FRANCHISE AGREEMENTS: WHAT YOU NEED TO KNOW BEFORE YOUR

CLIENTS SIGN, PART 1 & PART 2

First Run Broadcast: March 12 & 13, 2019

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes each day)

Though franchises often seem to clients like vehicles to assured success, they are nonetheless

risky ventures. The task for lawyers advising clients about franchises is to counsel them about

setting reasonable expectations and help them understand the practical implications of the

franchise agreement. This is no easy task because these agreements a complex arrangement of

restrictions, fees, operational requirements, intellectual property protections and reporting

periods. But understanding how these agreements work – and the range of what’s negotiable and

what’s not – is essential to client success. This program will provide you with a real world guide

to the framework of franchise law, practical due diligence of franchise opportunities, and

reviewing and negotiating the most important provisions of franchise agreements.

Day 1 – March 12, 2019:

• Setting and counseling clients about realistic franchise expectations

• Practical guide to reading/understanding a Franchise Disclosure Document (FDD)

• Phases of franchise review – due diligence, negotiation of agreement, and lease work

• Spotting red flags early in the process

• Framework of franchise law and relationship of federal/FTC regulations to state

regulation

Day 2 – March 13, 2019:

• Major economic and non-economic provisions in franchise agreements

• Determining what’s truly negotiable – and what’s not

• Scope of territory – rights within in it and the opportunity to expand

• Tiers of fees, royalties and marketing expenses

• Operating standards and covenants – and negotiating for local modification

• Transfer and exit issues when a franchisee wants out

Speakers:

David Gusewelle is an attorney in the Denver office of Drumm Law, LLC, where his practice

focuses his practice on franchise and trademark law. Prior to joining Drumm Law, he worked

for law firms in the St. Louis, Missouri area, representing businesses and individuals in a variety

of legal fields including litigation, real estate, bankruptcy and corporate law matters. Before

entering private practice, he worked in real estate for an international petroleum company. Mr.

Gusewelle earned his B.S.B.A. from the University of Missouri-Columbia and his J.D. from

Vanderbilt Law School.

VT Bar Association Continuing Legal Education Registration Form

Please complete all requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________

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Franchise Agreements: What You Need to Know Before Your Clients Sign, Part 1

Teleseminar March 12, 2019 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75 Non-VBA Members $115

NO REFUNDS AFTER MARCH 5 2019

VT Bar Association Continuing Legal Education Registration Form

Please complete all requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________

Firm/Organization _____________________________________________________________________

Address ______________________________________________________________________________

City _________________________________ State ____________ ZIP Code ______________________

Phone # ____________________________Fax # ______________________

E-Mail Address ________________________________________________________________________

Franchise Agreements: What You Need to Know Before Your Clients Sign, Part 2

Teleseminar March 13, 2019 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75 Non-VBA Members $115

NO REFUNDS AFTER MARCH 6, 2019

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: March 12, 2019 Seminar Title: Franchise Agreements: What You Need to Know Before Your Clients

Sign, Part 1 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: March 13, 2019 Seminar Title: Franchise Agreements: What You Need to Know Before Your Clients

Sign, Part 2 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

DAVID GUSEWELLE: (303) 968-1900 x701 / david@drummlaw.com

Understanding

Franchise

Agreements

Franchise Attorney

What is a Franchise?

•Under the Federal Trade Commission’s Franchise Rule (16 C.F.R. § 436 et seq.), a franchise is a contract or agreement between two or more persons in which:

–Trademark. The business involves distribution of goods or services substantially associated with the franchisor’s trademark or trade name;

–Required Payment. The franchisee pays at least $540 within the first six months for the right to enter into a franchise agreement, including a payment for goods and services; and –Significant Control or Assistance. The franchisor exercises significant control over, or provides significant assistance in, franchisee’s method of operation)

•State definitions vary

What is a Franchise?

