The FTC is seeking comments “on the overall costs, benefits, necessity, and regulatory and economic impact of its Labeling Requirements for Alternative Fuels and Alternative Fueled Vehicles,” and the comment period is expected to extend until mid-December 2023 (date to be confirmed once officially published).  Among other topics, the announcement is focused on seeking comments on issues related to electric vehicle charging stations.

Currently, the rule requires public EV charging stations to disclose the following information on each dispenser in view of the consumer: the common name of the fuel, kilowatt capacity, voltage, whether it is alternating or direct current, and whether it is conductive or inductive.  The FTC is interested in receiving comment on, among other topics, questions related to any research on consumer information available at charging stations, how that information should be displayed, and in what format. The comment form (which will be available here) includes other  questions about labels for electronic vehicle charging stations providing charging to consumers.

The rule has not been reviewed for 10 years.  This new request comes following the FTC’s requests for public comment on other topics, including franchise agreements and franchise business practices and on updating the Green Guides.  Often it takes at least a year for the FTC to issue updated rules from the time comments close, and sometimes public comment periods are extended.

As many energy companies and franchisors incorporate EV charging, they will want to consider submitting comments as well as monitoring the outcome of the FTC’s new review. 

Fast-changing privacy laws. New state privacy legislation is being proposed and signed into law monthly, creating an inconsistent patchwork of laws governing how franchised (and non-franchised) businesses can use their data. Brands cannot afford to bury their heads in the sand. Customer data is the lifeblood of nearly all businesses. Brands need to be up to date on the new regulations and prepared to adjust their data policies and operational approaches. Each state’s requirements vary. Consider incorporating appropriate requirements to address privacy issues in your franchise agreements and operations manuals.

Time to speak up. The Federal Trade Commission has asked for public input as it is poised to enact the first extensive new franchise regulations in a generation. Many are concerned that the FTC may hamstring brands’ abilities to continue generating opportunities for would-be entrepreneurs using the franchise model. If you are a franchise success story, now is the time to make your voice heard. Greensfelder’s team is prepared to walk you through the public comment process.

Not so fast. Important insights from Christina Russell, CEO of Radiance Holdings (and former franchisee of the Curves brand): Rapid franchise growth may look like success for emerging brands, but it can be the path for the brand’s demise if the franchisor has not built sufficient infrastructure to support the new franchisees. A good franchise attorney can help you plan for the future and minimize risks.

Protecting your data from AI. The confidential data of businesses using popular cloud-based data storage services and web-based email services may be fueling the rise of artificial intelligence services like Google’s AI chatbot Bard and OpenAI’s ChatGPT. It’s important for businesses to understand how their data storage and email services can use their data to ensure that AI tools don’t farm it and give their competitors unexpected access.

The robots are taking over! Will they protect your confidential information? Franchise systems are increasingly embracing digitization, AI, and even robots, but must be careful in the implementation. Obtaining and deploying valuable data points to help guide operations can give franchise systems a cutting edge, but franchisors should make sure they understand the impact of sophisticated software. For example, confidential information entered into ChatGPT as part of a request for ChatGPT to generate material may make that confidential information part of the data maintained by the software for use by anyone else.

Labor issues in full swing – but why? Issues involving independent contractor classification and joint employer status continue to be a thorn in the sides of franchisors. Following what is happening at the NLRB and the DOL, it is obvious that labor lawyers are sometimes practicing politics rather than law. However, politics is not the only thing having a significant impact on unionization and labor issues. Changing demographics in the workforce play a significant role, and franchisors and franchisees alike must understand how these changes may impact their businesses to best avoid labor disputes.

“I have a great prospective franchisee but am not registered in any state” – Exemptions to the rescue! At a roundtable moderated by our own Beata Krakus, a lively debate took place about the use of exemptions from federal and state disclosure rules and statutes. Exemptions can be a useful tool when a franchisor has had to go dark during renewal season, or for a franchisor wishing to sell a franchise in a registration state where it is not yet registered. It is a tricky area of law, though, that any franchisor needs to tread into carefully, with significant differences between exemptions available under the FTC Franchise Rule and state laws.

Franchisee associations and advisory councils. Whether your system already has a franchise advisory council and/or a franchisee association, consider how to ensure the franchise is optimizing its value. At a roundtable moderated by Abby Risner, both franchisor and franchisee attorneys discussed the ways in which franchise advisory councils can be a great resource to franchisors for communicating with franchisees, testing new ideas, rolling out changes to brand standards, offering training opportunities, and more.  Franchise advisory councils are typically formed by the franchisor, whereas franchisee associations are normally formed by a group of franchisees, sometimes when there is widespread franchisee discontent.

Setting sail for foreign lands – an update. The IFA/IBA Joint Conference provided practitioners with insights to issues faced by franchisors taking their brands to new markets abroad. Many issues faced by franchisors are the same, but with a twist. For example, registration requirements exist in many countries, but may look different. Some countries may require the franchise agreements to be registered, while others may require training and operations manuals to be part of the registration. Likewise, many countries have relationship statutes, but in some cases the regulation goes beyond what is common in the U.S., significantly restricting how much franchisees may be required to spend on remodeling, or even requiring the franchisor to contribute financially to the remodeling.

Given all the developments in new state laws related to joint employer and franchising issues, as well as rapid advances in technology that are unpredictable and could dramatically affect the way companies do business, this is an important time to revisit your agreements to consider class action waivers and/or dispute resolution provisions, including whether a dispute escalation clause or arbitration provision is appropriate for your system.

Nevertheless, as requirement for all loans, SBA lenders must still examine the franchised business for affiliation based on ownership. The SBA announcement described the following as an example: “(W)hen lending to a Franchised business, the SBA Lender must determine who owns the applicant business and any businesses the applicant owns in accordance with these regulations. However, neither the SBA Lender nor SBA will review the applicant Franchised business for affiliation with other entities beyond ownership; the applicant business will not be considered affiliated with the Franchisor or other Franchised businesses except by ownership.”

If you have questions, please contact our Franchising & Distribution team.

For example, the FTC is asking about:

• Whether franchisors negotiate franchise agreements, and if so, what terms are negotiated;
• Whether franchisors can make unilateral changes to the franchise relationship, for example through their operations manuals;
• How franchisors restrict franchisee purchases of goods and services, as well as how common it is for franchisors to receive payments from third-party vendors based on franchisee purchases from the vendors;
• How franchisors control wages and working conditions of franchisee employees; and
• Whether franchisors market their franchises using other languages than English.

Franchisors, franchisees, and members of the public at large are encouraged to respond by May 9, 2023, by submitting written data, empirical research, views, facts and opinions. If you are a franchisor with questions about the FTC request or require assistance with preparing a response, please contact a member of Greensfelder’s Franchising & Distribution team.

At the federal and state levels, resources and guidance on EV charging are available. If you are considering whether to integrate EV charging in your franchise system, there are legal considerations to evaluate in addition to the business, finance, and technological aspects:

1. Franchise and/or Licensing and Application of State Relationship Laws. Implementing EV charging as part of a franchise system presents unique legal considerations. Do you want to control the EV charging model, or are you willing to be more flexible for each business partner to implement as they see fit? Are you interested in owning the EV charging business, or do you want to incorporate standards for franchisees that elect to add EV charging? Are you comfortable allowing all locations to incorporate EV chargers? Do you want establish limitations on how they do so? In developing answers to these questions, be sure these issues are rolled into your contracts and/or franchise disclosure document now, even if you aren’t using them yet, so you have them available when implementation is desired.

