News Briefs

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CA Franchise Relationship Bill Passes Senate Committee

California SB 610, which would significantly expand rights and protections for franchisees, passed the Senate Judiciary Committee by a vote of 5-2 on April 17. With the vote, the bill has been moved to consideration by the full Senate, where a vote might be taken soon.

While passage in the Senate Judiciary Committee is a success for proponents of the bill, it is a long way from becoming law. Not only would the bill have to pass the California Senate, but it would also have to move through the California Assembly. And that latter development seems unlikely, given that in the same week, the Assembly delayed until next year its consideration of HB 1141, which addresses some of the same franchise relationship issues.

Under SB 610, franchisors would be held to a duty of acting in good faith and fair dealing with franchisees, and franchisees would gain the right to sue for damages when franchisors act unfairly with respect to the sale, renewal, transfer or termination of a franchise. Triple damages and attorneys' fees also could be awarded. In addition, SB 610 would ease franchisees' ability to form independent associations.

Prior to the vote, numerous franchisee representatives testified before the Judiciary Committee in favor of the bill. Peter Lagarias, principal of the Lagarias Law Offices in San Rafael, CA, reflected on its potential impact for franchisees. “Many franchisees invest their life savings in their franchises, sometimes taking loans on their homes, and often look to their franchises for their livelihoods,” Lagarias told FBLA after his testimony. “They deserve a level playing field especially on terminations and renewals.”

Lagarias added that he considers SB 610 to be “an important first step” in strengthening the California Franchise Relations Act, but that AB 1141 “has additional needed changes.”

Also testifying in favor of the bill were Ali Mazarei and Amin Salkhi, both of whom are owners of convenience store franchises and on the board of directors of the Service Station Franchise Association, Inc.; Keith Miller, a Subway franchisee and board member of the Coalition of Franchisee Associations; and owners of Quiznos franchises and McDonald's franchises.

The International Franchise Association (“IFA”) opposes SB 610 and sent a representative to testify. IFA believes that the good faith requirement would increase litigation and interfere with franchisor-franchisee contracts, Dean Heyl, IFA's Director, State Government Relations, Public Policy & Tax Counsel, told the committee. Also, IFA has argued that making cancellation or non-renewal of franchise contracts more difficult could potentially harm the franchise brand, other franchisees and even consumers, if franchisors are unable to remove bad actors from their ranks.

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State Roundup: Numerous Franchise Bills Proposed Across Nation

State legislators are considering more than a score of bills with direct impact on the franchising industry, and they include legislation about non-compete agreements, taxes and status of employment.

One bill that had franchisors concerned was Minnesota H.F. No. 506. This bill would void almost all non-compete agreements that prohibit parties from “exercising a lawful profession, trade, or business.” Although aimed primarily at employment non-competes, the language of the bill was broad enough to encompass franchising. In April, the Labor, Workplace and Regulated Industries Committee decided not to vote on the bill until additional study is conducted this summer.

A bill in Illinois, SB 2169, would require franchisors to file an annual return stating the gross sales of each franchisee operating in the state, as well as each franchisees' name, address, the certificate of registration number and federal identification number. The concept, proponents say, is to get a more accurate reading on sales within the state and to thus ensure that taxes are fully assessed. No action has yet been taken on the bill. New York is the only state with this type of sales reporting requirement, though Massachusetts is also considering similar legislation.

In Washington state, HB 1440 would reclassify some types of contractors as employees, potentially affecting many franchises. The law could edge into issues seen in other states, such as Massachusetts, about whether certain types of franchisees are contractors or employees. Already, two substitute versions of the bill have been introduced, indicating the significance that affected parties are placing on the issue.

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Burger King Sues Former Franchisees

Burger King has sued the former owners of seven franchise restaurants in Missouri, Joseph R. Gunther and Vicki Gunther, for breaching their franchise agreement in 2012 by failing to make royalty and advertising payments. After notifications for franchise violations, Burger King terminated the franchises in January 2013, but the lawsuits allege that the former franchisees continued to use Burger King's trademarks. Burger King is seeking back royalties, punitive damages, and attorneys' fees. The restaurants are located in Columbia, Jefferson City, Moberly and O'Fallon, MO, and the lawsuit has been filed in the Southern District of Florida.

The Gunthers could not be reached by FBLA. Burger King representatives would not comment to FBLA about the litigation.

Instant Tax Service Franchisee Permanently Enjoined from Tax Return Prep

The principals of a Las Vegas franchisee of Instant Tax Service consented in February to a civil injunction that bars them from preparing tax returns for others. Benyam Tewolde and Yordanos Kidanits consented without admitting the allegations against them, and the order was signed by a judge in the U.S. District Court for the District of Nevada, said the U.S. Department of Justice.

The Justice Department charged that Tewolde, Kidanits and some of the staff members at their franchised offices prepared false tax-return forms with fabricated businesses and income, falsely claimed education credits and dependents, sold deceptive loan products, prepared bogus W-2 forms and committed other violations.

The Justice Department added that four more lawsuits are pending against Instant Tax Service, its founder Fesum Ogbazion, and its franchisees. Tewolde and Kidanits could not be reached for comment. A trial on Justice's request to permanently shut down the franchisor is scheduled for May 2013.

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Washington State Goes Electronic for Franchise Filings

In mid-March, the Securities Division of the Washington State Department of Financial Institutions went live with an online E-File system for new applications, renewals, amendments and reapplications for franchises in the state of Washington. It can be accessed at http://dfi.wa.gov/sd/franchise.htm.

