New Briefs

The survey also revealed that many franchisors have changed law firms, especially for litigation services. Fifty percent of the firms have changed primary litigators in the last three years, and 39% have changed their primary firm for annual renewals, registration, and disclosure work.

Franchisors are taking different paths toward resolving disputes with franchisees, according to the survey. Thirty-six percent require arbitration, and 27% require mediation, while 10% said their first effort is to quickly settle disputes. Another 27% did not answer, perhaps indicating that they pursue multiple approaches simultaneously. With litigation always a threat, the survey also revealed that franchisors are spending about 23% of their overall legal services budget on “preventative counseling” to avoid lawsuits and 34% on compliance; just 11% is spent on actual litigation.

In the last few years, numerous veteran franchise attorneys have left large practices to join mid-sized firms or to start boutique operations with a franchise focus. It's clear from the survey that franchisors are aware of these firms and are comfortable using them. Just 10% of survey respondents said they are “most comfortable” with firms with 50 or more attorneys. In contrast, mid-sized (10-49 attorneys) and boutique (one-10) firms each were cited by 37% of respondents. Another 16% said that firm size did not matter.

To receive a copy of the complete survey, send an e-mail to [email protected].

CA Legislators Consider Broad Pro-Franchisee Law

Franchisees and franchisors are gearing up for public debate about The Level Playing Field for Small Business Act of 2012 (Assembly Bill 2305), which was introduced in March. As its name indicates, the bill is intended to strength various protections for franchisees operating in California and to negate what the bill terms as “the widespread use of one-sided and nonnegotiable franchise agreements ' ” The bill, which can be found at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201120120AB2305, would amend both the California Franchise Relations Act and the state's Franchise Investment Law.

Among its key provisions, the bill would strengthen protection against terminations by franchisors and void language by franchisors to have disputes with California franchisees settled in the franchisor's home state. Also, it would impose a duty of good faith on all parties to a franchise agreement and a duty of competence on franchisors. It would increase franchisees' protections against territorial encroachment and would prohibit a franchisor from enforcing any covenant not to compete upon the expiration or termination of a franchise agreement.

Associations of franchisees and organizations that traditionally support franchisees have announced their support of the legislation. “This past year we have emphasized the importance of franchisors developing good faith and fair dealing practices and including them in the franchise agreements. With this legislation, such practices will become the law of the land,” said Jay S. Patel, a member of the board of the Asian American Hotel Owners Association. “This legislation is a large step forward for fair franchising.”

However, the International Franchise Association opposes the bill, said Alisa Harrison, vice president of communications and marketing. IFA has prepared a position statement that notes that California already “regulates franchise disclosure under the Franchise Investment Law and regulates the terms of the relationship between franchisor and franchisee under the Franchise Relations Act. The FRA is one of the more restrictive state laws governing franchise relationships ' The legislation is burdensome, unnecessary, and duplicative.”

Among its specific criticisms of the bill, IFA noted that the good faith and duty of competence requirements could result in an increase in judicial involvement to resolve minor disputes. It also challenged the requirement to recognize “any” independent franchisee associations, which IFA said would force franchisors to “collectively bargain as though they were labor unions” with as many associations as were created.

Thomas J. Kent, Jr., partner and co-chair of the Franchising, Licensing & Distribution practice at Fox Rothschild LLP in Exton, PA and former in-house counsel for a major franchisor, agreed with IFA's assessment. “The big issue with the bill is that some of the language is so broad and vague that it invites litigation,” Kent said. “The bill is trying to accomplish so much that it would create uncertainty for franchisors and franchisees.”

One example can be found in the area of territorial encroachment, Kent said. “The proposed legislation says that a franchisor can't place another operating unit within 'unreasonable proximity' of an existing franchise unit. What does 'unreasonable proximity' mean?” said Kent.

The encroachment provisions, as well as the terminations provisions, also illustrate the other major problem with AB 2305, from a franchisor's perspective. “The franchise relationship is based on the contract agreement that outlines the responsibilities of both parties,” said Kent. “California would modify or interfere with that contract.”

Good-cause requirements for terminations “would possibly ' take away a franchisor's ability to make a business decision,” said Kent. “I can imagine scenarios where a franchisee is violating the terms of the contract, but the circumstances are exceptional, such as a family illness. It might be a good franchisee that's going through a rough time, and the franchisor would like to show compassion. But if the franchisor is required to treat all franchisees equally, then it would have to terminate this franchisee because it's not meeting the standards, because that's the only way to preserve the franchisor's ability to terminate any franchisees,” Kent said. “There's no room for the franchisor to exercise compassion or business judgment.”

