such as franchisee posts about local offers or promotions.

Conclusion

Social media is here to stay, and at this point most franchise systems are participating in one way or another. While it is a medium that offers great advantages and opportunities to franchisors and franchisees, it is a public space where franchisors and franchisees alike need to practice caution.

Beata Krakus is an associate in the Chicago office of Greensfelder, Attorneys at Law. She can be contacted at [email protected].