Illinois is joining the online filing platform of the North American Securities Administrators Association (NASAA), allowing for franchise filings to be done online, as opposed to in hard copy, according to a Sept. 1, 2022, announcement. 

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.

As energy companies and convenience retailers continue to adapt in a transitioning energy industry, the 2022 Petroleum Marketing Attorneys’ Meeting highlighted important developments including those related to electric vehicles, privacy laws and antitrust considerations. The following are five key takeaways from the conference, which explores issues affecting energy companies and distributors.

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.

Franchisors beware: The Federal Trade Commission is making it very easy for franchisees to file fraud complaints against you. In publicizing its fraud reporting tool – aptly named ReportFraud.FTC.gov – the FTC has fired another warning shot that it is ramping up enforcement efforts against you.

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 Federal Trade Commission has recently been sending “Notices of Penalty Offenses Concerning Money-Making Opportunities and Endorsements and Testimonials” to franchisors and companies selling other types of business opportunities. These notices from the federal consumer protection agency are seemingly coming from out of the blue and being served on registered agents similar to a lawsuit, causing recipients a fair amount of concern. Although the FTC tells the recipient that it is not being singled out (see this list of businesses who received the notice in October), it warns in bold letters on the first page that the recipient is now on notice that engaging in certain conduct could subject the company to civil penalties up to $43,792 per violation. A sample of the letters being sent to businesses can be viewed here.

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

Greensfelder Officer Beata Krakus was recently featured by 1851 Franchise as a 2021 Top Franchise Legal Player. Check out the publication’s interview with Beata to find out what drew her to franchising, the most common mistake franchise brands make, and what she thinks is the biggest legal hurdle facing the franchising industry in 2022.

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.

With the COVID-19 pandemic affecting the performance of many businesses in 2020, franchisors are faced with a whole new set of considerations when preparing their 2021 franchise disclosure documents, including whether to include financial performance representations from 2020.

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.

Dawn Johnson, Beata Krakus, Susan Meyer, Abby Risner, and Leonard Vines recently attended two virtual franchise programs – the International Franchise Association Annual Convention and the American Bar Association Forum on Franchising. 

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.