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Key takeaways from the ABA Forum on Franchising
By Franchising & Distribution Group on October 27, 2015 at 10:28 AM

The American Bar Association’s annual Forum on Franchising took place recently, and Greensfelder, Hemker & Gale attorneys David Harris, Dawn Johnson, Beata Krakus, Kim Myers, Abby Risner and Leonard Vines, as well as franchise paralegal Tom Ligouri, attended the two-day program in New Orleans.

Beata Krakus was elected to serve on the ABA Forum on Franchising Governing Committee.

Leonard Vines spoke and presented a paper at one of the Forum’s most well-attended break-out sessions, Drafting and Negotiating Challenging Provisions in Franchise and Development Agreements. The presentation discussed tips for negotiating franchise agreements and in particular difficult issues when faced with negotiating provisions relating to lost future royalties, personal guarantees, assignments and transfers, reservation of rights, advertising and area development agreements.

The Forum also announced the establishment of the John R. F. Baer Scholarship for International Civility and Professionalism, in honor of Greensfelder’s deceased partner. The scholarship will provide free tuition and a travel stipend for attendance at the Forum’s annual meeting.

Some key takeaways from the program:

DATA BREACH

Data breach is an ever-growing threat that nearly all businesses face, and one presentation provided advice on how franchisors can help minimize their risks. Lessons include updating operations manuals to make recommendations to franchisees about data security practices, such as:

  • Changing default credentials;
  • Using and frequently changing strong passwords;
  • Log monitoring;
  • Inspecting hardware;
  • Segregating payment card environment from other systems and networks;
  • Recommending virus protection software; and
  • Installing and monitoring firewalls

Larger franchisors also may want to consider providing training programs to franchisees designed to educate franchisees on how to minimize their risks.

Greensfelder has a team of attorneys who regularly counsel clients on data privacy and security and would be pleased to help you address these issues. And, this is another reminder to franchisors to continuously review and update their operations manuals.

Practice pointer: Update your operations manual to address data breach and security issues.

INVESTOR LIABILITY

In recent years, there has been a trend of private equity and venture capital (PE/VC) investments in franchises and, therefore, a need to understand to what extent such investors can be held liable for franchisee claims against the franchisor.

Often, a PE/VC firm’s investment goals of generating a relatively quick return through capital appreciation can be at odds with the traditional franchise model goal of long-term growth and stability. These differing goals can lead to litigation concerns in the franchise system. The current bases for liability – piercing the corporate veil/alter ego, control person liability under state franchise laws and RICO – are giving way to evolving theories such as aiding and abetting a breach of duty or breach of franchise agreement, interference with contractual relations, WARN Act employment law violations and trustee claims.

Practice pointer: PE/VC firms can mitigate their potential liability by limiting their exercise of control over the franchisor, carefully selecting favorable state laws and including arbitration provisions in order to splinter system-wide dispute resolution.

ADVERTISING WITH SOCIAL MEDIA

Social media has changed a franchisor’s ability to advertise, but it also creates potential pitfalls that must be navigated. These include considering when a post constitutes an endorsement and promotions that encourage consumers to “like” a product on Facebook. Social media also creates opportunity for consumers to generate advertising content on their own for your product or service. Social media policies can be critical to addressing these issues with respect to a system’s franchisees, and they ensure protection of the brand.

Practice pointer: Do not neglect careful consideration of state laws on advertising. Also, consider whether you should develop a social media policy for your franchisees.

ARBITRATION INJUNCTIONS

Many franchisors have arbitration provisions in their franchise agreements, and many of those provisions allow a party to seek injunctive relief from a court, for example, in cases of misuse of a trademark or violating a non-competition agreement. One presentation on non-traditional remedies discussed the recently (2013 and 2014) adopted rules for the three major arbitration providers (AAA, JAMS and CPR) that allow parties to seek emergency relief from a specially designated arbitrator. This could impact a franchisor’s practice of applying for preliminary injunctive relief with a court pending arbitration.

Under the new rules, the parties can apply for emergency relief by providing notice to the administrator and the other party, with a brief description of the issue. An expedited schedule will be set for partiality disclosures, challenges to the arbitrators, a hearing and written submissions. The emergency arbitrator, for lack of a better word, will hear the request for emergency relief before the arbitrator is appointed who will hear the case (although parties could decide later to keep that same arbitrator for the merits). The general standard for emergency relief for the AAA and JAMS is that, in the absence of such relief, “immediate and irreparable loss or damage” will result. For CPR, the rules allow any interim measures that the arbitrator deems necessary. In general, the arbitrator can require the applicant to post security, can issue sanctions for non-compliance, and will retain jurisdiction until the regular arbitrator is appointed.

According to the presentation, these rules have rarely been invoked, so there is not much experience on which to rely. However, if you have a mandatory arbitration clause with any of these three providers, you may want to consider whether to ask the arbitration provider for emergency relief rather than the court. It is unclear whether federal courts would have jurisdiction to hear a motion to confirm, vacate or modify an interim award by an arbitrator.

Practice pointer: There are a number of potential issues, such as how to proceed if you need ex parte same-day relief not provided for in the arbitration rules, whether the new rules allow an arbitrator more flexibility than a judge in presentation of evidence and fashioning relief, and whether an arbitrator can enforce its rulings compared to a court’s contempt power. 

JOINT EMPLOYER ISSUES

Richard F. Griffin, Jr., the general counsel of the National Labor Relations Board, and David Weil, the administrator of the Wage and Hour Division of the U.S. Department of Labor and author of “The Fissured Workplace,” spoke on joint employer issues, a topic that has preoccupied many in the franchise field for some time. For an in-depth take on the presentation, please see our Franchising & Distribution Blog.

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