franchisee
...now browsing by tag
Monday, February 24th, 2020
The Payment Requirement required for a license to be deemed a franchise:
The last of the three definitional elements of a franchise covered by the FTC Franchise Rule is that purchasers of the business arrangement must be required to pay to the franchisor as a condition of obtaining a franchise or starting operations, a sum of at least $500 at any time prior to or within the first six months of the commencement of operations of the franchised business.
Here is what the FTC Franchise Rule states on the “Required Payment” element, directly from the FTC website at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf.
As to what constitutes a payment, the term “payment” is intended to be read broadly, “capturing all sources of revenue that a franchisee must pay to a franchisor or its affiliate for the right to associate with the franchisor, market its goods or services, and begin operation of the business. Often, required payments go beyond a simple franchisee fee, entailing other payments that the franchisee must pay to the franchisor or an affiliate by contract – including the franchise agreement or any companion contract. Required payments may include: initial franchise fee, rent, advertising assistance, equipment and supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a result of the purchase), training, security deposits, escrow deposits, non-refundable bookkeeping charges, promotional literature, equipment rental and continuing royalties on sales. Payments which, by practical necessity, a franchisee must make to the franchisor or affiliate also count toward the required payment. A common example of a payment made by practical necessity is a charge for equipment that can only be obtained from the franchisor or its affiliate and no other source.”
Posted in business law, franchise law | No Responses »
Tags: Buy a Franchise, buying a franchise, buying a franchised business, federal franchise law, franchise agreement, franchise arbitration, franchise attorney, Franchise Disclosure Document, franchise dispute, franchise law, franchise lawyer, franchise litigation, franchise your business, franchisee, FTC Franchise Rule, Maryland franchise registration, selling a franchise
Friday, October 26th, 2018
Pursuant to the Maryland Franchise Registration and Disclosure Law, below are the mandatory amendments that must be made to a franchise agreement contained in a Franchise Disclosure Document attempting to be registered in the state of Maryland. There are additional changes that must also be made to the disclosure portion of the Franchise Disclosure Document.
Maryland Franchise Agreement Amendment
In recognition of the requirements of the Maryland Franchise Registration and Disclosure Law, the parties to the attached Franchise Agreement (the “Agreement”) agree as follows:
1. “execute a general release, in a form prescribed by Franchisor, of any and all claims against Franchisor and its subsidiaries and affiliates, and their respective officers, directors, agents, and employees. Notwithstanding the above, pursuant to COMAR 02.02.08.16L, the general release required as a condition of renewal, sale, and/or assignment/transfer shall not apply to any liability under the Maryland Franchise Registration and Disclosure Law.”
2. “the Franchisee’s execution of a general release of the Franchisor, in a form satisfactory to Franchisor, of any and all claims against Franchisor and its affiliates, successors, and assigns, and their respective directors, officers, shareholders, partners, agents, representatives, servants, and employees in their corporate and individual capacities, including, without limitation, claims arising under this Agreement, any other agreement between Franchisee and Franchisor or its affiliates, and federal, state, and local laws and rules. Notwithstanding the above, pursuant to COMAR 02.02.08.16L, the general release required as a condition of renewal, sale, and/or assignment/transfer shall not apply to any liability under the Maryland Franchise Registration and Disclosure Law.”
3. “Notwithstanding the above, the provision in the Franchise Agreement which provides for termination upon bankruptcy of the franchisee may not be enforceable under federal bankruptcy law (11 U.S.C. Section 101 et seq.).”
4. “Notwithstanding the above, the parties agree that only with respect to claims arising under the Maryland Franchise Registration and Disclosure Law, Franchisee may bring such claims in any federal or state court in the state of Maryland.”