Consider whether the EV charging can be offered under the same franchise brand or whether it will have a separate mark.  You will also want to evaluate any related brand and marketing controls you need in place.  Do you have image programs that apply to the underlying business? Will the same standards apply to the EV charging, or do they need updating and adjustment?

If you are not a franchise or you are excluded or exempted from franchise laws for the other aspects of your brand but are allowing EV charging under a trademark, consider whether your business could now be subject to a franchise or other state relationship laws.

2. Ownership. You should also consider legal questions related to ownership of the EV chargers. Do your contracts clearly provide who owns the chargers? Will they be locally owned or third-party leased? If you are contracting with a utility or charging partner for supply, who is responsible for ownership, installation, operation, and maintenance?  For any lease arrangements, consider associated real estate issues.

3. General Contractual Arrangements. This is a rapidly developing industry. Ensure your contractual provisions allow flexibility to change your design and financial model as technology develops. Whether it is construction, utility supply, vendors, leasing hardware, or maintenance, you should verify that all contractual provisions allow flexibility. 

Consider the legal implications and contractual terms associated with the pricing structure: Will your EV chargers be free, pay-as-you-go, or subscription-based? Who will set the pricing?  

4. Premises liability. Evaluate legal risks and allocation related to premises liability risks associated with EV charging stations—including fire, the presence of electricity/wiring/plugs, traffic accidents, and slip and falls. Review the indemnity provisions in your franchise agreements to verify whether they need to be modified or updated.

5. Data privacy and cybersecurity risks. Are you collecting or capturing any personal or biometric information to use the charging service? Depending on how your system functions, be sure you evaluate whether you are collecting any information that could be covered by state privacy laws such as the California Consumer Privacy Act or Illinois’ Biometric Information Privacy Act. These laws are constantly changing and being adopted, so be sure to regularly check for updates in your applicable jurisdictions.  With respect to any information you are collecting for subscribers or payment, you will need to ensure you have applicable cybersecurity issues covered and potentially cybersecurity insurance.

6. Permitting, Compliance, and Developing Rules and Requirements on EVs. From your charging infrastructure to optional certifications, be sure you have evaluated local, state, and federal requirements.  These include local permits for installation as well as specific codes on charger installations.  You will also need to consider zoning to verify it does not restrict your plans.

Depending on financing sources, review other applicable rules, including the minimum standards for federally funded EV charging projects set out in the National Electric Vehicle Infrastructure Standards and Requirements, effective March 30, 2023.  For example, these requirements address the number and type of charging ports as well as payment methods. 

7. ADA considerations. Ensure compliance with the Americans with Disabilities Act requirements for accessing and using EV chargers.

8. Payment Processing and Loyalty Programs. Assess contracts and legal risks associated with the method of payment specific to the addition of EV chargers.  You may also consider whether your existing loyalty program for the franchise system applies to the EV charging, or whether a separate loyalty program will apply.

9. Legal Risks Associated with Intermingled Businesses. Will your business provide services to occupy customers for the full time it takes to charge their vehicle?  What type of charging customer do you want to service? You should assume that a customer will need to charge for at least 30 minutes and possibly much longer, so consider what space and services you have available during that time.  It may be a dining experience, well-supplied convenience store, or another activity that typically takes at least 30 minutes.  You will want to evaluate your legal risks and contractual obligations depending on the crossover nature of the services or businesses.  If you offer EV charging for free, how will you limit use to customers?

10. Insurance. Consider whether the various contracts associated with the EV charging need to incorporate insurance requirements and/or whether you need to expand your insurance coverage related to the EV charging.  If you are leaving many aspects to the discretion of franchisees, consider whether you need to modify your existing insurance requirements in your franchise agreements.

Greensfelder franchise attorneys Leonard Vines and Paul Woody recently shared their thoughts with the publication on what they think franchising strategies will look like in 2023.

Read the full article here.

In all, the deals involved 13 brands that use franchising as their primary distribution and growth model. Greensfelder served as franchise counsel to private equity firms purchasing either the franchisors themselves, or substantial interests in the franchisors, and to lenders who were financing the acquisitions of franchisors and franchisees, including the lender to a private equity firm purchasing a franchisee that operates hundreds of franchises across three brands.  Greensfelder Officers Beata Krakus and Leonard Vines were lead counsel for the franchise law aspects of the deals and worked closely with Paul Woody, Dawn Johnson, Abby Risner and Kyle Siebert, among other members of the group. 

As franchise diligence counsel, the group has worked on deals involving some of the most recognizable franchise systems in the United States. Other law firms representing buyers and lenders turn to Greensfelder’s team for assistance with franchise-related due diligence because of our high level of knowledge, experience, responsiveness and competitive Midwestern rates. 

“These types of large acquisitions illustrate the importance of the fundamentals we emphasize to franchisors: having a relationship with experienced franchise counsel, ensuring compliance with regulations, being smart with your growth, and maintaining strong relationships with your franchisee network,” Krakus said.  “These fundamentals can have a significant impact on the value of a franchised brand.

“We offer the tools and guidance that not only prepare our franchisor clients for growth in the near term but also give them the opportunity to maximize their value in the long term.”

Franchisors routinely require prospective franchisees to answer questions about the franchise sales process and the franchisee’s understanding of the franchise agreement in writing by marking “yes” or “no” in a questionnaire. Likewise, franchise agreements often include statements similar to those in the questionnaire. These take the form of acknowledgments the franchisee agrees to when signing the franchise agreement.

Franchisors justify such questionnaires and acknowledgments as helping to avoid misunderstandings by franchisees and helping franchisors confirm that its franchise sellers were complying with the law. However, during the past few years, the North American Securities Administrators Association (NASAA) became increasingly concerned that the questionnaires and acknowledgments were being used unfairly as a tool to protect franchisors from potential liability from franchisee claims of fraud or misrepresentations in the offer and sale of a franchise, Franchisors were often successful, as some courts accepted them as a valid defense to the franchisees’ claims.

Because of its concerns, NASAA issued a new policy governing such questionnaires and acknowledgments, effective January 1, 2023. The NASAA policy lists examples of so-called “Prohibited Statements” franchisors can no longer use in “Questionnaires” and “Acknowledgements” (as defined in the NASAA policy); however, the list is not all-inclusive. A summary of the listed Prohibited Statements that cannot be used includes:

• the prospective franchisee has read and understands the FDD and attachments;
• the prospective franchisee understands or comprehends the risks associated with the purchase of the franchise;
• the prospective franchisee is qualified or suited to own and operate the franchise;
• the prospective franchise relied only on the FDD in deciding on the purchase and not any other information from others;
• neither the franchisor nor a franchise seller made any representation, including any financial performance representation, outside or different from the FDD and attachments;
• success or failure of the franchise is dependent solely or primarily on the franchisee;
• the franchisor bears no liability or responsibility for franchisee’s success or failure;
• a reiteration or duplication of any representation or statement already elsewhere in the FDD or attachments;
• the prospective franchisee has had the opportunity to or has/has not actually consulted with professional advisors or consultants or other franchisees;
• the prospective franchisee understands the franchisor is relying on questionnaires, acknowledgments, or similar documents, including to ensure that the sale was made in compliance with law and that no unauthorized, inaccurate, or misleading statements were made; and
• requires or suggests that the prospective franchisee must agree to any Questionnaires, Acknowledgments, or similar documents or provide false answers as a condition to the purchase of the franchise.

The franchisor is also required to include a specific provision in the FDD, the franchise agreement, or the applicable state law addenda stating that nothing said or signed within the commencement of the franchise relationship waives any franchisee claims under applicable law or disclaims reliance on any statements made by the franchisor, franchise seller, or anyone acting on behalf of the franchisor.

