Greensfelder’s Franchising & Distribution Industry Group attended the 2023 International Franchise Association’s (IFA) Legal Symposium in Washington, D.C., in May. Greensfelder Officers Beata Krakus and Abby Risner led roundtable discussions, and the team attended sessions exploring the dynamic changes happening in the world of franchising. Below is a summary of the group’s top takeaways:

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.

The U.S. Small Business Administration (SBA) is amending various regulations governing SBA’s 7(a) Loan Program and 504 Loan Program. As part of the amended revisions, the SBA is removing the provisions relating to affiliation based on franchise and license agreements. Because of that removal, the SBA is eliminating the SBA Franchise Registry as of May 11, 2023.  

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.

The FTC on March 10 posted a solicitation for public comments on several questions relating to the relationship between franchisors and franchisees, as well as to franchisors’ involvement in certain franchisee employment matters and the relationship with third-party suppliers to franchisees. 

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.

Electric vehicle (EV) charging is now available at traditional motor fuel stations, as well as restaurants, parking garages, grocery chains, and banks.  With the increase of fully electric vehicles apparent in the news and on the streets and poised to grow exponentially, some franchisors are assessing incorporating EVs into their franchise systems.

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.

As noted in Restaurant Dive, many restaurant chains have spent the last few years pushing for growth through multi-unit franchisees, but challenges could lie ahead, as franchisees will likely face challenges due to high costs and pressure to use new technologies.

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.

Greensfelder’s Franchising & Distribution Industry Group had a busy end to 2022. In the final two months of the year, the group served as franchise counsel to multiple parties involved in large acquisitions, with all but one closing in December and the remaining transaction expected to close in the first quarter of 2023. 

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.”

New policy effective as of January 1, 2023

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.  

One of the frequent services my colleagues and I provide to franchisors is franchise sales compliance training. It is often an eye-opening experience for new franchisors, and even experienced franchisors can find it to be a stark reminder of how heavily regulated the business of selling franchises is.

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.