All three of the definitional elements must be met before a business opportunity will be considered a “franchise” The name which the parties give to their relationship is not determinative as to whether the relationship is or is not a franchise Contractual language stating that the agreement “does not create a franchise relationship” is ineffectual to ensure that result

Franchise Regulation

Due to its regulation, some practices that are standard in other business transactions may be illegal in the franchise context Failing to timely deliver a Franchise Disclosure Document to a potential buyer Terminating a contract without first providing notice and an opportunity to cure

What is a Disclosure Law?

Disclosure laws require franchisors to prepare a “Franchise Disclosure Document” (or “FDD”), which is similar to a securities disclosure, and provide that document to prospective franchisees The contents of the FDD generally are governed by a combination of state and federal laws, which have been refined into a uniform set of rules circulated by the North American Securities Administrators Association (www.nasaa.org). In general, an FDD must be given to a prospect 14 calendar days before the franchisor receives any payment, or requires the franchisee to sign any contract, relating to the franchise.

What is a Registration Law?

•“Registration” means that, before a franchisor can sell in a the state, it must file its Franchise Disclosure Document with the applicable regulatory authority •The regulator will review and, in some instances, comment on the FDD and require the franchisor to make changes. •Registration must be renewed annually. If a franchisor is not registered in a jurisdiction that requires registration, it cannot sell franchises in that jurisdiction.

What is a Relationship Law?

Governs elements of the franchisee-franchisor relationship For example, among other things, some relationship laws:

Limit the circumstances under which a franchisor can terminate or refuse to renew the franchise contract; Prevent, or provide protections against, unequal treatment between franchisees; Protect the rights of franchisees to form independent associations; or Require the franchisor to buy back inventory previously sold to the franchisee

FTC’s Franchise Rule

•Governs all franchisors operating anywhere in the United States and its territories

–Purpose is to prevent fraud in the franchise relationship

•Disclosure law only

–There is NO national registration requirement. The FTC will only review an FDD after receiving complaint(s), and even then will only do so rarely. –As a result, if offer / sale is made in non-registration states, the FDD will not first be reviewed by a governmental entity

•No federal relationship law

FTC’s Franchise Rule

•Must furnish FDD to all prospective franchisees 14 calendar days before signing a binding agreement or accepting payment

–F/K/A “Uniform Franchise Offering Circular” or “UFOC” •Amended Franchise Rule (July 1, 2008)

•“Plain English Rule” – no legalese or technical jargon permitted in the FDD •FDD must be updated once a year (within 120 days of franchisor’s fiscal year end); more frequently upon the occurrence of a material change to the information disclosed in the FDD

FTC’s Franchise Rule

The Franchise Rule does not provide individuals with the right to sue franchisors for violation of the Franchise Rule Common law fraud claims or “unfair trade practices” claims can be brought based on misrepresentations in FDD or noncompliance with the Franchise Rule

Franchise Registration States

14 states have franchise registration and disclosure laws.

Oregon has a disclosure law only (no registration requirement)

Broadly speaking, a state’s registration or disclosure law may be implicated where:

The franchisor is located within that state; The prospective franchisee lives in that state; or The contemplated franchise will be located in that state

Franchise Registration States

Before any offer of a franchise is made, franchisor must register the offering with the state Registration lasts for one year; in some cases, expires within 90-120 days after the franchisor’s fiscal year end. In other cases, expires one year after registration. Certain exemptions apply per statute (but federal law differs)

Franchise Laws

A “franchisor” must furnish a disclosure document to all prospective franchisees before signing a binding agreement or accepting payment

“Franchisor” is a person who offers franchises Includes subfranchisors and area representatives / regional developers

Unlawful to offer to sell a franchise with a document that contains an “untrue statement of material fact” or to make a material omission Potential civil and criminal liability for knowing violations

Franchise Laws

•Aggrieved individuals can sue for damages resulting from violation; if violation was willful, can seek rescission of franchise contract

–Many state registration / disclosure laws authorize franchisees located in the state to sue in their own state court

•Contractual forum selection clauses overridden

•Joint and several civil liability for every person who “controls” franchisor, officers, directors, and “employees who materially aid” the franchisor in committing the violation

–Unless they lacked knowledge or reason to know

Threshold Questions

Ask the client why they want to buy into this system. Has the client looked at other systems? Has the client considered licensing or starting their own business? Consider Reviewing Competitors’ FDDs • Are major terms / disclosures comparable or better?