5. “Limitations of Claims. ANY AND ALL CLAIMS AND ACTIONS ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE RELATIONSHIP OF FRANCHISEE AND FRANCHISOR, OR FRANCHISEE’S OPERATION OF THE FRANCHISED BUSINESS, INCLUDING ANY PROCEEDING, OR ANY CLAIM IN ANY PROCEEDING (INCLUDING ANY DEFENSES AND ANY CLAIMS OF SET-OFF OR RECOUPMENT), MUST BE BROUGHT OR ASSERTED BEFORE THE EXPIRATION OF THE EARLIER OF (A) THE TIME PERIOD FROM BRINGING AN ACTION UNDER ANY APPLICABLE STATE OR FEDERAL STATUTE OF LIMITATIONS; (B) ONE (1) YEAR FROM THE DATE UPON WHICH A PARTY DISCOVERED, OR SHOULD HAVE DISCOVERED, THE FACTS GIVING RISE TO AN ALLEGED CLAIM; OR (C) TWO (2) YEARS AFTER THE FIRST ACT OR OMISSION GIVING RISE TO AN ALLEGED CLAIM; OR IT IS EXPRESSLY ACKNOWLEDGED AND AGREED BY ALL PARTIES THAT SUCH CLAIMS OR ACTIONS SHALL BE IRREVOCABLY BARRED; EXCEPT THAT ANY AND ALL CLAIMS ARISING UNDER THE MARYLAND FRANCHISE REGISTRATION AND DISCLOSURE LAW (MD. CODE BUS. REG. §§ 14-201 THROUGH 14-233) SHALL BE COMMENCED WITHIN THREE (3) YEARS FROM THE GRANT OF THE FRANCHISE. CLAIMS OF FRANCHISOR ATTRIBUTABLE TO UNDERREPORTING OF SALES, AND CLAIMS OF THE PARTIES FOR FAILURE TO PAY MONIES OWED AND/OR INDEMNIFICATION SHALL BE SUBJECT ONLY TO THE APPLICABLE STATE OR FEDERAL STATUTE OF LIMITATIONS.”
6. “No Waiver. The foregoing acknowledgments are not intended to nor shall they act as a release, estoppel or waiver of any liability incurred under the Maryland Franchise Registration and Disclosure Law.”
7. Each provision of this amendment shall be effective only to the extent, with respect to such provision, that the jurisdictional requirements of the Maryland Franchise Registration and Disclosure Law are met independently without reference to this amendment.
Posted in franchise law | No Responses »
Tags: Buy a Franchise, buying a franchise, buying a franchised business, FDD, federal franchise law, franchise agreement, franchise arbitration, franchise attorney, Franchise Disclosure Document, franchise law, franchise lawyer, franchise litigation, franchise your business, franchisee, FTC Franchise Rule, Maryland Franchise and Registration Law, Maryland franchise law, Maryland franchise registration, new york franchise registration, Registering a franchise in Maryland, Selling Franchises in Maryland
Friday, October 26th, 2018
This is the mandatory addendum that must be included in any Franchise Disclosure Document that a franchisor is attempting to register in the state of Washington. No edits/changes may be made:
Washington Franchise Agreement Addendum
The state of Washington has a statute, RCW 19.100.180 which may supersede the franchise agreement in your relationship with the franchisor including the areas of termination and renewal of your franchise. There may also be court decisions which may supersede the franchise agreement in your relationship with the franchisor including the areas of termination and renewal of your franchise.
In any arbitration involving a franchise purchased in Washington, the arbitration site shall be either in the state of Washington, or in a place mutually agreed upon at the time of the arbitration, or as determined by the arbitrator.
In the event of a conflict of laws, the provisions of the Washington Franchise Investment Protection Act, Chapter 19.100 RCW shall prevail.
A release or waiver of rights executed by a franchisee shall not include rights under the Washington Franchise Investment Protection Act except when executed pursuant to a negotiated settlement after the agreement is in effect and where the parties are represented by independent counsel. Provisions such as those which unreasonably restrict or limit the statute of limitations period for claims under the Act, rights or remedies under the Act such as a right to a jury trial may not be enforceable.
