The franchisee is accused of engaging in an advertising campaign featuring the tagline "a match made in Vegas heaven: boobs and Bobbies." The allegation by Capriotti’s is that the franchise owner collaborated with the Las Vegas strip club Crazy Horse III to offer the Capriotti’s trademark turkey, stuffing, and cranberry sauce sandwich, the "Bobbie," during happy hour at the strip club. The problem with the attention-grabbing campaign, Capriotti’s claims, is that the franchisee never received permission from the company to run the advertisement. If the allegation is true, this very well could provide sufficient justification for termination of the franchise agreement.

Every well-drafted franchise agreement will have certain restrictions regarding the franchisee's ability to advertise. The franchisee will ordinarily be permitted to use any advertisements created by the franchisor's marketing department without obtaining advance permission. If the franchisee creates its own advertisements, however, the franchisor's written permission must first be obtained. Many franchise agreements will have a specific procedure for obtaining this written consent, including a time limitation for the franchise company to grant or deny permission to use the ad. Presumably, this is the provision that the Capriotti's franchisee has been accused of violating by failing to obtain the required approval.

The action by Capriotti's is understandable from a brand management point of view. The purpose of franchise agreement provisions that place limitations on a franchisee's ability to advertise is to protect brand integrity. If a franchisee is given carte blanche to use the franchise company's trademarks in any way that the franchisee sees fit, the overall brand image can be harmed if the franchisee is injudicious in the marks' use. In the Capriotti's example, the "boobs and Bobbies" ad could hurt the brand in the eyes of the public, which may not want to patronize a sandwich shop that associates with a strip club. Which is exactly Capriotti's point, as it contends in the lawsuit that the teaming up of the Capriotti's brand with an adult entertainment business will hurt the family-friendly reputation of the business.

The Capriotti's lawsuit provides important reminders for both franchisees and franchisors. For franchisees, the legal case underscores the absolute importance of obtaining franchisor permission and consent before using any marketing material that has not been created by the company's marketing department. For franchisors, the lawsuit is a reminder that it is critical for the franchise agreement to have appropriate controls for franchisee-created advertising, as well as strong remedies to address a franchisee's violation of those restrictions.

As reported in my January 6, 2011 blog post, a number of states have begun taxing out-of-state franchise companies on income that the franchisors earn from their in-state franchisees.  Under the reasoning of these states, intangible property that a franchisor owns within the state – which can be company’s goodwill and the right to license its trademarks to in-state franchisees – creates a sufficient connection to the state to justify taxation on revenue generated within the state. Last year's KFC Corp. v. Iowa Department of Revenue case is only the latest in a line of cases that appears to validate this practice.  The United States Supreme Court's refusal to hear the KFC case appears to provide even further validation to this practice.

According to an op-ed piece in Roll Call by Reps. Bob Goodlatte (R-Va) and Bobby Scott (D-Va.), BATSA would provide a federal preemption law to prevent state departments of revenue from taxing out of state franchisors without a physical “nexus” in that state.  As the Congressmen state in their op-ed:

The legislation would clarify that a state or locality can’t levy a direct tax on a business unless the business has employees, an office or property in a state for more than two weeks during the year. The standard, if enacted, would reduce litigation, improve certainty and create greater investment in new jobs.

BATSA would apply to business-activity taxes, including income taxes and franchise taxes, but would NOT apply to transaction taxes, such as sales taxes. The famous, years-long battle over when sellers should collect state sales taxes on purchases made online is a separate question not affected by BATSA in any way.

BATSA is a pleasant anomaly in Washington: a thoroughly bipartisan bill with nearly as many Democrats as Republicans onboard. BATSA has also overwhelmingly been approved twice by the House Judiciary Committee.

The International Franchise Association is a strong supporter of BATSA, as it would lessen the administrative and financial burden on franchisors, who today face the very real threat of having to file income tax returns in each and every one of the states in which a franchisee is located.  To lend your support to the IFA's efforts urging passage of BATSA, contact Jay Perron at jperron@franchise.org. 

There are a couple of good articles this week that demonstrate possible answers to these questions.  Yesterday's Wall Street Journal had an article relating to some of the creative incentives being given by franchisors to assist their franchisees in a continued down economy.  Papa John's and Denny's are establishing programs to lend money to their franchise owners, cut back on royalty fees, and assist owners in challenged or growth markets.  These are good examples of the types of programs that a franchisor can implement to help franchisees during challenging economic times. An article on restaurant-focused site MonkeyDish highlights the ways that small business owners can find funding in challenging capital markets.  This includes finding lending sources through relative newcomer Boefly.com (often called the "match.com" for small businesses), which has over 1500 participating lenders, and using middlemen such as Franchise American Finance and American Association of Government Finance, which can assist small business owners in wading through the red tape associated with Small Business Administration loans. 

Most prognosticators predict that in 2012, we will start to see economic growth.  One thing is certain: if more small business loans are made, the economy will get better.

According to the lawsuit, in 2007 Eisenberg agreed to appear in Camp Hell as a favor to his friends.  He was on set for only one day of filming, and logged only a few minutes of total screen time.  Because he was only minimally involved in the movie, he was surprised to see that his face was prominently featured on the cover of the DVD, implying that he starred in the film.  His lawsuit asserts various California law causes of action, including claims for unfair business practices and publicity rights.  But, according to Hollywood law blogger Eriq Gardner, the lawsuit reads more like “a consumer class action, saying that the producers are ‘continuing to perpetrate a fraud on the public.’”