Will the Franchisor negotiate? How much bargaining power does the client have? Who is representing the franchisor in negotiations?

Threshold Questions (con’t)

Scope of Review • FDD is often a few hundred pages long in total. • Are you reviewing everything? Does the client have relevant business experience?

• Has the client put together a pro-forma? • Will the client need to form an entity?

What are client’s long-term plans for ownership? Is the client familiar with franchising? What state laws impact the Franchise Agreement?

The Franchise Disclosure Document

Franchise Agreement is an Exhibit to FDD. It contains 23 items of information that the Federal Trade Commission (FTC) has determined to be important to prospective franchisees. The FDD is not a legally binding agreement, franchisee attorneys should carefully review the franchise agreement as that is the binding document that controls the relationship.

The Franchise Disclosure Document

The proposed franchise agreement will be included; disclosures in the FDD should match the terms in the contract

–Item 17: Tabular summary of key contract terms •Item 1: History of the company (how long has it been in business?), organizational information, industry regulations •Item 2: History of the key officers and employees •Items 3 & 4: Litigation & Bankruptcy history •Items 5, 6, and 7: Fee and investment information

The Franchise Disclosure Document

•Item 8: Restrictions on sources of products and services

–Is franchisor exclusive supplier? Or does it name third party sources?

•Item 10: Financing offered by Franchisor •Item 11: Assistance offered by Franchisor

–Prior to opening (including training program) –After opening

•Item 12: Territory

The Franchise Disclosure Document

Item 13: Trademark Registered vs. not registered Indemnification; defense of franchisee’s use of marks

Item 14: Patents and copyrights

Registered vs. not registered

Item 15: Obligation to Participate in Operations Active vs. passive ownership

The Franchise Disclosure Document

Item 19: Financial Performance Representations All franchisors are permitted but not required to make FPRs Some franchisors don’t make them. If they do, the FPRs MUST be included in Item 19 Providing FPRs not contained in Item 19 = presumptive violation of Franchise Rule

Item 20: System / franchisee information Number of outlets, company-owned and franchise-owned Growth / shrinkage over last 3 years Names / contact information for existing franchisees

Franchise Agreements: Non-Negotiable Documents?

Most franchise agreements are generally not negotiable

Franchisor wants uniformity in system; different deals cause complexity in administration Also, different / better / sweetheart deals can cause resentment

Generally, the newer the system, the more likely the franchisor is to negotiate

Confirm Franchisor’s Willingness to Negotiate

Certain franchisors refuse to negotiate. Some states penalize franchisor for not being “willing” to negotiate. If a franchisor is willing to negotiate, it is the franchisee attorney’s responsibility to guide its client on what is important.

Negotiation Process – Just Because

It helps the negotiation process to have valid reasons for the requested changes for the franchise agreement rather than asking for them “just because.” Pointing out valid business reasons for requested changes makes it more difficult for the franchisor to reject such requests

Negotiable Items

There are certain items of the franchise agreement that are usually non-negotiable. Non-negotiable items often include personal guarantees, royalties, advertising fund contributions, dispute resolution requirements, termination and post-termination rights, indemnification and initial franchise fees. Franchisors generally are not willing to make system changes in negotiations. But, your client is buying into their system and should have a full understanding of it up front.

