FAQS FOR EXISTING FRANCHISORS
How do we know if our franchise documents need updating?
You are also required by law to update your franchise offering circular at least once per year (within 90 days after the end of each fiscal year). Your offering circular needs to be updated even sooner if there are any material changes to the information it contains. (Information is "material" if a prospective franchisee might consider that information important when making a decision whether to purchase a franchise.) Additionally, franchise systems typically change over time – especially during the early years. Your franchise agreement and offering circular need to be updated regularly in order to keep pace with your evolving system. This could be important to help protect your legal rights and remedies.
How do we know if our franchise documents need improving?
Your franchise documents probably could use an overhaul if any of the following apply to your system:
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Your prospective franchisees are reluctant to sign your franchise agreement because they do not understand it.
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There are parts of your franchise agreement that you or your sales staff do not understand.
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Your UFOC and form agreements have not been updated in more than a year.
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Your franchise documents were prepared by a non-lawyer, or a general practice lawyer.
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You notice that issues that commonly arise with your franchisees are not adequately covered by the franchise agreement.
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Your offering circular and franchise agreement do not fit with the look, feel, and style of your system.
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You use a complicated set of separate state-specific UFOCs or addenda instead of a unified document for use in all states.
Does our franchise agreement have to be in legalese?
There are no legal reasons for franchise agreements or franchise offering circulars to be in legalese. Unfortunately, most lawyers still use archaic terminology and complicated sentence structures in legal documents. This makes the documents difficult for non-lawyers to understand and follow. If you, your staff, or your franchisee prospects are having difficulty understanding your franchise agreement, you should seriously consider having the document rewritten in plain English.
What is involved in renewing state registrations and exemptions?
Most state franchise registrations are valid until 90 or 120 days after the end of the franchisor’s fiscal year. In some states, the registration is valid for a full calendar year from the date of registration. In order to maintain the registration, certain documents need to be filed before the filing deadline (which may be 30 days or more before the registration actually expires). These documents usually include at a minimum a registration renewal form, an updated offering circular (including updated audited financial statements), and, of course, a filing fee. I am often able to streamline this process by consolidating a franchisor’s renewal dates so that they all fall during the same calendar quarter. There may also be renewal filing requirements under state business opportunity laws in some states, depending on your situation.
What kinds of franchise advertising needs to be filed?
Some states have laws that require franchisors to file with the state franchise regulators a copy of all advertising materials before they are used in the state. The laws apply to advertising relating to the offer of the franchise opportunity, and not to advertising of the products or services you and your franchisees provide.
Why should we consult a lawyer about negotiating changes to the franchise agreement?
Some states have laws that prohibit franchisors from discriminating among its franchisees. These laws generally prohibit a franchisors from treating one franchisee in the state differently than a similarly-situated franchisee in the same state. California does not have this kind of anti-discrimination law, but it does have a law that requires franchisors who negotiate changes with franchisees to: (a) file a notice with the state describing the negotiated changes; (b) amend its offering circular to disclose that the franchisor has negotiated changes to the standard offer; and (c) provide a copy of the notice to all franchisee prospects in California for the next 12 months.
Why should we consult a lawyer about franchisee defaults, terminations and non-renewals?
Many states have laws that restrict when a franchisor can terminate or not renew a franchise agreement. These laws typically require "good cause" for termination or non-renewal, and the statutes often specify the kinds of defaults by the franchisee that are considered to be good cause. These laws usually also specify how much notice needs to be given, and how many days the franchisee has to cure the problem. These state laws supercede the provisions of the franchise agreement. A franchisor’s failure to comply with state law may make the franchisor’s termination or non-renewal efforts ineffective, or, worse, may give the franchisee a legitimate claim against the franchisor for wrongful termination of the franchise agreement. It is essential that a franchisor check applicable state law before taking any action against a franchisee relating to any default, termination or non-renewal.
What is encroachment?
Encroachment refers to the situation when a franchisor opens a company-owned unit or allows a franchisee to open a franchised unit near another franchisee’s unit. If the franchisee with the first unit suffers economic harm as a result of the opening of the new unit, that franchisee may have a claim against the franchisor for encroachment. Encroachment can also be caused by a franchisor selling goods or services in a franchisee’s territory through non-franchised channels of distribution.
What is co-branding?
Co-branding refers to the arrangement where one or more franchisees operate 2 or more franchises at the same location. An example of co-branding is a gas station that includes a fast food restaurant inside. Because of the fact that certain areas, equipment, employees, supplies and responsibilities may be shared among the multiple franchises, co-branding arrangements are more complicated than ordinary franchises.
What should we do about unintentional violations of state franchise laws?
Unintentional violations most often occur when a franchisor sells a franchise in a franchise registration state without first registering the franchise in that state. Ignorance of the law is not a valid excuse. When a franchisor realizes its error, it should immediately notify the franchise regulators in the relevant state. The state regulators are more lenient with franchisors who confess. Generally, the regulators will direct the franchisor to offer rescission to the affected franchisee. Rescission is the legal term for undoing the deal. If the franchisee chooses to accept rescission, the franchisor would reimburse the initial fee, the franchisee would stop using the franchisor’s marks and system, and the franchise agreement would be treated as if it never existed. State regulators may also impose fines or other penalties in this situation, or even require the franchisor to attend training on how to comply with franchise sales legal requirements.