Transfer fees are collectable to the extent that they reflect the franchisor’s reasonable estimated or actual costs in effecting a transfer.
The undersigned does hereby acknowledge receipt of this addendum.
Dated this _____ day of __________________ 20______.
Posted in franchise law | No Responses »
Tags: buying a franchise, buying a franchised business, FDD, federal franchise law, franchise agreement, franchise attorney, franchise concept, Franchise Disclosure Document, franchise law, franchise law firm, franchise lawyer, franchise litigation, franchise renewal, franchise your business, franchisee, FTC Franchise Rule, selling a franchise, what is a franchise
Wednesday, August 24th, 2011
A licensing or other relationship where the trademark and system/significant control prongs of the FTC Franchise Rule are met is excluded from the scope of the franchise regulation if the total required payments by the franchisee before and during the 6-month period after the business opens do not exceed $500.
The required fee element captures all sources of revenue paid by a licensee to a licensor for the license. The element is deliberately expansive, encompassing lump sum, installment, fixed, fluctuating, up-front, and periodic payments for goods or services, however denominated, whether direct, indirect, hidden, or refundable.
To avoid the FTC Rule franchise fee requirement, it is possible for a licensor to defer required payments exceeding $500 for at least six months, and as a result, not be deemed a franchise under the FTC Rule and federal law. This remains true even if the licensee signs a nonnegotiable, secured promissory note (with no acceleration clause) promising to pay the money after six months.
The deferment option is not all-encompassing however. While the FTC Rule permits this deferment of payment option, this is applicable only in those states that do not have individual, state specific franchise laws, since in those states such license transactions are governed by the FTC Rule. There are upwards of 15 states across the country, including Maryland, Virginia, New York, California, and Illinois, which do have specific franchise laws, and which do not grant this deferment option. As a result, deferment is not an option in these states. Have your franchise attorney check the franchise law of each individual state before proceeding.
Posted in business law, franchise law | No Responses »
Tags: Buy a Franchise, buying a franchise, federal franchise law, franchise, franchise agreement, franchise arbitration, franchise attorney, Franchise Disclosure Document, franchise fee, franchise law, franchise law firm, franchise lawyer, franchise litigation, franchise renewal, franchise royalties, franchise transfer, franchise your business, franchisee, franchising or licensing, franchisor dispute, FTC Franchise Rule, licensing v. franchising, maryland franchise disclosure, Maryland franchise registration, maryland franchise registration and disclosure, maryland fraud law, new york franchise law, purchase a franchise, selling a franchise
Wednesday, August 17th, 2011
There are many reasons one can point to in order to explain how over the last several years arbitration has become less and less favored as a dispute resolution mechanism in the franchise arena. One of the mean reasons that the arbitration bubble has burst is due to a lack of a valid and fair appeals process. While it is common knowledge that a losing party in a state or federal court trial is permitted to appeal an unfavorable decision on a multitude of grounds, the same is hardly true in the arbitration process. Rather, it is extremely difficult for most losing parties in an arbitration matter to come close to meeting the rigid criteria for vacating an arbitration award.
For those arbitration matters resolved under the Federal Arbitration Act, the standard of review of an arbitration award under the Federal Arbitration Act provides for only four specific grounds for vacating an arbitration award, as follows: i) where the award was procured by corruption, fraud, or undue means; ii) where there was evident partiality or corruption in the arbitrators, or either of them; iii) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or, iv) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. In addition, most state arbitration statutes mirror the FAA in this area.
As a result of the rigid four categories stated above, it is extremely difficult to overturn an arbitration award except in the most egregious circumstances. A court is prohibited from vacating an arbitration award regardless of how vociferously the court may disagree with the reasoning behind the arbitrator’s decision. Rather, parties that have been successful in appealing an arbitration award have for the most part been able to provide evidence to the court that either the arbitration committed fraud, misconduct or was biased, or the party has been able to prove that a procedural defect was committed thereby severely prejudging a party to the point the party was denied its fundamental rights of due process.
