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Legal Confab Attendance Signals Industry Growth, Importance

Judicial Update’s hot topics include arbitration and vicarious liability.

“It’s tough here in Washington,” International Franchise Association Pres. & CEO Steve Caldeira, CFE, told a crowd of more than 500 Legal Symposium attendees gathered in the nation’s capital for their annual information exchange. “The regulatory environment remains very, very tough.”

The good news, he said, is that franchise establishments will increase by 1.3 percent this year, adding more than 10,000 new units. According to IFA’s first quarter update to The Economic Outlook for Franchise Businesses report, franchising is projected to grow by nearly 2 percent, creating 156,000 jobs, driven by a 4.2 percent boost of $33 billion from franchise establishments.

IFA will soon also release a study that BDO, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services, that highlights the various provisions in the tax code that are most important to franchise businesses’ ability to create jobs faster than non-franchise businesses.

The not-so-good news is that Congress continues to struggle with reining-in the federal debt through tax and spending reform and is wrestling with immigration policy while the new health care act unfolds and labor issues remain unsolved.

When it comes to comprehensive immigration reform, “We are cautiously optimistic that we will see real movement and we will continue to beat the drum about the importance of this issue.” Caldeira urged the industry to support the mandatory electronic verification system (E-verify), “we feel the system must include sufficient safeguards for employers in the franchise industry.”

IFA’s growing footprint on Capitol Hill is evident, said Legal Symposium Task Force Chairwoman and Haynes & Boone Partner Joyce Mazero, citing that under Caldeira’s leadership, the association has experienced compelling increases in political engagement through FranPAC, news media outreach and positive interaction with policymakers at both federal and state levels.

Franchise Agreements – Finding the Right Balance

The first day’s program fostered lively exchanges on finding the right balance in franchise agreements. Panelists featured were IFA 2010 Chairman Ken Walker, CFE, and IFA Secretary and Pres. and CEO of NRD Holdings, LLC Aziz Hashim, a multi-unit franchisee of Popeye’s, Checkers/Rally’s Drive In Restaurants and Domino’s Pizza in a session that was moderated by Baker, Donelson, Bearman, Caldwell & Berkowitz, PC Counsel Joel Buckberg.

Topics included agreement clarity, core values, supplier distribution, advertising funds, system growth, succession and training as panelists energized the audience with their candid views.

Responding to a question about the guiding principles of a franchise contract, Walker noted the significance of market forces. “Market forces ought to determine the future of franchising and the future of a contract,” he said and asserted that clarity in the agreement is also critical. Hashim added that a common misconception is that only franchisors are the stewards of the brand, which is “the furthest thing from the truth,” and that contract clarity is essential. When it comes to training, Walker suggested it shouldn’t be sporadic, but a lifetime system practice.

Hashim said in one word which core values attract him to a particular franchise: integrity. Rather than paying attention to the nicely framed and printed core values in an office, Hashim said, “I look for whether the brand walks the walk” and talks with franchisees, as well as sales, legal and operating personnel in the franchise.

Asked what makes them “see red” in a contract or relationship, Walker and Hashim offered different but significant points of view. Walker said he sees red when the first conversation he has with a new franchisee is through an attorney. Hashim is turned off when a franchise agreement fails to take into account the commitment of the franchisee, especially in matters of equity.

Advice from the panelists on system growth included recommendations on using market mapping processes “because there is such a thing as saturation in the marketplace, said Hashim.” Walker added for franchises to grow effectively, “you do it with metrics, you do it with measuring.”

Judicial Update at a Glance

Foley & Lardner LLP Partner Bobbi Howell and Nixon Peabody LLP Partner Gregg Rubenstein presented this year’s Judicial Update. Drawing from their comprehensive paper discussing more than 300 franchise-related cases, Howell and Rubenstein summarized legal trends over the past year and provided their insights concerning future developments.

Arbitration. The hot topic this year was franchisee associations’ attempts to bring collective claims in both court and arbitration despite their member-franchisees having agreed to arbitrate claims on an individual basis. Although a 2010 Supreme Court decision held that parties must affirmatively agree to permit class or collective arbitration, at least one association succeeded in pursuing arbitration for its members whose agreements contained no such provision, but also had no explicit ban on collective actions. Associations that attempted to avoid arbitration altogether, however, failed in their attempts, as courts were unwilling to allow franchisees to use their associations to avoid their arbitration obligations.

Vicarious Liability. Another hot topic was franchisor vicarious liability. “Traditional” vicarious liability cases based on the franchisor allegedly controlling the instrumentality of harm continue to be filed. More interesting, and perhaps more alarming, is the increasing number of cases in which franchisors are claimed to be employers not just of their franchisees, but of their franchisees’ employees. The implications of this trend were discussed at length during the update, including whether a franchisor deemed to be an employer in one case may find that decision wielded as weapon by a third-party plaintiff in another case trying to establish vicarious liability. It remains to be seen whether more courts will treat franchisors as employers and whether being an employer for some purposes means being an employer for all purposes.

Restrictive Covenants. Cases involving restrictive covenants remained plentiful this past year. One particularly interesting decision for those who draft these agreements (and those seeking to challenge them) is Hamden v. Total Car Franchising Corp., 2012 U.S. Dist. LEXIS 111432 (W.D. Va. Aug. 7, 2012), in which the court held that a covenant prohibiting competition for two years after “termination” of the franchise agreement did not apply when the franchisee simply chose not to renew upon “expiration” of the franchise.

Lanham Act Damages. The Lanham Act remains a powerful tool for franchisors when former franchisees continue operating and using the marks after termination. While preliminary injunctive relief is routinely granted, courts during this past year made clear that they will be far more exacting in the proof required for an award of damages under the act, particularly where a franchisor is also seeking contract damages.

Laura Fenwick is manager of publishing for the International Franchise Association. She can be reached at 202-662-0761 or lfenwick@franchise.org.

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