What Should a Franchisor Do Now? On its face, implementation of the NASAA policy seems easy, but in practice, it raises many questions — about how documents need to be revised, whether they need to be revised for all U.S. franchise sales, and what amendments to registration may be necessary. We expect some additional guidance from NASAA, but in the meantime, franchisors who have questions about the applicability of the NASAA policy to their franchise system or how to implement the necessary changes may contact a member of our Franchising & Distribution team.  

The reward, of course, can be great. Brands see franchising as an investment that will provide increased brand awareness, market share and revenue in return. However, it is important to do it right from the start.

In most parts of the United States, there are no state laws or state officials regulating franchise sales. In those jurisdictions, the sole regulatory body is the Federal Trade Commission (FTC).

Sometimes franchisor representatives will ask me, “Paul, what are the odds that the FTC would come after us if we say or do the wrong thing?” It’s a fair question. These clients don’t want to disregard the regulations, but entrepreneurs are used to weighing risks.

Nowadays, the odds are changing.  

I recently had the honor of presenting to franchise counsel from around the world at the American Bar Association’s Forum on Franchising Annual Meeting. One of my co-presenters was a director with the FTC. I want to share a quote from her that struck me: “Franchising is a priority for the Commission right now.” She went on to say that the FTC has made a “renewed commitment, across the agency, to protecting franchisees from illegal practices.”

The scope of business activities the FTC regulates is broad. However, as that quote makes evident, the FTC has chosen to focus on what it sees as protecting franchisees from franchisors who do not comply with franchise sales regulations.

And the FTC is making it easier for franchisees to alert the FTC to potential problems. Per my co-presenter, the FTC has simplified the process of filing a complaint with the commission. Franchisees can now report their franchisor by just clicking a button on the FTC’s fraud reporting website.

The FTC’s Franchise Rule has not changed. It is no harder now to franchise your brand than it was five or 10 years ago. However, this is not a time to ignore your brand’s compliance obligations.

Whether your brand has made the conscious decision to use the franchise model as its growth engine, use a distribution network to get products to consumers, or license others to sell under its name and concept, you need to bring experienced franchise counsel onto your team. Ignorance of franchise regulations will not help you if the FTC, or a state regulator, starts asking questions. The best way to protect your brand and your investment is to know the law and follow it.

I recently presented to the American Bar Association’s Forum on Franchising on the wide variety of laws, regulations and industry standards that apply to franchisor and franchisee marketing and ad campaigns. A co-presenter and I authored an extensive legal paper summarizing many of those aspects, accessible here.

However, franchisors and franchisees who are operating businesses in these uniquely challenging times probably don’t have time to wade through 46 pages of a legal white paper. Therefore, below I provide a few takeaways that can help business owners and marketing directors know when to reach out to legal counsel for guidance and protection.

Marketing the franchise opportunity to potential new franchisees

Advertising franchise opportunities is a highly regulated endeavor. If you are a franchisor who promotes the availability of franchises using in-house staff and resources, you need to work closely with your franchise counsel to ensure that your print, internet and other marketing efforts comply with the Federal Trade Commission’s strict requirements.

If you have sales staff using social media to contact potential franchise candidates, that staff needs to go through compliance training with your franchise attorney. And if you use third-party brokers or vendors to promote your franchise opportunities, you should ensure that the broker or vendor has a demonstrable track record in selling franchises legally. If they screw up, you will likely be held liable. Therefore, you should monitor your broker/vendor’s promotional efforts, or have your franchise counsel review their promotional efforts.  

Marketing your underlying product or service

Here are a few areas of potential pitfalls when using various marketing strategies to promote your product or service:

Texts, emails, calls: Are you planning to reach customers via text, email or telephone calls, or do you encourage franchisees to do so? Your first email, text or call should be to your attorney. Federal law regulates the content of your campaign and details regarding how your messages are sent. There is a cottage industry of lawyers who represent consumers who receive noncompliant marketing texts, emails or calls. Those attorneys can turn your marketing universe into a group of class action plaintiffs. Because the defenses to these regulations are few and weak, damages can quickly skyrocket into the millions, and that doesn’t even count the plaintiffs’ attorneys fees you will likely be required to pay.

Celebrity mentions: Thinking about tagging a celebrity from your brand’s, or franchisee’s, Twitter account (if Twitter still exists by the time of this post)? Or do you want to post a meme using a celebrity’s image or likeness? Think again. Federal and state law give celebrities the right to sue companies who use their name, image, likeness or voice (or good impressions thereof) without permission. Remember, just because private citizens can make posts about celebrities doesn’t mean you, as a commercial enterprise, can. Also, the scope of who is a “celebrity” is expanding. YouTube content creators, social media influencers and streamers are now celebrities to large swaths of your consumer market.

Truth in advertising: We’ve all heard the phrase “the truth shall set you free.” That’s often not so in advertising and marketing. A claim in your ad may be technically true and still land your brand in hot water. Generally, if a statement is true, but causes consumers to make assumptions that are not true, regulators — and even your competitors — can come after you.

Third-party marketers: Hope to avoid calling your attorney by just farming out your marketing to a third party? If that vendor takes legal compliance seriously and has sufficient expertise of advertising law, you might get away with it. However, if the vendor doesn’t follow the law, your brand can be held liable — even if you were relying on the vendor to get it right! So, when it comes to third parties, do your homework, make sure your attorney has reviewed the vendor agreement, and don’t just set it and forget it. Your brand, and its resources, are on the line. Keep a close eye on your vendor’s campaigns, and have counsel at the ready.

The amendments make a multitude of changes to the CFRA and CFIL.  In particular, franchisors will need to consider how the following changes made by California Assembly Bill 676 will impact their franchise contracts and relationships:

Waivers and Disclaimers 

The most impactful change on businesses franchising in California will likely be the new restrictions on waivers and disclaimers.  The amendments declare certain waivers and disclaimers as contrary to public policy, and therefore void and unenforceable. This includes disclaimers of representations made by the franchisor, the franchisee’s reliance on any such representations, or related to the franchisee’s reliance on the franchise disclosure document or its exhibits. Franchise agreements and Franchise Disclosure Documents typically require a franchisee to disclaim reliance on statements made outside of the documents themselves. These are often reflected in merger or integration clauses, and they verify that the final, signed documents represent the parties’ final agreed-upon terms. As a result, franchisors should revisit their franchise documents and consider whether any updates are needed to address this California-specific prohibition.

It is likely that these prohibitions will be the subject to future litigation. For example, the prohibition may create uncertainty on the interplay with the parol evidence rule, which prevents evidence outside of a fully integrated, final agreement from being presented in court.  Further, the import of integration clauses by the courts is uncertain. Depending on the answers to these issues, franchisors may be concerned that statements made during negotiation—even if not reflected in the final terms of the agreements—may be presented in court and taken out of context.

Setoff at Termination 

Another significant change by the amendments is regarding treatment of debts owed after termination or nonrenewal of a franchisee. Formerly, consistent with the parties’ contractual terms, a franchisor could offset any amounts owed to the franchisee against the amounts that the franchisee owed. Now, a franchisor can only offset the amounts owed, if the franchisee agrees to the amount or if the franchisor received a final adjudication. Though this may seem like a minor change, this could prove costly and time intensive for franchisors. Particularly in situations where a franchisee is terminated for failure to meet financial obligations or maintain appropriate records.