Kent said that the proposal in the bill to give franchisees 60 days to cure monetary defaults (as compared with a five-day cure period in effect today) is the type of change that at least retains certainty for franchisors. “I'm not saying that I like a 60-day monetary cure, but at least I know what it means. In effect, my contract [with franchisees] has been modified, but at least it's in an objective way,” he said.

MA Court Extends Class of Coverall Employees

The U.S. District Court for the District of Massachusetts recently extended a prior ruling in Awuah, et al. v. Coverall North America, Inc., 460 Mass. 484 (Aug. 31, 2011), to cover more independent contractors who had been classified as “franchisees” by cleaning franchisor Coverall. In doing so, the court is allowing those workers to calculate triple damages, dating to Dec. 12, 2006, when the class action was commenced. Also, the workers can seek the return of their initial franchise fees and other fees paid to Coverall.

After losing a ruling in 2006 with respect to the classification of workers as franchisees and a ruling about damages in August 2011 (see FBLA October 2011), Coverall sought summary judgment to limit the number of workers-franchisees who were covered by the ruling, as well as their monetary rewards. The court ruled that the plaintiffs' claims for wages could go back to December 2006, as could claims for “insurance fees” that Coverall deducted, but which an employer would typically cover. But claims for purchases of equipment and supplies would be limited to two years. The court said that workers in New Hampshire are entitled to collect on claims, as well as workers who declared bankruptcy, had partners, or sold their businesses to recoup some of their investment.

Workers who signed releases prior to the August 2011 decision are not entitled to seek damages or additional restitution. Also, the court stated that workers who joined the class in February 2012 are not covered, and Coverall's appeal of their eligibility has yet to be decided.

Survey Reveals Trends in Franchisors' Use of Outside Counsel

A survey conducted last fall by law firm Mulcahy LLP reveals interesting perspectives by franchisors about the outside attorneys with whom they work. The survey was conducted in October 2011 at the Franchise Leadership & Development Conference and was recently released by Mulcahy. Approximately one-third of conference attendees responded to the survey.

While the results of the survey were generally positive, they also pointed out areas in which interactions between franchisors and outside counsel can be improved. Nearly 60% of survey respondents rated the quality of legal services as “much better” or “somewhat better” than five years ago, and another 31% rated the quality as unchanged. However, only 42% said that they were receiving “much more” or “somewhat more” value from outside legal services than five years ago, and 31% said the value was unchanged.

The survey also revealed that many franchisors have changed law firms, especially for litigation services. Fifty percent of the firms have changed primary litigators in the last three years, and 39% have changed their primary firm for annual renewals, registration, and disclosure work.

Franchisors are taking different paths toward resolving disputes with franchisees, according to the survey. Thirty-six percent require arbitration, and 27% require mediation, while 10% said their first effort is to quickly settle disputes. Another 27% did not answer, perhaps indicating that they pursue multiple approaches simultaneously. With litigation always a threat, the survey also revealed that franchisors are spending about 23% of their overall legal services budget on “preventative counseling” to avoid lawsuits and 34% on compliance; just 11% is spent on actual litigation.

In the last few years, numerous veteran franchise attorneys have left large practices to join mid-sized firms or to start boutique operations with a franchise focus. It's clear from the survey that franchisors are aware of these firms and are comfortable using them. Just 10% of survey respondents said they are “most comfortable” with firms with 50 or more attorneys. In contrast, mid-sized (10-49 attorneys) and boutique (one-10) firms each were cited by 37% of respondents. Another 16% said that firm size did not matter.

To receive a copy of the complete survey, send an e-mail to [email protected].

CA Legislators Consider Broad Pro-Franchisee Law

Franchisees and franchisors are gearing up for public debate about The Level Playing Field for Small Business Act of 2012 (Assembly Bill 2305), which was introduced in March. As its name indicates, the bill is intended to strength various protections for franchisees operating in California and to negate what the bill terms as “the widespread use of one-sided and nonnegotiable franchise agreements ' ” The bill, which can be found at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201120120AB2305, would amend both the California Franchise Relations Act and the state's Franchise Investment Law.