According to a staff member, early activity on E-File was brisk, with 195 filings coming in through April 19.

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CA Franchise Relationship Bill Passes Senate Committee

California SB 610, which would significantly expand rights and protections for franchisees, passed the Senate Judiciary Committee by a vote of 5-2 on April 17. With the vote, the bill has been moved to consideration by the full Senate, where a vote might be taken soon.

While passage in the Senate Judiciary Committee is a success for proponents of the bill, it is a long way from becoming law. Not only would the bill have to pass the California Senate, but it would also have to move through the California Assembly. And that latter development seems unlikely, given that in the same week, the Assembly delayed until next year its consideration of HB 1141, which addresses some of the same franchise relationship issues.

Under SB 610, franchisors would be held to a duty of acting in good faith and fair dealing with franchisees, and franchisees would gain the right to sue for damages when franchisors act unfairly with respect to the sale, renewal, transfer or termination of a franchise. Triple damages and attorneys' fees also could be awarded. In addition, SB 610 would ease franchisees' ability to form independent associations.

Prior to the vote, numerous franchisee representatives testified before the Judiciary Committee in favor of the bill. Peter Lagarias, principal of the Lagarias Law Offices in San Rafael, CA, reflected on its potential impact for franchisees. “Many franchisees invest their life savings in their franchises, sometimes taking loans on their homes, and often look to their franchises for their livelihoods,” Lagarias told FBLA after his testimony. “They deserve a level playing field especially on terminations and renewals.”

Lagarias added that he considers SB 610 to be “an important first step” in strengthening the California Franchise Relations Act, but that AB 1141 “has additional needed changes.”

Also testifying in favor of the bill were Ali Mazarei and Amin Salkhi, both of whom are owners of convenience store franchises and on the board of directors of the Service Station Franchise Association, Inc.; Keith Miller, a Subway franchisee and board member of the Coalition of Franchisee Associations; and owners of Quiznos franchises and McDonald's franchises.

The International Franchise Association (“IFA”) opposes SB 610 and sent a representative to testify. IFA believes that the good faith requirement would increase litigation and interfere with franchisor-franchisee contracts, Dean Heyl, IFA's Director, State Government Relations, Public Policy & Tax Counsel, told the committee. Also, IFA has argued that making cancellation or non-renewal of franchise contracts more difficult could potentially harm the franchise brand, other franchisees and even consumers, if franchisors are unable to remove bad actors from their ranks.

'

State Roundup: Numerous Franchise Bills Proposed Across Nation

State legislators are considering more than a score of bills with direct impact on the franchising industry, and they include legislation about non-compete agreements, taxes and status of employment.

One bill that had franchisors concerned was Minnesota H.F. No. 506. This bill would void almost all non-compete agreements that prohibit parties from “exercising a lawful profession, trade, or business.” Although aimed primarily at employment non-competes, the language of the bill was broad enough to encompass franchising. In April, the Labor, Workplace and Regulated Industries Committee decided not to vote on the bill until additional study is conducted this summer.

A bill in Illinois, SB 2169, would require franchisors to file an annual return stating the gross sales of each franchisee operating in the state, as well as each franchisees' name, address, the certificate of registration number and federal identification number. The concept, proponents say, is to get a more accurate reading on sales within the state and to thus ensure that taxes are fully assessed. No action has yet been taken on the bill. New York is the only state with this type of sales reporting requirement, though Massachusetts is also considering similar legislation.

In Washington state, HB 1440 would reclassify some types of contractors as employees, potentially affecting many franchises. The law could edge into issues seen in other states, such as Massachusetts, about whether certain types of franchisees are contractors or employees. Already, two substitute versions of the bill have been introduced, indicating the significance that affected parties are placing on the issue.

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Burger King Sues Former Franchisees

Burger King has sued the former owners of seven franchise restaurants in Missouri, Joseph R. Gunther and Vicki Gunther, for breaching their franchise agreement in 2012 by failing to make royalty and advertising payments. After notifications for franchise violations, Burger King terminated the franchises in January 2013, but the lawsuits allege that the former franchisees continued to use Burger King's trademarks. Burger King is seeking back royalties, punitive damages, and attorneys' fees. The restaurants are located in Columbia, Jefferson City, Moberly and O'Fallon, MO, and the lawsuit has been filed in the Southern District of Florida.

The Gunthers could not be reached by FBLA. Burger King representatives would not comment to FBLA about the litigation.

Instant Tax Service Franchisee Permanently Enjoined from Tax Return Prep

The principals of a Las Vegas franchisee of Instant Tax Service consented in February to a civil injunction that bars them from preparing tax returns for others. Benyam Tewolde and Yordanos Kidanits consented without admitting the allegations against them, and the order was signed by a judge in the U.S. District Court for the District of Nevada, said the U.S. Department of Justice.

The Justice Department charged that Tewolde, Kidanits and some of the staff members at their franchised offices prepared false tax-return forms with fabricated businesses and income, falsely claimed education credits and dependents, sold deceptive loan products, prepared bogus W-2 forms and committed other violations.

The Justice Department added that four more lawsuits are pending against Instant Tax Service, its founder Fesum Ogbazion, and its franchisees. Tewolde and Kidanits could not be reached for comment. A trial on Justice's request to permanently shut down the franchisor is scheduled for May 2013.

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