Civil Liability 

The amendments potentially expand civil liability against franchisors. Prior to the changes, civil liability under CFIL could only arise against a private party for violations of the law as explicitly stated in the chapter. These amendments removed that limitation, and now provide that “[n]othing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect.”

Other Franchisee Protections 

The amendments provide additional protections for franchisees:

• Franchisors are now prohibited from refusing to grant, or provide financial assistance, to a franchisee or prospective franchisee that has been provided to similarly situated franchisees based solely on any characteristic (of the franchisee/prospective franchisee or neighborhood/location) that is protected under California’s civil rights act (Unruh Civil Rights Act), e.g., age, disability, race, religion, sexual orientation.
• Franchisors are prohibited from modifying a franchise agreement, or requiring a general release, in exchange for any assistance related to state or federal emergencies.

Franchise Transfers

Finally, the amendments impose additional requirements on franchisee-to-franchisee sales. After receiving an application to transfer, a franchisor must notify the prospective franchisee in writing as soon as practical of any additional documents or information needed. Further, if a franchisee requests required forms or information on the standards of approval, the franchisor must provide it within 15 calendar days of receiving the request. Finally, after receiving all the required information, the franchisor must notify the prospective franchisee of their approval or disapproval within 60 days. However, these new provisions do not prohibit a franchisor from exercising a right of first refusal or imposing additional requirements on franchisee-to-franchisee sales.

If you franchise or plan to franchise in California, these amendments make important changes that you should consider with respect to your existing contracts, franchise disclosure documents, as well as your conduct during and at the conclusion of any franchise relationship. You may wish to discuss the impacts these changes may have on your existing and future franchise relationships with your legal counsel.

The NASAA platform, called FRED, already allows franchisors to file their state filings for several other states requiring franchisors to register before offering and selling franchises. While a number of states maintain their own online filing platforms, many have been migrating to FRED, making the NASAA platform a convenient tool for franchisors and their counsel.

If you have questions about this development, please contact a member of Greensfelder’s Franchising & Distribution group.

Repurposing the motor fuel station and incorporating EVs raises different considerations for today, in the near future, and in the long term.

• Convenience retailers are continuing to evolve and expand their offerings to consumers. Brands must be able contractually to adapt to the constantly changing environment—including ensuring that your franchise, supplier, and real estate agreements provide the flexibility to adapt over time.
• Retailers continue to focus on diverse ways to maximize spaces large and small. We are likely to see sites of all sizes adding a variety of non-traditional offerings to the premises, but also to see attempts to copy the model of bigger convenience retailer sites.
• Innovation is required to overcome infrastructure obstacles hindering wide-scale electric vehicle adoption.
• While there is a large push for expanding resources for electric vehicles, the use of traditional motor fuels and bridge fuels will still be needed in the meantime. Convenience retailers need to strike a balance between offering alternative fueling options with continuing to develop innovative offers to the traditional fuel consuming customer.
• Keep in mind the intersection of traditional PMPA obligations and Section 2807 of the PMPA related to renewable fuel pumps.

Privacy laws are rapidly developing, with many state legislatures actively responding with legislation that varies by jurisdiction.

• As energy companies adopt more innovative technologies directed at consumers, it is imperative they stay apprised of this changing legal landscape.
• How consumer information is handled and disclosed will continue to be legislated by states, and a uniform federal standard is unlikely in the near future.
• Companies that fail to comply with state laws governing consumer information face stiff civil penalties.
• Companies should be aware of the existing biometric laws in Illinois, Texas, and Washington and the potential for more states to adopt similar laws, including some state laws that provide a private right of action with statutory damages for violation.

Antitrust considerations are getting more attention. Be careful not to overlook your antitrust and pricing obligations.

• Some states are making it easier for plaintiffs to bring antitrust claims by abandoning the federal requirement that a plaintiff show injury to competition as a whole rather than merely to a single competitor.

As an energy company, do not underestimate the importance of connecting with juries.

• Jurors generally connect with clear contractual language and companies that help their retailers/franchisees succeed.

Carefully evaluate your options for business partners facing financial distress.

• Because the majority of oil and gas contracts are executory contracts, companies should be aware of the rules governing a debtor’s assumption or rejection of those contracts.

Greensfelder attorneys Abby Risner, Upneet Teji, Daniel Garner, David Simmons, Celine George and Kathleen Howard contributed to this post.

The new weapon in the FTC’s arsenal is directed specifically to the franchise industry. The FTC did this by adding a new bullet point option in its reporting form that says “franchise.”  Consumers follow a series of prompts to provide details about the franchisor and what they claim the franchisor did wrong, including some suggestions such as “unfair or unreasonable contract terms” or “misleading statements during the sales process.” The FTC told the Franchise Times that this new reporting option is a “big deal” because it will go directly “to the franchise team, not get lost in the fraud pile.”

This franchise-specific website complaint form comes on the heels of the FTC’s letters served like subpoenas on franchisors, putting them on notice of what the FTC considers to be unfair and deceptive trade practices under the threat of $43,792 penalties per violation. 

If these two actions are not enough to make you nervous, the FTC’s announcement that it was adding a franchise-specific question in its complaint form was part of a press release last week titled, “FTC Sues Burger Franchise Company That Targets Veterans and Others With False Promises and Misleading Documents.” The U.S. Department of Justice had just sued fast-food chain Burgerim and its owner on the FTC’s behalf for allegedly selling franchises to more than 1,500 consumers for $50,000 to $70,000 franchise fees and then failing to refund the money when the franchisees could not open restaurants, despite promising to do so. The lawsuit claims that the franchisor made false promises and withheld material information that should have been in its Franchise Disclosure Document.

In announcing the lawsuit, the FTC said it was making it easier for other franchisees to file complaints “to help us root out deception and other illegal conduct in the franchise industry.” The press release is available at https://www.ftc.gov/news-events/press-releases/2022/02/ftc-sues-burger-franchise-company-targets-veterans-others-false.

We advise you not to panic, as cases like Burgerim are the exception and an example of wide-spread fraud alleged within the franchise system. But it certainly bears repeating during what appears to be an increasing focus on franchisors that you need to make sure you are complying with all applicable state and federal laws and the FTC Franchise Rule, including Item 19 regarding financial performance representations. This may not stop franchisees from filing complaints with the FTC, but you will at least have a solid foundation for your defense if the FTC or its law enforcement partners come calling.     

The multi-page notices inform the recipient that it is an “unfair or deceptive trade practice to make false, misleading or deceptive representations concerning the profits or earnings that may be anticipated by a purchaser of a money making opportunity” under the broad consumer protection law that created the FTC, the Federal Trade Commission Act (the “Act”). To drive the point home, the FTC provides case examples of what the FTC has previously litigated and determined are “penalty offenses” and/or resulted in cease and desist orders. 

The examples of what the FTC considers “unfair or deceptive” may surprise even well-meaning businesses that do not intend to deceive but are just trying to put their franchise, or business opportunity, in the best light, or intending to highlight the opportunity available by promoting the earnings of their best performers. 

It is possible for all of the information in a promotional piece to be factually accurate, and still be misleading or deceptive under the FTC’s definition (and possibly under state laws). If you are selling a money-making opportunity, the standard you will be held to is not basic factual accuracy. Rather, the FTC will focus on the “overall impression” that a promotional piece gives a prospect and investigate whether that “overall impression” is consistent with what a typical participant experiences after buying into the opportunity. It is possible for a promotional piece to be factually accurate, and still leave prospects with an overall impression that they are likely to achieve results that are not typical for other purchasers. The FTC also warns that endorsements, testimonials and consumer reviews that companies commonly use to advertise and market their products and services in traditional and social media can be unlawful in certain circumstances. 