Unless an aggrieved party can show documented evidence in one of these two areas, a court is extremely unlikely to grant a motion to vacate an arbitration award. It is for this reason, and others, that many franchisors in a variety of industries have turned away from arbitration and instead prefer to have their disputes heard by a state or federal court judge.
Posted in business law, franchise law | No Responses »
Tags: Buy a Franchise, federal franchise law, franchise agreement, franchise arbitration, franchise attorney, Franchise Disclosure Document, franchise dispute, franchise law, franchise litigation, franchise purchase, franchise renewal, franchise your business, franchisee, FTC Franchise Rule, maryland franchise disclosure, Maryland franchise law, maryland franchise registration and disclosure, selling a franchise
Thursday, April 28th, 2011
The Payment Requirement.
The last of the three definitional elements of a franchise covered by the FTC Franchise Rule is that purchasers of the business arrangement must be required to pay to the franchisor as a condition of obtaining a franchise or starting operations, a sum of at least $500 at any time prior to or within the first six months of the commencement of operations of the franchised business.
Here is what the FTC Franchise Rule states on the “Required Payment” element, directly from the FTC website at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf.
As to what constitutes a payment, the term “payment” is intended to be read broadly, “capturing all sources of revenue that a franchisee must pay to a franchisor or its affiliate for the right to associate with the franchisor, market its goods or services, and begin operation of the business. Often, required payments go beyond a simple franchisee fee, entailing other payments that the franchisee must pay to the franchisor or an affiliate by contract – including the franchise agreement or any companion contract. Required payments may include: initial franchise fee, rent, advertising assistance, equipment and supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a result of the purchase), training, security deposits, escrow deposits, non-refundable bookkeeping charges, promotional literature, equipment rental and continuing royalties on sales. Payments which, by practical necessity, a franchisee must make to the franchisor or affiliate also count toward the required payment. A common example of a payment made by practical necessity is a charge for equipment that can only be obtained from the franchisor or its affiliate and no other source.”
Posted in business law, franchise law | No Responses »
Tags: buying a franchise, buying a franchised business, franchise agreement, franchise arbitration, franchise attorney, franchise concept, franchise fraud, franchise future royalties, franchise law, franchise law firm, franchise lawyer, franchise litigation, franchise your business, franchisee, franchisor dispute, franchisor financial statements, FTC Franchise Rule, ftc rule, Maryland franchise law, maryland franchise registration and disclosure, purchase a franchise, sell your franchised business, selling a franchise
Thursday, April 28th, 2011
Here is what the FTC Franchise Rule states on the “Significant Control or Assistance” element, directly from the FTC website at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf.
“The FTC Franchise Rule covers business arrangements where the franchisor will exert or has the authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation.”
The relevant question is when does such control become significant. “The more franchisees reasonably rely upon the franchisor’s control or assistance, the more likely the control or assistance will be considered “significant.” Franchisees’ reliance is likely to be great when they are relatively inexperienced in the business being offered for sale or when they undertake a large financial risk. Similarly, franchisees are likely to reasonably rely on the franchisor’s control or assistance if the control or assistance is unique to that specific franchisor, as opposed to a typical practice employed by all businesses in the same industry.
Further, to be deemed “significant,” the control or assistance must relate to the franchisee’s overall method of operation – not a small part of the franchisee’s business. Control or assistance involving the sale of a specific product that has, at most, a marginal effect on a franchisee’s method of operating the overall business will not be considered in determining whether control or assistance is “significant.”
For the sake of the Rule, significant types of control include: site approval for unestablished businesses, site design or appearance requirements, hours of operation, production techniques, accounting practices, personnel policies, promotional campaigns requiring franchisee participation or financial contribution, restrictions on customers, and locale or area of operation.
