Franchise Agreements, FDDs and Related Documents:...

Franchise Agreements, FDDs and Related Documents: Negotiating Key Terms Protecting Franchisor or Franchisee Interests Regarding Territory, Fees, Advertising, Termination and More

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WEDNESDAY, JANUARY 8, 2014

Presenting a live 90-minute webinar with interactive Q&A

Harris J. Chernow, Partner, Chernow Kapustin, Horsham, Pa.

Mitchell J. Kassoff, Attorney at Law, South Orange, N.J.

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Franchise Agreements, FDD and Related Documents: Negotiating Key Terms

Harris J. Chernow Chernow Kapustin, LLC

Horsham (Philadelphia), PA

Mitchell J. Kassoff South Orange, NJ

January 8, 2014

If it is a franchise…

then the prospective franchisee should receive a Franchise Disclosure Document (“FDD”) that complies with the FTC Rule and the applicable state disclosure laws.

Harris J. Chernow – Chernow Kapustin, LLC 5

FRANCHISE DISCLOSURE DOCUMENT (“FDD”)

Disclosure – What’s The Purpose? • Regulatory perspective: Pre-sale disclosure may

reduce fraud and leads to informed decision making. • Franchisee perspective: Pre-sale disclosure provides

prospective franchisees with important information about the franchise system and offering.

• Franchisor perspective: Pre-sale disclosure sets forth expectations of franchisee and franchisor.


Federal and State Regulations

The FTC Rule State Laws • Disclosure only • Registration with review • No Federal registration • Notice filings • Preempts only • Specific industry laws inconsistent or less • Relationship laws protective state laws • No laws • Exemptions


State Registration

Fourteen States have registration and disclosure requirements: California Hawaii Illinois Indiana Maryland Michigan Minnesota New York North Dakota Rhode Island South Dakota Virginia Washington Wisconsin *Other states-Notice Filings


Franchise Relationship States

• Arkansas • Mississippi • California • Missouri • Connecticut • Nebraska • Delaware • New Jersey • Hawaii • Rhode Island • Illinois • South Dakota • Indiana • Virginia • Iowa • Washington • Michigan • Wisconsin • Michigan • Puerto Rico • Minnesota • Virgin Islands


Representing the Franchisee


Franchisee Concerns – Why Buy a Franchise?

• Why shouldn’t I do this myself? • For what do I need a franchise? • How will it improve my chances for success?

• What does it cost to enter?

• What will I save by doing a franchise?

• What do I pay over time?

• How much can I make?

• How will they help me?

• What happens when I want to exit the business?

• Numerous questions to ask


The Phases of Franchisee Representation:

• Counseling the Prospective Franchisee – “What is a Franchise really about?”

• Due Diligence – client duty • Negotiating the Franchise Agreement • Business and Real Estate/Lease Issues • Litigation and Arbitration


Counseling The Prospective Franchisee

• Understand the client’s background • Know your client’s needs/expectations • Be clear about your role (and limitations)

- Business v. Legal - Important

• Emphasize your client’s need to do his/her own due diligence


DUE DILIGENCE

• FDD • Talk to those in and out of the system • Know the competition • Consult knowledgeable financial professionals

(accountants) • State regulators • Other attorneys


The FDD: READ IT

(because your client probably didn’t)


WHAT’S IN THE FDD • Item 1: The Franchisor and any Parents,

Predecessors, and Affiliates

• Item 2: Business Experience

• Item 3: Litigation

• Item 4: Bankruptcy

• Item 5: Initial Fees

• Item 6: Other Fees


WHAT’S IN THE FDD

• Item 7: Estimated Initial Investment

• Item 8: Restrictions on Sources of Products and Services

• Item 9: Franchisee’s Obligations

• Item 10: Financing

• Item 11: Franchisor’s Assistance, Advertising, Computer Systems and Training


WHAT’S IN THE FDD • Item 12: Territory

• Item 13: Trademarks

• Item 14: Patents, Copyrights and Proprietary Information

• Item 15: Obligation to Participate in the Actual Operation of the Franchised Business

• Item 16: Restrictions on What the Franchisee May Sell


WHAT’S IN THE FDD • Item 17: Renewal, Termination, Transfer and Dispute

Resolution

• Item 18: Public Figures

• Item 19: Financial Performance Representations (Earnings Claims)

• Item 20: Outlets and Franchisee Information Also includes Franchisee Associations