Franchisors and other recipients of the FTC notice may be asking what they did wrong. The bottom line is that – if you receive such a notice – there is no need to panic. The FTC states that it is “widely” distributing the notice to “business opportunities, franchises, multi-level marketing companies, coaching companies, gig companies, and others,” and receipt of the notice does not necessarily indicate that the FTC believes that your company is in violation of the Act. However, this notice may be a sign that the FTC will be looking more closely at franchisors and other businesses’ marketing and promotional materials and practices. Therefore, it is time to review your promotional materials and marketing practices with an attorney who is knowledgeable about the Act and FTC compliance. The scope of what the FTC considers to be misleading, deceptive or false is probably broader than what your sales or marketing teams would assume. The notice does not change a franchisor’s obligations under other laws and regulations such as the FTC Franchise Rule (specifically Item 19 financial performance representations in the Franchise Disclosure Document), the Business Opportunity Rule, or other federal and state statutes. Therefore, a franchisor will need to consult with counsel to make sure it is complying with all of these sources of legal obligations. Please contact Greensfelder’s Franchising & Distribution group if you have questions.

More information about the FTC investigation can be found here:

• https://www.ftc.gov/news-events/blogs/business-blog/2021/10/one-money-latest-notice-penalty-offenses-takes-deceptive
• https://www.ftc.gov/news-events/press-releases/2021/10/ftc-puts-businesses-notice-false-money-making-claims-could-lead

Read the full interview

Question 1: How did you end up specializing in franchise law and what drew you to the field?

• I think like most franchise lawyers, it’s not like I went into law school dreaming of franchise law. It was a bunch of different circumstances, but if anything, if there was ever a silver lining, for me at least, with 9/11 and the recession that followed, it was that I ended up finding my passion for franchise law. I had started at a large law firm around that time and was supposed to do M&A work and corporate work, and that work all dried up with the recession that followed 9/11. So I kind of bounced around a little bit, did some bankruptcy work as well, and then somebody said, “Well, you know, you should you should check out the franchise group because they do things that are similar to corporate, so you’ll learn stuff that will be relevant.” And I kind of found the franchise group and never looked back.

Question 2: These days in 2021 and 2022, sort of the post-COVID or the ongoing COVID landscape, what do you think is the biggest hurdle facing franchisors?

• There’s one thing that I think has been going on for well over a decade right now and that’s definitely joint employer and misclassification. So, I mean we can keep talking about that forever, but I think that the new one that a lot of franchisors will have to come to grips with in the next year or so is related to how the systems have changed because of the pandemic. ... Most franchisors and franchisees had to implement some kind of temporary measures during the pandemic to stay afloat, and in some cases those have turned out to be great, at least for most franchisees. But that may not be uniform, or there may be other reasons that a franchisee doesn’t want to continue that way or want to have some variation, or it doesn’t feel like this pandemic version of the system is what they bought. So for franchisors, I think it will be reviewing their agreements and thinking about the relationships of the franchisees to make sure that they can actually require these changes long term, for example.

Question 3: What is the most common mistake you see franchise brands making from a legal perspective, whether these are clients of yours or just in general?

• I think there’s as many as there are franchisors and franchisees, right? But ... the ones that I tend to focus on are the ones where I have to call my litigation colleagues and say, “Hey what do we do about this?” And those also come up in a lot of different circumstances, but I would say that a lot of them kind of find their source in the franchisors and maybe franchisees not doing their diligence early on. Franchisors, especially startup franchisors, are super-eager to find new franchisees, and anybody who shows interest and is willing to sign on the dotted line ... they will sell a franchise to. ... It’s kind of penny-wise, pound-foolish — you get a franchisee in, but then you buy yourself a lot of issues because maybe they didn’t quite understand what the system entailed, or maybe they’re just not the right person for your system. So that leads to a lot of issues in my experience.

Question 4: So, Beata, you work with franchisors, but if you were speaking to somebody who was a prospective franchisee, somebody who was thinking about signing on with the brand, what advice might you give them?

• You know it’s almost a flip side of what I was just talking about, because it’s franchising at the end of the day. It’s a relationship ... you join a brand, you join a family, and you want to make sure you know what family you’re joining, and that comes down, in a large extent, to who the franchisor is and how they operate their system. You’ll find that there’s systems out there that have very detailed controls and everything is regulated, and it’s down to how many ice cubes there should be in a soda, right? And then you have others that are not like that at all – there’s definitely a trademark, there’s a general feel for what the brand is, but they are not going to give you that support or control, depending on how you see it, and that will definitely impact the franchisees’ experience. ...If you can figure that out, and it’s typically not that difficult to do, you know every FTD has a list of all franchisees in the system attached to it, so you can call the list and learn from existing franchisees what their experience is, and that should help you in figuring out what your life as a franchisee in this brand may look like.

Question 5: So final question for you, what has kept you in this field? What do you love about working with franchisors?

• It’s funny, and I suppose when I speak to younger attorneys or associates in my firm, say, that just because you like the law, you shouldn’t assume that all practice areas are created equal. And to me it’s very much the ability to be involved in — how should I say this, it’s not on the -management level as such but it’s helping problem-solve. I love problem-solving and finding creative solutions to issues that franchisors may have and kind of figuring out how to make it work. So that ability to help and that closeness that you have to your clients and to the management side of the business, I really like that, and that would definitely keep me in franchising hopefully for a long time to come.

For more information, please visit our Franchising & Distribution page.

In a recent panel at the International Franchise Association’s Legal Symposium, Greensfelder franchise attorney Dawn Johnson and her co-panelists discussed hypothetical and real-life scenarios that address this topic and provide franchisors with some insight on what they should and should not include in Item 19 of the franchise disclosure document.

Click here to read the full article in the Franchise Times about the panel.

Some hot issues discussed at the programs included:

Sound Advice for New Franchisors. Consistent with recommended advice we give new franchisors, this included:

1. start expanding close to home – close enough to drive home and back in one day;
2. be selective when approving franchisees – almost every franchisor has approved early prospects they regret. Avoid the temptation to sell just because you will get some ready cash; and
3. grow in clusters – concentrate on areas that are close together. You don’t want to be traveling all across the country to support a few franchisees here and there. 

FPRs. Pulling your hair out about how to prepare your financial performance representations this year? You are not the only one. Franchisors struggle with how to (and if to) use 2020 data and if that very unusual year’s data really gives prospective franchisees a good idea for their potential future performance. Rethink whether to show annual averages, or maybe do quarterly or even monthly averages instead. Consider using geographic subsets to address different performance results in different parts of the country. And talk to your franchise attorney early to make sure that the revised FPR complies with the FTC Franchise Rule and NASAA guidelines.

Advertising. Hot topics in advertising for franchisors:

1. social media influencers: Use care with advertising through social media influencers. Many franchisors are exploring this area, but they must take care to seek legal guidance to ensure compliance with the legal requirements and evaluate risks associated with social media influencers, including guidance from the FTC; and
2. cause marketing: Ensure you are aware of whether the states where you are considering launching cause marketing regulate the cause marketing you are planning, including whether the state dictates what you must include and specific steps that you must follow.

Insurance. Maintaining, reviewing, and updating your insurance coverage cannot be overstated. Franchisors often overlook important types of coverage, two of which are:

1. Directors and Officers Liability Insurance, which covers the franchisor, its officers and directors for mismanagement, illegal acts, fraud, etc., and
2. Franchisors’ Errors and Omission Insurance, which covers errors and omissions in connection with franchise sales and disclosure.