Significant types of assistance include: formal sales, repair, or business training programs, establishing accounting systems, furnishing management, marketing, or personnel advice, selecting site locations, furnishing systemwide networks and website, and furnishing a detailed operating manual.
The following activities will not constitute significant control or assistance: promotional activities, in the absence of additional forms of assistance, (this includes furnishing a distributor with point-of sale advertising displays, sales kits, product samples, and other promotional materials intended to help the distributor in making sales. It also includes providing advertising in such media as radio and television, whether provided solely by the franchisor or on a cooperative basis with franchisees;), trademark controls designed solely to protect the trademark owner’s legal ownership rights in the mark under state or federal trademark laws (such as display of the mark or right of inspection), health or safety restrictions required by federal or state law or regulations, agreements between a bank credit interchange organization and retailers or member banks for the provision of credit cards or credit services, and assisting distributors in obtaining financing to be able to transact business.”
Posted in business law, franchise law | No Responses »
Tags: Buy a Franchise, buying a franchised business, federal franchise law, franchise agreement, franchise arbitration, franchise attorney, Franchise Disclosure Document, franchise future royalties, franchise law, franchise law firm, franchise lawyer, franchise litigation, franchise your business, franchisee, FTC Franchise Rule, Maryland franchise law, Maryland franchise registration, sell your franchised business, selling a franchise
Thursday, April 28th, 2011
Often times I have prospective franchisor clients, that is, clients who believe they have a business concept that can be expanded possibly through licensing or franchising, ask me to explain the differences between licensing and franchising from a legal perspective. Inevitably, the conversation turns to an explanation from the client as to why the concept is not truly a franchise after all. As I have explained on this blog previously, while there certainly are relationships that are true licenses, more often than not, many licensing relationships are indeed nothing more than disguised franchises.
Here is what the FTC Franchise Rule states on the issue, directly from the FTC website found at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf. The FTC Franchise Rule covers the offer and sale of franchises. As under the original Rule, a commercial business arrangement is a “franchise” if it satisfies three definitional elements.
“Specifically, the franchisor must: (1) promise to provide a trademark or other commercial symbol; (2) promise to exercise significant control or provide significant assistance in the operation of the business; and (3) require a minimum payment of at least $500 during the first six months of operations.”
Be aware that the name given to the business arrangement is irrelevant in determining whether it is covered by the amended Rule.
“With regard to the trademark element, a franchise entails the right to operate a business that is “identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark.” The term “trademark” is intended to be read broadly to cover not only trademarks, but any service mark, trade name, or other advertising or commercial symbol. This is generally referred to as the “trademark” or “mark” element.
The franchisor need not own the mark itself, but at the very least must have the right to license the use of the mark to others. Indeed, the right to use the franchisor’s mark in the operation of the business – either by selling goods or performing services identified with the mark or by using the mark, in whole or in part, in the business’ name – is an integral part of franchising.
In fact, a supplier can avoid Rule coverage of a particular distribution arrangement by expressly prohibiting the distributor from using its mark.”
Posted in business law, franchise law | No Responses »
Tags: business law, Buy a Franchise, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise dispute, franchise law, franchise law firm, franchise lawyer, franchise litigation, franchise your business, franchisee, franchising or licensing, FTC Franchise Rule, licensing v. franchising, maryland business law, Maryland franchise registration, maryland franchise registration and disclosure, sell your franchised business, small business attorney
Wednesday, January 5th, 2011
In Flynn v. Everything Yogurt, et al., 1993 U.S. Dist. Lexis 15722 (D. Md. 1993), the Maryland Federal District Court granted a motion to dismiss a fraud claim for failure to state a claim under Rule 12(b)(6). The Court held that ““Projections of future earnings are statements of opinion rather than statements of material fact. Projections cannot constitute fraud because they are not susceptible to exact knowledge at the time they are made. Layton v. Aamco Transmissions, Inc., 717 F. Supp. at 371 (D. Md. 1989); See also, Johnson v. Maryland Trust Co., 176 Md 557, 565, 6 A.2d 383 (1939) (statement referring to value of securities representing collateral for the payment of trust notes was a matter of expectation or opinion). Thus, the Defendants’ projections can not constitute statements of material fact under § 14-227(a)(1)(ii).”