Recognize the Negotiable Items

These items include: • Right of First Refusal on Additional Territories • Right of First Refusal on New Brands • Additional Training • Trademark Infringement Indemnification • Pre-approved Transferees • Extra Renewal Terms • Deadline Extensions • Cure Provisions • Financing of the Initial Franchise Fee • Tiered or Deferred Royalty • Removal of Franchisor’s Right of First Refusal

Recognize the Negotiable Items

These items include: • Deferred Advertising Fund Contributions (especially

important in new systems) • Reasonableness in all of Franchisor’s approvals • Addition of “Material” to Defaults • Modification of Cross Defaults • Commercially Reasonable Lease Addendum • Termination Fee • Addendum Terms in Renewal and Transfer

Agreement • Same Royalty, Advertising Fee and Territory in

Renewal Agreements

FA’s – Defined terms

• Operations Manual

• All-encompassing – communications, directives • Fluid • Required to follow

• Gross Revenues • Several fees are based on this definition • Tips? • Charge-backs/refunds? • Taxes? • Employee meals? • Value of coupons

FA’s – Critical Fees

• Fee Crazy?

• Royalties should cover most fees • Are additional fees customary and what are they

for? • Client should bake all fees into a pro-forma

• Initial Franchise Fee

• Partial or Full Refund? • Installments? • Range in Item 5 of FDD • Discounts on Future Agreements? • Financing

FA’s – Critical Fees

Royalties

• Frequency? How paid? • % of Gross Revenue. • Industry expectations. • Minimum Royalty? • Tiered? • Changes to Gross Revenue definition? • Seasonality • Item 19 • Fixed upon renewal / future agreements? • Taxes – Taxes directly related to client’s

operation. Income to franchisor could be passed down.

FA’s – Critical Fees

Advertising/Brand Fund Fees

• Established?

• If so, difficult to negotiate. • Typical range / industry expectations • % of Gross Revenue • Minimum contribution? • What does this cover? • # of and location of other franchisees • Fixed upon renewal / future agreements?

FA’s – Other Common Fees

See Items 5 & 6 of FDD • Transfer Fee • Renewal Fee • Initial / Additional Training Fee • Local Advertising Requirement • Cooperatives • Technology / Software Fees • Convention Fees • Relocation Fee • Late / NSF Fund / Credit Card Fees • Failure to Report • Audit • Management Fee • Liquidated Damages / Early Termination Fees

FA’s – Pre-opening / Deadlines

• Training completion • Permits • Construction • Site Approval • Deadline to sign lease • Lease terms – concurrent with term of FA? • Lease addendum – typically in FDD • Construction • Deadline to open • Is termination automatic if a deadline is missed? • What support does client get during this period?

FA’s – Term and Renewals

• Typical length

• Shortening / lengthening • Services vs. brick & mortar

• Number of renewal terms – often negotiable • Fees / territory locked in renewal – sometimes

negotiable • “Then-current” FA - not negotiated

• May have materially different terms • Lock in / cap fees where possible • Consider locking in territory

FA’s – Term and Renewals

• Conditions to renew • Good standing • Lease renew • Number of defaults during term –

problematic • Advance notice • Remodeling

• Renewal fee – reasonable? • Frequently impacted by state franchise laws.

• Failure to renew can be actionable akin to termination

• Does not apply to expiration

FA’s – Territory

• Exclusive or Non-Exclusive Territory?

• If non-exclusive, what reservations is the

franchisor making? • Non-traditional locations • Mergers / Acquisitions • Alternative Channels of Distribution

• Internet • Grocery Store

FA’s – Territory (con’t)

• Known at time of signing or TBD?

• Search area – exclusive? • Strategies if “TBD”.