System Changes. Changes to the system are inevitable in a healthy franchise, and the failure to change will result in stagnation.  However, prior to initiating changes, the franchisor should devote sufficient resources to effectively implement the change and make the franchisees aware of why the changes are important for their future success. Franchisors should also consider various assistance programs (i.e., financing and leasing programs, special terms from designated vendors, and internal support) to help minimize the burden on the franchisees and gain their support.

Dispute resolution. With many courts closed or operating virtually most of the past year, and now facing backlogs of cases, franchisors should consider using mediation as a way to resolve disputes with franchisees more quickly and less expensively than arbitration or litigation, even if the franchise agreement does not require mediation. Moving forward out of the pandemic, practitioners expect that virtual mediations will continue to be used in some cases to reduce travel and related costs for the parties and/or mediator.

Struggling franchisees. During the past year, franchisors have used a variety of methods to help franchisees through the pandemic, including helping renegotiate lease terms, extending the terms of area development agreements, easing brand standards, and forbearing or forgiving royalties. Although some of the franchisee assistance has been done on “handshake deals,” it is usually better practice to get written releases for major events or changes to avoid future problems when things return to “normal.” For those franchisees who cannot survive, franchisors should help facilitate transfers to new franchisees where it is important to keep units open, waive transfer fees, consolidate into multi-unit franchisees or even consider allowing the franchisees to leave the system.  

Greensfelder summer associate Kiran Jeevanjee contributed to this blog post.

Native American tribes occupy a unique position within the American legal system, and understanding these issues is vital for any franchisor considering a tribe as a potential franchisee. Federally recognized Native American tribes are classified as “domestic dependent nations” — meaning that the tribes are considered “distinct independent political communities” and can govern their own internal affairs. The most important consequence of this classification from a business perspective is that such tribes are entitled to tribal sovereign immunity that protects them from any civil suits or criminal prosecutions to which they did not consent.

This sovereign immunity is powerful and highly relevant: It shields all tribal officials and any tribal employees acting in their official capacity from federal common law claims and from contract suits arising from governmental or commercial activities. Because tribes are immune from contract suits absent a clear waiver of sovereign immunity, for a franchise agreement to be enforceable against a tribe, a franchisor must first obtain a valid waiver of tribal sovereign immunity. Tribes retain this immunity when doing business both on and off the reservation. Thus, this immunity applies regardless of the franchise’s physical location.

Because a tribe will be immune from legal efforts to enforce a franchise agreement absent a waiver of that immunity, the prudent franchisor should negotiate a clear and effective waiver early in the process to ensure enforceability of the final franchise agreement. Below are some simple steps to increase the likelihood that your sovereign immunity waiver will be valid and your franchise agreement will be enforceable.

The most important consideration is ensuring that the waiver is clear and obvious. A valid waiver of sovereign immunity is one that is “clear, express, and unambiguous.” Santa Clara Pueblo v. Martinez, 436 U.S. 49, 59 (1978). While there are no “magic words” that constitute a valid sovereign immunity waiver, the waiver must be affirmative and unequivocal. Franchisors should pay careful attention in drafting the waiver clause of any franchise agreement as courts otherwise typically exercise a strong presumption against a waiver of sovereign immunity. An invalid sovereign immunity waiver can nullify an entire franchise agreement and have devastating consequences on your franchisor-franchisee relationship. The more you can include to demonstrate to a court that the franchisee intended to expressly and unequivocally waive sovereign immunity, the better.

These are some effective methods for making your waiver clear:

• Use express and unambiguous language. Make sure your waiver expressly states that the tribe is knowingly waiving tribal sovereign immunity. You can increase the likelihood this will be enforceable using typical contractual drafting techniques, such as bolding the relevant language and requiring initial or signature lines for the specific provision itself.
• Include express choice-of-law provisions and dispute mechanisms. These sorts of provisions will significantly increase your sovereign immunity waiver’s chances of validity because they are strong evidence that the tribe understood and agreed that it might have to litigate or arbitrate disputes without resorting to an immunity defense. In C&L Enterprises, Inc. v. Citizen Band Potawatomie Tribe of Oklahoma, for example, the Supreme Court held that a contract signed by a tribe with a clear arbitration provision and choice-of law clause was a clear waiver of sovereign immunity. Because the tribe “agree[d] to submit disputes arising under the contract to arbitration, to be bound by the arbitration award, and to have its submission and the award enforced in a court of law,” the tribe clearly and expressly waived sovereign immunity. 532 U.S. 411, 420 (2001). Including a choice-of-law provision and/or a dispute resolution mechanism in your franchise agreement will indicate to courts that the franchisee expressly waived sovereign immunity.
• Demonstrate that the tribe has followed its own required procedures. In addition to having a clear and unequivocal sovereign immunity waiver, the appropriate tribal authority must be the one who authorizes the sovereign immunity waiver. Franchisors should consult tribal law and the tribe’s internal governing documents to determine who has the authority to waive sovereign immunity and the process the tribe must follow to do so. Typically, this is the tribe’s governing body. The franchisor should obtain certification that the appropriate authority waived sovereign immunity and consider making the certification an exhibit or schedule to the franchise agreement. If an otherwise valid sovereign immunity waiver is granted by an inappropriate authority, the franchisor will ultimately be left with an unenforceable franchise agreement. For example, in World Touch Gaming, Inc. v. Massena-Management, LLC, World Touch Gaming entered into an agreement with an unincorporated enterprise of the Akwesasne Tribe. 117 F. Supp. 2d. 271 (2000). In the agreement, the tribal entity’s vice president waived sovereign immunity, but did so without the express authorization of the Tribal Council. The court found that the sovereign immunity waiver was invalid and dismissed the case on the grounds that the Tribe was immune from suit.

Franchising with Native American tribes can be a great opportunity for both parties. However, it is important to know and to understand the sovereign immunity-related risks associated with doing business with Native American tribes. Including a clear and express sovereign immunity waiver that is authorized by the appropriate tribal authority is one way to ensure your franchise agreement is enforceable and will create a strong franchisor-franchisee relationship for years to come.

Under the Federal Trade Commission Franchise Rule and applicable state franchise laws, a franchisor may not make a Financial Performance Representation (FPR) unless it has a “reasonable basis” for the representation at the time it is made. This requirement raises the question of whether franchisors whose businesses have been materially and adversely impacted by COVID-19 should update their FPRs in Item 19 of their Franchise Disclosure Document (FDD) because their existing historical FPR may no longer provide prospective franchisees with an accurate idea of how locations in the franchise system perform.

The Federal Trade Commission has not commented on how or whether franchisors should revise their FPRs in light of the impact of COVID-19. However, the Franchise and Business Opportunities Project Group of the North American Securities Administrators Association (NASAA) just issued guidance for affected franchisors who make historical FPRs. The full text of the guidelines is at https://www.nasaa.org/wp-content/uploads/2020/06/FPRs-in-the-time-of-COVID-19.pdf.

This guidance has not been officially sanctioned, but it does provide valuable direction to franchisors as they update their FPRs in this challenging environment. For those who determine that changes to the franchise system or business model will have an impact on their FPR, the NASAA Project Group notes that the franchisor may no longer include a historical FPR that is not updated to reflect those changes and their impact on the FPR.