The Maryland Federal District Court also held in Payne v. McDonald’s Corporation, 957 F.Supp. 749 (D. Md. 1997) that claims of fraud against McDonald’s must be dismissed: “McDonald’s projections concerning the future building costs of the Broadway restaurant and concerning the impact of new restaurants on future sales of the Broadway facility are just as much predictions of ‘future events’ as are projections of future profits. Accordingly, this Court concludes that it was unreasonable for plaintiff Payne to rely on any of McDonald’s predictive statements as a basis for the assertion of fraud-based claims in this case.”
In addition to the McDonald’s case cited above, see Miller v. Fairchild Industries, Inc., Finch v. Hughes Aircraft Co., and Hardee’s v. Hardee’s Food System, Inc., all of which stand for the proposition that predictions or statements which are merely promissory in nature and expressions as to what will happen in the future are not actionable as fraud.
Posted in business law, franchise law | No Responses »
Tags: arbitration, arbitration clause, breach of contract lawsuit, business breach of contract, business law, business litigation, Buy a Franchise, corporate litigation, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise fraud, franchise law, franchise litigation, franchisee, fraud, fraud in the inducement, fraudulent, fraudulent representation, FTC Franchise Rule, maryland breach of contract, maryland business, maryland business law, maryland fraud law, shareholder dispute, shareholders' agreement, small business attorney, small business lawyer
Wednesday, January 5th, 2011
In the recent case of JM Vidal, Inc. v. Texdis USA, Inc., 2010 U.S. Dist. LEXIS 93564 (S.D.N.Y. 2010), the New York District Court held that the New York Franchise Sales Act is inapplicable to the sale of franchises by a franchisor based in New York where the franchisee resides outside of New York and the franchised business is based outside of New York. In Vidal, a franchisee located in Washington State brought an action against a franchisor that was incorporated in Delaware and maintained its principal place of business in New York.
The franchisee alleged that the franchisor violated the New York Act by: (i) selling a franchise before it registered the UFOC; (ii) failing to timely deliver the UFOC at or before the initial meeting; and (iii) misrepresenting the estimated future earnings of the franchised unit, among other claims.
The Court dismissed the franchisee’s New York Act claim by holding that the New York Act is inapplicable and unavailable in an action by an out of state franchisee in a claim against a New York-based franchisor. The Court determined that the principal place of business of the franchisee is the essential element in the analysis – so that if the franchisee is not based in New York, then the New York Act is not applicable.
In making this determination, the Court relied on previous New York decisions, including Century Pac, Inc. v. Hilton Hotels Corp., 2004 U.S. Dist. Lexis 6904 (S.D.N.Y. Apr. 21, 2004) and Mon-Shore Mgmt., Inc. v. Family Media, Inc., 584 F. Supp. 186 (S.D.N.Y. 1984). Vidal stated that “only the franchisee’s domicile matters for the purposes of determining whether the statute applies.”
This case should be reviewed carefully by Maryland franchisors and franchisees, and their lawyers, since the specific jurisdictional language of the New York Franchise Act that was at issue in this case is nearly identical to that contained in the Maryland Franchise Act.
Posted in business law, franchise law | No Responses »
Tags: Buy a Franchise, federal franchise law, franchise, franchise agreement, franchise arbitration, franchise dispute, franchise law, franchise litigation, franchise royalties, franchise your business, franchisee, franchisor, FTC Franchise Rule, maryland franchise disclosure, Maryland franchise law, Maryland franchise registration, maryland franchise registration and disclosure, New York Franchise Act, new york franchise disclosure, new york franchise law, new york franchise registration, sell your franchised business, selling a franchise
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
Subscribe in an RSS reader