• Item 21: Financial Statements

• Item 22: Contracts

• Item 23: Receipts – Electronic Disclosure


Contractual Options Venue Choice of Law Class Action Limitation Multiple Plaintiff Limitation Jury Waiver Payment of Attorney’s Fees Mediation Arbitration State Court Federal Court

Mitchell J. Kassoff, Esq., (973) 762-1776, [email protected], www.legal-franchise.com 20

Venue

• City/County Selection • City/County Location of Franchisor’s

Headquarters at the Time Litigation is Commenced


Choice of Law

• Location of Franchisor • Location of Franchisee • A Different State • Investigation of Protections Provided to a

Franchisee by a Particular State’s Law


Class Action Limitation

• Franchisor Should Limit the Amount of Plaintiffs – Multiple Plaintiffs Provide Financial Strength to

Pursue Litigation – Possible Damages Could be Extreme – Attorney’s Fees for a Successful Class Action could

be devastating


Multiple Plaintiff Limitation

• Franchisor Should Limit the Amount of Plaintiffs – Multiple Plaintiffs Provide Financial Strength to

Pursue Litigation – Possible Damages Could be Extreme


Jury Waiver

• Since it is likely that a jury will be more sympathetic to a franchisee rather than a franchisor, a franchisor should place a jury waiver in the franchise agreement.

• The jury waiver should be extremely noticeable and the franchisee should sign at this provision so that he cannot claim later that he was not aware of the jury waiver.


Payment of Attorney’s Fees

• A provision that requires the losing party in litigation to pay the attorney’s fees of the winning party will reduce non-meritorious litigation.


Mediation

• All franchise related litigation must be reported in the franchisor’s Franchise Disclosure Document.

• By having mediation a franchisor might be able to resolve issues with his franchisee and avoid this problem.


Arbitration

• Arbitration is less expensive and resolves issues more rapidly than court based litigation.

• For most practical purposes an arbitrator’s award is not appealable.

• A franchisor should also avoid a jury trial since a jury might be more sympathetic to a franchisee


State Court

• If a franchisor and franchisee are located in the same state it is unlikely that federal jurisdiction will be obtainable.

• Provisions should be made for state court venue in this event.


Federal Court

• A franchisor might wish to bring matters to as rapid a conclusion as possible to show prospective franchisees that there is no litigation pending.

• If the local state court’s calendar is full, a franchisor might wish to invoke federal jurisdiction if possible.


FRANCHISE AGREEMENT NEGOTIATIONS

or

At Least Make Sure the Client Understands the Terms


Reasons Why Franchisors May Not Negotiate

• No Need – Market Demand • Standard uniform contract • Too burdensome to control • If negotiate with one, will have to negotiate with all

(California and FDD disclosure issues) • Maintain ultimate upper hand and strength


Reasons Why Franchisees Should Try to Negotiate

• Why prospective franchisees may have leverage

– They are the customers – Money talks – Be willing to walk – Explanation/rationale – Unknown factors


Negotiating the Agreement MAYBE – MAYBE NOT

The Wish List • The Parties

• Location

• Territory

• Alternative Channels of Distribution

• Initial Franchise Fees

• Royalties


“THE WISH LIST” • Training

• Grand Opening and Continuing Assistance

• Advertising

• Assignment of Telephone Numbers and Domain Names

• System Changes


“THE WISH LIST”

• Implementation of New Standards, Products and/or Requirements

• Financial Records

• Trademark/Service Marks - Changes/Indemnification

• Renewal – “The ‘then-current for’ of Franchise Agreement” • Transfer - “The ‘then-current for’ of Franchise Agreement” • Default Provisions


“THE WISH LIST” • Non-Compete/Restrictive Covenants

• Venue, Forum Selection, Waivers

• Liquidated Damages

• Transfers by the Franchisor

• Termination/Future Royalties

• Guaranty

• Franchisor v. Franchisee Obligations


What Else to Look For:

• Follow Up by Exploring Statements Made by the Franchisor/Franchise Sales Team:

– “Earnings Claims” or FPRs – Representations Regarding Success

– Any Terms Not reflected in the Written Franchise

Agreement


Thank you: Harris J. Chernow, Esquire

Chernow Kapustin LLC www.chernowkap.com

Email: [email protected] Tel: 215-659-3600

Mitchell J. Kassoff, Esquire www.legal-franchise.com

Email: [email protected] Tel: 973-762-1776

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