• ROFR’s • Territory locked on renewal? • Open areas • Catering / Delivery • Protections from other franchisees

FA’s – Transfers

Broadly defined

Franchisor transfers

• Can freely transfer • Client should understand a 3rd party can

become franchisor quickly. • Can strain relationship

Franchisee Transfers • Types of Transfers Covered

• Transfers of equity Partial ownership assignment

• Transfer to entity

FA’s – Transfers (con’t)

• Transfer to trust • Transfer by will or to family member • Death/disability

• Are transfer fees connected to type? • Conditions to transfer

• Consent • Transferee meets requirements • Broker fees • Release of claims • Not in default • Notice • ROFR • Refurbishments

FA’s – Transfers (con’t)

• Typical transfer fees

• % of then-current fee vs. hard number • What does fee cover?

• Termination rights if unapproved transfer • Franchisor’s Right of First Refusal

• Apples to apples? • Financing?

• Security interests

Representing Buyer in Transfer

• 2 general ways for transfer to 3rd party

• Sign new FA • Assume existing FA

• Franchisor makes no representations • Franchisor’s concerns in approval

• Purchase agreement doesn’t cover their assets

• Buyer is qualified • Purchase price doesn’t over-leverage buyer • Continuing operations of franchise

Representing Buyer in Transfer

• Claims against Seller • Fire sale or seller cashing out?

• If cashing out - little room for negotiation • If fire sale – negotiate everything reasonable

• Did seller negotiate an addendum? If so do terms travel?

• Do the same due diligence on the franchise system – call franchisees, review Item 20, etc.

Representing Buyer in Transfer

When Client is Signing New FA

• Client should be disclosed with FDD • Ask seller for their FDD • Compare original and new FA/FDD to see what

has changed • New fees? • Same territory? • Condition / Remodel? • Adjust purchase price • How many renewals remain? • Who pays transfer fee? • Do negotiated terms flow through? • Lease assumption

Representing Buyer in Transfer

When Client is Assuming Existing FA

• Generally buyer not disclosed with FDD • Get a copy of current FDD

• Should do the same due diligence review • How much time remains on term? • Term extension? • How soon is renewal? • Do seller’s past defaults apply to client? • Remodel? • Negotiated changes carry forward? • How many renewals remain? • Who pays transfer fee? • Lease Assumption

FA’s - Advertising

• Grand opening fees / spend • Local advertising cooperative? • Advisory council? • Approval process • Minimum local ad requirement? • Method of advertising

• Internet advertising often restricted • Materials provided? • Fee for unauthorized advertising?

• Sales / Pricing – • Restricted? • Minimum/maximum prices set?

• Antitrust implications

FA’s – Advertising (con’t)

• Social media restrictions • SEO • National program vs. local store • Franchisee presence on main website • Customization?

FA’s - Independence

• Independent contractor relationship • Solely responsible for hiring/firing • Contracts signed by franchisee entity • Inform employees who they work for • Business name shouldn’t include marks

FA’s - Reporting

• Frequency / type • Annual reports for FDD • Tax returns • Keeping records • Audit rights (not interfere with business)

• Costs borne by each party • POS Systems / underreporting • Fees vs. termination for underreporting royalties • Inspections • Secret shoppers • Online reviews • Customer resolution issues

FA’s - Indemnification

• Often requested, rarely negotiated

• Little room for negotiation • Liability to client

• Why included – uniform defenses to 3rd party claims

• Carefully review with client and explain implications

• Joint employer indemnity • Franchisor’s negligence covered?

• Gross negligence / willful misconduct • Franchisors usually indemnify proper use of

trademarks • Tied to good standing?