While recognizing that “it is impossible at this time to provide more specific guidance to franchisors about making a historical FPR in 2020 and beyond,” the NASAA Project Group recommends that franchisors consider the following factors:

(a) whether the franchise business has been significantly impacted by the COVID-19 pandemic;
(b) the type of data the franchisor includes in the FPR;
(c) the reasonable inferences a prospective franchisee can draw from the FPR;
(d) when the franchisor estimates a prospective franchisee can expect to open for business after entering into a franchise agreement;
(e) whether and how the franchisor adapts the franchise business to account for current market conditions resulting from the COVID-19 pandemic; and
(f) whether and how the franchisor adapts the franchise business to account for future market conditions resulting from the COVID-19 pandemic.

Franchisors who need to update their FPRs should work closely with their accountants and attorneys and recognize that changes will depend on the unique facts and particular circumstances of the franchise system.

The exemptions under the FTC Franchise Rule are intended to exclude franchise transactions in which the prospective franchisee doesn’t need the protection the rule is intended to provide. As several exemptions available under the FTC Franchise Rule are tied to dollar thresholds, they need to be adjusted from time to time to remain relevant. For example, when the current rule was adopted in 2007, a franchise sale was exempt from the FTC Franchise Rule’s disclosure requirements if the payments from the franchisee to the franchisor in the first six months of the franchisee’s operations did not exceed $500. Adjustment of the dollar threshold is necessary for this exemption not to become irrelevant with inflation. 

The fees being adjusted effective July 1, 2020, are:

• The minimum fee exemption threshold will be $615.
• The large investment exemption threshold will be $1,233,000.
• The large franchisee exemption threshold will be $6,165,500.

Each of these exemptions is complex, and franchisors should carefully consider the specific facts of any sale before relying on an exemption. Please contact Greensfelder’s Franchising & Distribution group if you have questions about exemption-based franchising.

In recent days, several U.S. states have announced accommodations for franchise filings.

California announced an extension of time for calendar year franchisors to file their  2020 renewals from April 20 to June 20 in light of the COVID-19 pandemic. Although the renewal filing fee of $475 remains in effect if the renewal is filed by June 20, those who do not file  by April 20 must suspend sales until approved. Filers are urged to file electronically and can sign their application forms using an e-sign software program, such as DocuSign, instead of getting their signatures notarized.  Those who file by hard copy are asked to waive the automatic effectiveness, and their filing will not be effective until the actual date designated by order.

Hawaii is urging filers to use its online filing system. It has also extended the renewal filing deadline until April 30.

Indiana is granting franchisors whose current registrations were to expire between March 16, 2020, and May 31, 2020, a registration extension until June 30, 2020.

Minnesota is waiving its notarization requirement.

New York is extending current registrations and exemptions by 90 days and is accepting electronic filings.

South Dakota is asking franchisors to request an extension of their registration if they will not be able to file timely.

Virginia has extended the 21-day grace period previously reported on March 18  to registrations and exemptions expiring while the emergency declaration remains in effect. It also will accept PDF copies of the FDD on CD-ROM, though the application forms must still be submitted in paper form.

Washington is waiving its notarization requirement. 

Other states, including Illinois, North Dakota and South Dakota, will provide accommodations if requested.

Click here for our previous update on Virginia and here for Maryland, and stay tuned for further updates.

Read the full article at https://www.greensfelder.com/newsroom-publications-SBA-coronavirus-disaster-loans.html

Additional publications relating to the COVID-19 pandemic can be found here.

As opposed to the Maryland order (discussed in a previous blog post here), the Virginia order seems to require that the franchisor continues to use its 2019 FDD.  If the state of emergency continues, this may mean that franchisors offering franchises in Virginia will have to use their 2019 FDD to comply with Virginia law and their 2020 FDD to comply with federal FDD updating requirements.

Our Franchising & Distribution team of attorneys is continuing to monitor these developments and is available to answer your questions related to franchise matters affected by COVID-19.

Link to COVID-19 Resources page

Thankfully, states are also scrambling to help franchisors with the upcoming deadlines. First to act is Maryland. The governor declared a state of emergency on March 5, 2020, and on March 17, the Maryland securities commissioner issued an order extending registrations and exemptions for currently registered or exempt franchisors whose registrations or exemptions would have expired during the state of emergency. The registration and exemption dates will be extended for 30 days after the governor of Maryland declares the end of the state of emergency.

The Maryland extension of the registration period is similar to the provisions in the California and New York franchise laws allowing registered franchisors to continue offering franchises while an amendment application is pending. During the extension period franchisors can provide prospective franchisees subject to the Maryland franchise law with their new FDD, even though it is not registered. The FDD must include the material updates that are required by the FTC Franchise Rule. The franchisor may not enter into an actual franchise agreement until the updated FDD has been registered or deemed exempt. The franchisor must also give the prospective franchisee at least 15 days after registration/exemption to review the FDD, together with a marked copy of the registered/exempted FDD against the FDD that the franchisee received earlier.

Franchisors should also note that the automatic effectiveness the Maryland Franchise Law provides for is also waived during the emergency period and should not be relied upon for the time being.

While we are hopeful that other states will follow suit, franchisors should not expect that all states will do so, or announce a change in time for this year’s filings. Most annual renewal deadlines are set by statute, and any change may involve the legislature or the state franchise commissioner’s discretion in amending the deadlines by order.

If a franchisor is unable to meet a registration renewal deadline, it can still file an application as a new franchise. There will be a slightly higher filing fee and it will have to avoid sales until the registration is approved.

Our Franchising & Distribution team of attorneys is continuing to monitor these developments and is available to answer your questions related to franchise matters affected by COVID-19.

Link to COVID-19 Resources page

• hire or fire the employee;
• supervise and control the employee’s work schedules or conditions of employment;
• determine the employee’s rate and method of payment; and
• maintain the employee’s employment records.

The DOL explained that these “factors are consistent with section 3(d) of the FLSA, which defines an ‘employer’ to ‘include[] any person acting directly or indirectly in the interest of an employer in relation to an employee,’ 29 U.S.C. 203(d), and with Supreme Court precedent. They are clear and easy to understand. They can be used across a wide variety of contexts. And they are highly probative of the ultimate inquiry in determining joint employer status: whether a potential joint employer, as a matter of economic reality, actually exercises sufficient control over an employee to qualify as a joint employer under the [FLSA].”

The Notice of Proposed Rulemaking comes almost two years after the DOL withdrew the Obama-era guidance letter 2016-1, which resulted in an expansion of the joint employer doctrine such that even a business entity with very little control, if any, over an employee could still be considered a joint employer.

The Proposed Rulemaking is a welcome relief to businesses, including franchisors that have little to no control over franchisee employees. The DOL’s proposal states that the business model, including a franchise relationship, does not have any bearing on whether there is a joint employment relationship. Furthermore, the DOL included several hypothetical examples and explained that a franchisor providing its franchisees with sample employment materials, applications or policies or requiring the franchisees to conduct certain training would not result in a joint employment relationship if there was no other day-to-day control exercised by the franchisor.

If after the notice and comment period, the DOL adopts the proposed rule, it will not have the weight of law. However, it will provide guidance to the agency and courts when interpreting the FLSA and joint employment situations. If you have questions about how your business may be affected by this proposed rule, please contact any of the attorneys in our Franchising & Distribution Group.

The National Labor Relations Board (NLRB) on Jan. 25, 2019, overturned its 2014 ruling in 

In FedEx, the board held that drivers in the Connecticut terminal of a FedEx Ground Package Systems Inc. unit were employees and not independent contractors, saying that a wide range of factors favored employee status. In reaching that conclusion, the board modified the test for determining independent-contractor status by strictly limiting the significance of a worker’s entrepreneurial opportunity for economic gain. Specifically, the board held that it would give

weight to actual, not merely theoretical, entrepreneurial opportunity, and that it would necessarily evaluate the constraints imposed by a company on an individual’s ability to pursue this opportunity.

