The International Franchise Association’s annual Legal Symposium took place May 15-17, 2016. Greensfelder, Hemker & Gale attorneys Dawn Johnson, Beata Krakus, Kim Myers, Abby Risner and Leonard Vines attended the program in Washington, D.C, where industry speakers presented programs on important topics in franchising.
Vines moderated one of the roundtables on “Effective Use of Franchise Advisory Councils.”
Some key takeaways from this year’s sessions include:
Managing risk when implementing systemwide change
- Get franchisee buy-in: The quote “People don’t resist change, they resist being changed” set the tone for this presentation. Anchoring changes with franchisees before the changes are announced can make a tremendous difference to how franchisees will receive the news. It may be the difference between whether the changes will be embraced or rejected.
- Think through the contractual implications: How change is implemented will depend on the agreements in place between the franchisor and its franchisees. The approach that will have to be taken will differ depending on whether the franchise agreements permit the franchisor to introduce the change.
Financial performance representations
- FPRs, formerly called “earnings claims,” continue to be a hot topic for franchisors as they want to avoid litigation over unauthorized representations in the franchise sales process, yet still attract prospective franchisees who want to know how much money they can make. Despite the fear of litigation, the recurring question of whether a franchisor should make a financial performance representation in Item 19 of the Franchise Disclosure Document took a surprising turn this year, as the trend appears to be that more franchisors are making them.
- Franchisors that choose to make FPRs must be certain they have documentation to support the FPRs at the time the representation is made. Often, such documentation is lacking or has not been updated in several years. In-house and outside counsel should always ask to review the underlying documentation for FPRs.
- As always, training your franchise sales staff is key, as they often want to make the sale and can easily go beyond statements that are in the FDD.
- The rules on how to make FPRs could be clarified soon, as the North American Securities Administrators Association has issued a proposed commentary on FPRs to try to assist franchisors in making Item 19 disclosures. A final commentary has not yet been issued.
Updates on important franchise cases
- Brand protection: Franchisors may want to consider including in their franchise agreements the right to withdraw from a market and express terms limiting their obligation to protect the brand against competition
- Data privacy: Franchisors will have more risk of being held accountable for a breach the more connected they are to the franchisee’s system. Franchisors may want to consider including data security compliance requirements in their franchise agreements. Cybersecurity continues to be a big concern for all businesses, both franchised and non-franchised. Franchisors should consider insurance and a review of procedures.
- Class action waivers: If not already included in your franchise agreement, franchisors should consider including class action waivers.
- Advertising: Franchisors need to be aware of the risks that increase because of social media. Of course, franchisors want to continue to ensure that they are giving the consumer what is actually being advertised.
- Be sure a franchisee’s employees know they are working for the franchisee, and ensure there are no indications that could arguably cause them to think they are working for the franchisor, such as names on paychecks and employment applications.