FA’s – Default/Termination

• Franchisor’s ability to terminate can be subject

to state laws • Immediate termination grounds • Notice / opportunity to cure • Dispute as to validity • Serial Defaults • Cross-Default Rights • Reasonableness • Note - Good faith / fair dealing laws

FA’s – Dispute Resolution

• Little room to negotiate • Client needs to understand impact of mediation,

arbitration, litigation • Venue (can be trumped by state law) • Choice of law (can be subject to state franchise

laws) • Injunctive relief • Waivers of class action

FA’s – Post-Termination Rights

• Liquidated damages

• Only upon termination by franchisor for cause

• How calculated? Brand fund included? • Removal / Cap • Only following opening

• Non-Compete • Enforcement happens frequently

• Payment of fees • Franchisor Purchase Option

• How price is calculated • Customer lists, goodwill, phone #’s – franchisor’s • Lease assumption • Check state laws

FA’s – Reps & Warrants

• Organized properly • Other business holdings • Disclaimers / Questionnaires – review carefully

• Can & will be used against franchisee

FA’s - Miscellaneous

• Passive or active management by ownership. • Management required to have ownership? • Ongoing training. • Maintenance / remodel requirements. • Communications between franchisors and

employees • Operating principal • In-line vs. standalone • Honoring gift cards • Suppliers – proprietary vs. non-proprietary • Purchases from franchisor / affiliates • Dealing with press • Insurance – additional insured

Addendum

• Franchisors rarely make changes to the actual

franchise agreement. • Most negotiated changes are written as addenda or

amendments to the franchise agreement. • Redlines bad, bullet-point requests are good.

Ancillary Agreements

• Personal Guaranty • Area Development Agreement • Area Representative Agreement • Subfranchise Agreement • Confidentiality Agreements • Lease Addenda • Form of assignment / release • Financial Statements • Non-Traditional Locations • State Addenda • SBA Addendum

FA’s – Personal Guaranty

• Review with client • Who signs?

• All owners? • Spouses sign? Family members?

• Joint and several liability • Tips

• Carve out minority investors (10%) • Cap on liability • Majority owner only

• What else is covered besides financial obligations? • Covenants • Confidentiality • Non-Solicit

Area Development Agreements

• Mechanics • Signed contemporaneously with FA • Look at fees • Look at territory restrictions • Developers usually have leverage • Development schedule and commitment should be

reasonable • Cross-defaults • What happens when terminated/fulfilled?

FA: Potential Pitfalls

Non-competes Nearly all franchise agreements contain some form of post-termination non-compete Surprising number of franchisees are not aware that these provisions exist and try to operate independently after termination or expiration

FA: Potential Pitfalls

Purchasing Power Item 8 Example: “You may be required to purchase other fixtures, furnishings, and/or equipment from our approved or designated suppliers or us or our affiliate.” Prospective Franchisee Interpretation: “I’m sure if I find better deals, I can purchase from those sources. It’s my business, right?” What it really means: “You buy from whom we tell you to buy.”

Deal Breakers

It is helpful to provide franchisor with a list of provisions you want to discuss. Identifying the “deal breakers” may speed up the process and save the franchisee time and money.

Operations Manual

If properly prepared, should help mimic ‘Zors past success

Provide guidelines for aspects of the business such as store layout, vendors, advertising, etc.

Clearly lays out ‘Zor’s expectations for ‘Zee

Operations Manual

Potential Pitfalls:

‘Zors can generally revise Ops manuals at any time and ‘Zees will be required to comply with all changes

Revisions to Ops manuals may even be done through emails to ‘Zees or posts on an intranet, so ‘Zees should be sure to stay on top of these

Buying a Franchise

A good brand with a track record of success

Ability to use the brand’s experience and name recognition for your benefit

Barriers to entry

Operational support and marketing assistance

Purchasing power

Cooperative Advertising

Due Diligence

Sales process – What is said vs. Reality: “We are a family.”

We are a family until a private equity firm buys us out and then you’re on your own.

“We will support you every step of the way.” We will support you as we deem necessary in our sole discretion.

“You will benefit from our knowledge and experience.”

We will give you an operations manual and some initial training, but good luck after that.

Due Diligence

Item 20 of the Franchise Disclosure Document lists the names of all current and former franchisees as of the end of the franchisor’s previous fiscal year. Prospective franchisees should reach out to these franchisees and gather as much information on the franchisor as they are able.