Among its key provisions, the bill would strengthen protection against terminations by franchisors and void language by franchisors to have disputes with California franchisees settled in the franchisor's home state. Also, it would impose a duty of good faith on all parties to a franchise agreement and a duty of competence on franchisors. It would increase franchisees' protections against territorial encroachment and would prohibit a franchisor from enforcing any covenant not to compete upon the expiration or termination of a franchise agreement.

Associations of franchisees and organizations that traditionally support franchisees have announced their support of the legislation. “This past year we have emphasized the importance of franchisors developing good faith and fair dealing practices and including them in the franchise agreements. With this legislation, such practices will become the law of the land,” said Jay S. Patel, a member of the board of the Asian American Hotel Owners Association. “This legislation is a large step forward for fair franchising.”

However, the International Franchise Association opposes the bill, said Alisa Harrison, vice president of communications and marketing. IFA has prepared a position statement that notes that California already “regulates franchise disclosure under the Franchise Investment Law and regulates the terms of the relationship between franchisor and franchisee under the Franchise Relations Act. The FRA is one of the more restrictive state laws governing franchise relationships ' The legislation is burdensome, unnecessary, and duplicative.”

Among its specific criticisms of the bill, IFA noted that the good faith and duty of competence requirements could result in an increase in judicial involvement to resolve minor disputes. It also challenged the requirement to recognize “any” independent franchisee associations, which IFA said would force franchisors to “collectively bargain as though they were labor unions” with as many associations as were created.

Thomas J. Kent, Jr., partner and co-chair of the Franchising, Licensing & Distribution practice at Fox Rothschild LLP in Exton, PA and former in-house counsel for a major franchisor, agreed with IFA's assessment. “The big issue with the bill is that some of the language is so broad and vague that it invites litigation,” Kent said. “The bill is trying to accomplish so much that it would create uncertainty for franchisors and franchisees.”

One example can be found in the area of territorial encroachment, Kent said. “The proposed legislation says that a franchisor can't place another operating unit within 'unreasonable proximity' of an existing franchise unit. What does 'unreasonable proximity' mean?” said Kent.

The encroachment provisions, as well as the terminations provisions, also illustrate the other major problem with AB 2305, from a franchisor's perspective. “The franchise relationship is based on the contract agreement that outlines the responsibilities of both parties,” said Kent. “California would modify or interfere with that contract.”

Good-cause requirements for terminations “would possibly ' take away a franchisor's ability to make a business decision,” said Kent. “I can imagine scenarios where a franchisee is violating the terms of the contract, but the circumstances are exceptional, such as a family illness. It might be a good franchisee that's going through a rough time, and the franchisor would like to show compassion. But if the franchisor is required to treat all franchisees equally, then it would have to terminate this franchisee because it's not meeting the standards, because that's the only way to preserve the franchisor's ability to terminate any franchisees,” Kent said. “There's no room for the franchisor to exercise compassion or business judgment.”

Kent said that the proposal in the bill to give franchisees 60 days to cure monetary defaults (as compared with a five-day cure period in effect today) is the type of change that at least retains certainty for franchisors. “I'm not saying that I like a 60-day monetary cure, but at least I know what it means. In effect, my contract [with franchisees] has been modified, but at least it's in an objective way,” he said.

MA Court Extends Class of Coverall Employees

The U.S. District Court for the District of Massachusetts recently extended a prior ruling in Awuah, et al. v. Coverall North America, Inc., 460 Mass. 484 (Aug. 31, 2011), to cover more independent contractors who had been classified as “franchisees” by cleaning franchisor Coverall. In doing so, the court is allowing those workers to calculate triple damages, dating to Dec. 12, 2006, when the class action was commenced. Also, the workers can seek the return of their initial franchise fees and other fees paid to Coverall.

After losing a ruling in 2006 with respect to the classification of workers as franchisees and a ruling about damages in August 2011 (see FBLA October 2011), Coverall sought summary judgment to limit the number of workers-franchisees who were covered by the ruling, as well as their monetary rewards. The court ruled that the plaintiffs' claims for wages could go back to December 2006, as could claims for “insurance fees” that Coverall deducted, but which an employer would typically cover. But claims for purchases of equipment and supplies would be limited to two years. The court said that workers in New Hampshire are entitled to collect on claims, as well as workers who declared bankruptcy, had partners, or sold their businesses to recoup some of their investment.

Workers who signed releases prior to the August 2011 decision are not entitled to seek damages or additional restitution. Also, the court stated that workers who joined the class in February 2012 are not covered, and Coverall's appeal of their eligibility has yet to be decided.