Why should we consult a lawyer about our franchise operations manual?
A lawyer can help a franchisor minimize 3 kinds of serious legal risks that could arise from an operations manual that is worded improperly.
1. Unenforceable Franchise Agreement. The franchise agreement outlines the major obligations of the franchisee, and requires the franchisee to follow the mandatory system standards in the operations manual. The operations manual contains the detailed information about how to set up and run a franchise under the franchisor’s system. It is important that the operations manual not be inconsistent with the franchise agreement. Inconsistencies could make the affected parts of the franchise agreement unenforceable.
2. Vicarious Liability. In a normal franchise relationship, the franchisee is an independent contractor of the franchisor, and the franchisor maintains appropriate controls over franchisees in order to protect the goodwill associated with the franchise trademarks and service marks. In this normal franchise relationship, franchisors are usually not responsible for accidents, injuries, or other types of harm by franchisees, and their customers and employees. The franchise agreement is usually carefully written to maintain this protection for franchisors. However, the franchise operations manual can undo this protection by making the franchisee an agent or employee of the franchisor for particular purposes. This can happen when the manual gets too involved in the details of how to run the day-to-day operations at the franchised unit. In that case, there is a risk that the franchisor could be held vicariously liable for the harm caused by the action or inaction of its franchisees or their employees.
3. Negligence. A related way in which the franchise operations manual can undo the normal level of protection for franchisors happens when the manual includes requirements in areas involving risky business decisions. If the operation manual includes requirements that relate to the cause of the particular accident or injury, the franchisor may be held liable for negligently imposing improper standards. An example of this situation arose in a case where a hotel franchisor’s operating manual specified the type of door lock to be used for hotel room doors. When one of the locks malfunctioned and a hotel guest was raped by a stranger in her room, the franchisor was held liable to the victim for substantial damages.
Careful legal review of the operations manual can help minimize these types of risk.
How can we research competing franchises?
Two service companies collect and sell copies of franchise offering circulars. You can probably obtain your competitors’ UFOCs directly from FRANDATA or FranchiseHelp.
FRANDATA Corporation, 1725 Eye Street, NW, Suite 600, Washington, D.C. 20006 USA, phone (202) 336-7632, www.frandata.com
FranchiseHelp, Inc., 101 Executive Boulevard, Elmsford, NY 10523 USA, phone (914) 347-6735, www.franchisehelp.com ($190.00 for complete UFOC and exhibits)
Where do you practice law?
My law practice is nationwide. Most franchisors want to be able to sell franchises in every state. A franchise lawyer who specializes in representing start-up franchisors needs to be familiar with all of the applicable state and federal laws. I have extensive experience with the franchise laws and business opportunity laws of every state in the U.S., and with U.S. federal franchise law. My office is in the Silicon Valley in California, but my clients are located across the U.S.
Can you really work effectively with us from a distance?
Yes. As a result of technology, I can provide you with superior-quality legal services regardless of where you are located. Computers, fax machines, cell phones, and e-mail have changed the way legal services are provided. It is no longer necessary for lawyers and clients to meet in person and review documents across a conference table. I provide legal services to clients in various parts of the world without leaving my office.
Will you visit our business if we request?
Of course. It is often helpful, but rarely necessary, for me to observe your business in order to provide you with competent legal services. In an effort to help you control your legal costs, I do not insist on a site visit. But, I am available to travel if you want me to see your operations or to attend board meetings or other meetings in person.
Can you help us with lawsuits or arbitrations with our franchisees?
I no longer personally handle litigation or arbitration.
Most franchise disputes are resolved without litigation, arbitration or formal mediation. I can provide you with legal counseling regarding your disputes, and I can help negotiate favorable settlements for you. If the dispute cannot be resolved without litigation or arbitration, I can recommend experienced franchise litigators just about anywhere in the U.S. Or, I can assist your own local litigation lawyer to get up to speed on the relevant franchise law issues. For review and revision of franchise documents, I will probably be able to provide you with a proposal for a fixed-fee arrangement after I have reviewed your existing documents. Occasionally, existing documents will be so deficient, that it would be more efficient to start over from scratch. My fees for franchise and business opportunity registration renewal range from $250 to $1000 per state, depending on the state. Most other services for existing franchisors are offered at $250 per hour – with no additional charges for telephone calls, faxes, normal postage, secretarial overtime, etc. The only additional charges you will be responsible for are: state filing fees; travel costs (if you ask me to travel); any photocopy costs that are more than $5.00; and the costs of any bulky mail or expedited mail or delivery services (like priority mail, FedEx and UPS).
In certain circumstances, I may be willing to share business risks with my clients. This could mean allowing a client to defer payment for my services to the future; or charging a reduced fee in exchange for the right to a future income stream or equity stake. I am always open to new ideas to help clients manage their legal costs.