Due Diligence

Questions to ask of current/former franchisees:

What do you get that makes it worthwhile to pay franchise fee and royalties? Are you getting value in the system (e.g., operations)? The brand? Does the franchisor offer support? Is it proactive? Does it respond to requests for support? Does it respond to questions? For those that closed, why did they close? What issues did they face? How is relationship with franchisor? Financial performance?

Practice Tips

What should you do when a prospective franchisee asks you for advice? • Does a state’s registration law apply?

– Where is the franchisee domiciled? – Where is the franchisor headquartered? – Where will the franchisee’s business be located? – Where is the offer made / accepted?

. • Registration states: verify that the franchise is

registered – California, Minnesota, Virginia, Washington and

Wisconsin: online databases

Practice Tips

Keep in mind that franchise contracts are one-sided as of necessity

–System stability demands that franchisor retain strong controls –Similar to a commercial lease

Registration states: verify that the franchise is registered

– California, Minnesota, Virginia, Washington and Wisconsin: online databases

Exit Plan.

The Franchise Agreement Does it have a franchisee termination provision? What will you be on the hook for monetarily?

Has there been a breach of the Franchise Agreement? Did the ‘Zor or the franchise broker make promises to you before the Agreement was signed that never panned out?

If so, how?

Exit Plan.

In franchise law there are different hurdles:

Disclaimers regarding representations made prior to signing of the Franchise Agreement that are included in the FDD and/or Franchise Agreement

Required waivers of items like collective actions, punitive damages and jury trials

‘Zor may have wide discretion under the contract

Exit Plan.

In franchise law there are different hurdles:

Franchise Agreements often include “liquidated damages” provisions

Contract law may provide ‘Zor with rights to lost future royalties

Exit Plan.

Exit strategies: Oh the Possibilities

Sell to third party

Sell to family member

Sell to ‘Zor

Shut down upon expiration

De-brand

Disputed/Litigated Issues

Majority of clients complain of some sort of misrepresentation -Financial performance representation, promised support, promised national accounts, etc. Key issue is usually whether disclaimers apply -Statutory anti-waiver provision -Boilerplate? -Specific to alleged misrepresentation? -Who made the misrepresentation?

Disputed/Litigated Issues

Disclaimers Vary One line: “There have been no agreements, understandings, representations, or statements made other than those provided in this agreement.” Multi-page: Questionnaires asking franchisees to confirm no representations made about potential earnings, number of customers, profitability of existing franchisees, etc.

Disputed/Litigated Issues

Fraud by omission -Financial performance representations outside of FDD -Even if disclaim misrepresentations, did not include required information (e.g., number who met or surpassed results, reasonable basis, whether part of a subset, etc.)

Importance of a franchise attorney

Industry-specific knowledge Insight into the reputation of a ‘Zor and/or the experiences of other franchisees in the system

Importance of a franchise attorney

Familiarity with terms that are standard to Franchise Agreements and how these may affect ‘Zees

Territorial provisions (Exclusive? Not exclusive?)

What about internet sales? Catalog sales?

Other brands owned by franchisor or affiliate?

Right to terminate for minor defaults (even if cured)?

Importance of a franchise attorney

Familiarity with what terms in Franchise Agreements may indicate overreaching by a ‘Zor Excessive liquidated damages No territorial rights Unfair dispute resolution Overreaching restrictive covenants

Importance of a franchise attorney

Franchise law is not general business law Federal regulations and state statutes may impact terms in Franchise Agreement Dispute resolution provisions may not be enforceable in some states Liquidated damages may not be enforceable Choice of law may not be enforceable

• FTC’s Franchise Rule: – https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-

proceedings/franchise-rule

• FDD Franchise guidelines (registration states – North American Securities Admin. Association) – www.nasaa.org

Resource Links

Questions?

David Gusewelle

303-968-1900 x701

david@drummlaw.com