Now, in SuperShuttle DFW, Inc., the board concluded that franchisees of SuperShuttle at the Dallas-Fort Worth Airport are not statutory employees under the National Labor Relations Act (NLRA), but are independent contractors excluded from the NLRA’s coverage.

Importantly, the board found that the franchisees’ leasing or ownership of their work vans, their method of compensation, and their almost unrestricted control over their schedules and working conditions provided the franchisees with significant entrepreneurial opportunity for economic gain. These factors, along with the absence of supervision and the parties’ understanding that the franchisees are independent contractors, resulted in the board’s decision that the franchisees are not employees. In overruling FedEx, the board concluded that it would continue to consider “all of the common-law factors in the total factual context of each case and treating no one factor (or the principle of entrepreneurial opportunity) as decisive. And where the common-law factors, considered together, demonstrate that the workers in question are afforded significant entrepreneurial opportunity, [it] will likely find independent-contractor status.”

If you have questions about the SuperShuttle decision or need help classifying your workers, please call one of the attorneys in our Employment & Labor group. In addition, franchisors with questions about how this may affect them can contact a member of our Franchising & Distribution group.

Noting its earlier ruling in the case at the preliminary injunction stage, the court reconsidered the PMPA issues raised by the plaintiffs to challenge the termination of their supply agreements, presented with “further nuance” at the motion to dismiss stage. The court rejected all three arguments made by the plaintiffs attempting to apply the PMPA to the two unbranded stations.

First, the plaintiffs attempted to invoke the PMPA by arguing that their supply agreements for the two unbranded stations addressed issues of branding. Specifically, the plaintiffs pointed to the following provisions that they contended extended a right to use a trademark:

• a contractual requirement to “maintain all signs and advertising related to the gasoline brand being dispensed”;
• advertising fees;
• indemnity to the supplier whose logo or signage was used; and
• provisions that failure to comply with branding requirements would be grounds for termination.

The court rejected this contention and found that, although the provisions anticipated the use of trademarks, they did not actually confer any right to use a trademark or require that the sale of fuel occur under a trademark—as confirmed by the plaintiff’s failure to identify any specific trademark. As a result, the two locations could not constitute a “franchise” under the PMPA and, thus, were not subject to the termination requirements of the PMPA.

Second, the plaintiffs argued that their supplier admitted that the PMPA applied to the unbranded stations. The plaintiffs pointed to a provision in their supply agreements providing that “[t]he parties specifically acknowledge and agree that the franchise relationship (as defined in the Petroleum Marketing Practices Act, 15 USC §2801 et seq.) created by this Agreement between the Retailer and the Supplier is necessarily contingent upon the Retailer’s ability to maintain possession of the Premises.” The court rejected that the provision demonstrated a mutual intent for the PMPA to apply.

Third, the plaintiffs argued that a cross-default provision in the supply agreements rendered all three stations subject to the PMPA because the third station was undisputedly subject to the PMPA. Again rejecting the plaintiff’s argument, the court found that the cross-default provision did not extend application of the PMPA because it did not provide for automatic termination. Suggesting that had the agreements provided for automatic termination, they could extend application of the PMPA, the court cited an earlier decision from the Northern District of Illinois holding that where the termination of a premises lease and motor fuel franchise agreement would automatically terminate a separate mini-market franchise agreement, the PMPA could govern the mini-market agreement as well.

The court did not grant the motion to dismiss entirely because it could not determine from the face of the complaint whether the termination notice to the third station was valid under the PMPA.

The case is Catch 26, LLC v. LGP Realty Holdings, LP (N.D. Ill. April 17, 2018).

As a result, on your next visit to a restaurant, motor fuel station or fast food drive-thru, you will see something new when making your selection from the menu: nutritional information. The federal menu labeling rules apply to restaurants and similar food establishments if they are part of a chain of 20 or more locations that are doing business under the same name and selling substantially the same menu items for restaurant-type foods. The FDA has projected that the rules could apply to nearly 300,000 different establishments nationwide. The rules require establishments to display nutrition information — specifically, calories — for standard menu items and, upon request, provide additional written nutrition information.

In late 2017, the FDA issued additional guidance to respond to the practical questions facing those who need to comply with the rules: Do I need to include information on a coupon? What are the requirements for a salad bar? Do I have to provide the information on the menu in the store and online? The guidance addresses many questions, for example, clarifying that, generally, the rules should not apply to marketing materials such as coupons and billboards.

Against the backdrop of the looming compliance deadline, in February 2018, the House passed the Common Sense Nutrition Disclosure Act, which would ease the rules and, critically, limits civil liability. The question at this point is: Will the bill pass in the Senate before the compliance deadline in May? For now, retailers are preparing to meet the compliance deadline.

As we’ve previously highlighted, identifying nutrition information on menus presents potential risk, including to franchisors, in addition to regulatory compliance in the form of consumer actions. Make sure you are in compliance and prepared if faced with such a lawsuit.

Franchisor Cajun Global LLC, doing business as Church’s Chicken, had a typical franchise agreement provision that prohibited its franchisee, Swati Enterprises, from selling or transferring the franchise agreement without the franchisor’s written knowledge and approval. Despite this clause, two months after entering into the franchise agreement, Swati sold the franchise restaurant in Texas to an individual, Abdul Rahman, without Global’s knowledge or consent. Rahman never signed a franchise agreement with Global.

Swati and Rahman admitted the franchise was sold to Rahman, that Rahman performed under the franchise agreement as if he were a franchisee, and that he accepted the agreement’s benefits. The court found that Rahman, in concert with Swati: (1) paid royalties and marketing fees under the franchise agreement, (2) used Global’s federally registered trademarks, (3) received operational training and support from Global, (4) allowed Global to inspect the franchised restaurant, (5) addressed operational deficiencies that were found during inspections, and (6) obtained a confidential operational manual for the franchise. Global never knew of Swati’s and Rahman’s agreement because, according to Global’s allegations, Swati and Rahman represented that Rahman was the manager for Swati and that Swati remained the franchise owner.

When the franchise term ended, Rahman rebranded the franchised restaurant but continued to sell fried chicken. Global asked the court for a preliminary injunction against Swati and Rahman for violating the Lanham Act and the non-compete provision in the franchise agreement for operating a similar restaurant. Swati did not oppose the injunctive relief sought but said it could not comply because it no longer owned the restaurant. Rahman, in turn, claimed he was not bound by the franchise agreement because he did not sign it. The court disagreed.

Regardless of whether Rahman knew anything about the franchise agreement, the court found he was an owner, employee, and someone “in active concert and participation” with Swati under the federal preliminary injunction rule. Also, given Rahman’s “prolonged” performance under the franchise agreement and his acceptance of its benefits, state law principles of assumption and equitable estoppel applied to prevent Rahman from avoiding the non-compete obligations (and the Georgia court’s venue and jurisdiction) on the basis that he did not sign the franchise agreement. The case can be found here.

The takeaway: In certain circumstances, a franchisor may be able to enforce a franchise agreement against a non-signatory, depending on applicable state law and federal injunctive relief rules. This case is also a reminder for franchisors to keep their records current regarding franchisee ownership changes and to require franchisee compliance with contractual provisions requiring that the franchisor be notified of such changes.  

If you have any questions about this article or the issues raised in it, please contact the authors or Greensfelder’s Franchising & Distribution Group attorneys.