Overselling a famous actor’s involvement in a film is a common practice in the industry, although the Camp Hell example may be one of the worst offenders.  But, while there are agreements and rules among various creative unions in Hollywood relating to attribution and credit, there apparently aren’t any that specifically state the number of minutes of screen time that are necessary in a movie before an actor can be marketed as a film’s “star.” 

Fortunately, the franchising world has more explicit rules regarding how a franchise can be marketed and sold to potential franchisees.  Generally, the FTC Franchise Rule and a number of state laws require a franchise company to provide to a prospect certain types of disclosures regarding the business being marketed.  Through a legally compliant Franchise Disclosure Document, a possible franchise buyer will obtain a great deal of information about the franchise being sold, which information should support the marketing claims the franchisor makes generally.  Further, several states have specific restrictions on the types of statements that franchisors can make in advertising pieces, which restrictions are further designed to protect against misinformation to franchise buyers.  These laws work together to attempt to ensure that members of the public are not lured into buying a franchise based on puffery or overblown claims of success. 

It will be interesting to see how the Court handles Mr. Eisenberg’s lawsuit.  I wonder if the movie industry will, in the face of the Camp Hell situation, consider adopting more stringent rules about marketing actors?

I would love to hear from you -- have you ever watched a movie based on the claim that a movie was “starring” a certain actor, only to find out that the actor’s involvement was minimal?

Important facts to keep in mind in regards to the Interim Measures include:

• Both expatriates hired by local Chinese businesses (i.e. local hires) and expatriates hired in their home countries and dispatched to work in a Chinese branch or representative office of their employer (i.e. secondees) must contribute to China’s Social Security System.

• Both the employee and employer must make social security contributions. Contribution rates and the maximum amount of earned income the social security tax applies to are determined locally and thus vary depending upon the city in which an expatriate works. For example, an expatriate working in Shanghai must make an 11 percent social security contribution on the first RMB 11,688 (USD 1,843) of his or her monthly salary. The expatriate's employer must make a 37 percent contribution on the first RMB 11,688 (USD 1,843) of that salary. These figures are different for other cities including Beijing.

• Expatriates may start withdrawing payments from their social security contributions once they reach the statutory retirement age in China. If the expatriate leaves China before reaching the statutory retirement age, he or she may close their social security account and receive a lump-sum payment from their contributions.

• Failure to comply with the Interim Measures will result in stiff penalties. These range from 100 to 300 percent of contributions due, in addition to a daily late payment interest surcharge of 0.05 percent of the unpaid or underpaid contribution amount.

To illustrate the implementation of the Interim Measures, Company A, a U.S. corporation headquartered in St. Louis, hires Expatriate X, an American citizen. Expatriate X starts working in Shanghai on January 1, 2012. The worker’s monthly salary is RMB 20,000 (USD 3,154). Expatriate X must make an 11 percent contribution to China’s Social Security System on the first RMB 11,688 (USD 1,843) of his or her monthly salary. Company A must make a 37 percent contribution on the first RMB 11,688 (USD 1,843) of Expatriate A's monthly salary on Expatriate A’s behalf. Therefore, during each month of 2012, Expatriate X must make a RMB 1,286 (USD 203) social security contribution. Company A must make a RMB 4,325 (USD 682) contribution. All things being equal, the new law increases the cost of deploying Expatriate A in Shanghai by approximately RMB 67,332 (USD 10,617) annually.

If you need assistance in developing policies or complying with the new social security laws in China, or have any other related questions, please contact a member of Armstrong Teasdale's International Group.

If you are a McRib fan, you had better hurry.  According to the "McRib countdown clock," the sandwich is only available nationwide a little while longer...

Ordinarily, an unregistered franchisor that exhibits at a trade show in a franchise registration state would potentially violate that state's registration law, because the simple act of exhibiting at the show is arguably the making of an unregistered "offer to sell" a franchise.  For this reason, franchise companies have argued that state franchise registration laws unnecessarily discourage (and perhaps prevent) companies from participating in franchise expos for the purpose of obtaining valuable information.  Essentially, franchisors (and companies that are interested in franchising) contend that participating in trade shows can provide a valuable opportunity for them to "test the waters" to determine the market demand for their concepts.  According to their argument, if they are allowed to participate in trade shows without having to first register in the host state, they would be able to gain valuable insight from comments and suggestions made by prospects, other franchisors, and even attending consultants. 

From the franchisee's perspective, greater trade show participation by franchisors will increase the availability of information about a variety of concepts and give them the opportunity to obtain information, one-on-one, from representatives of those concepts – an opportunity that is unique to the franchise expo format.  Further, franchisees contend that more educated franchise companies make better franchisors, and will result in higher-quality Franchise Disclosure Documents and a better overall franchise system. 

For these reasons, both franchisors and franchisees have urged certain registration states to consider adopting an exemption similar to the one recently created in New York.  For example, California (the host state for the annual West Coast Franchise Expo is currently considering (but has not yet passed) a similar regulation that would provide franchisors the opportunity to attend and exhibit at trade shows without first having to go through the full registration process. I will update this blog if and when California and any other state follows New York’s example.

To take advantage of New York’s exemption, a franchisor is required to complete and submit an exemption application form and supporting materials to the Office of the New York Attorney General.  Exemptions are not automatic; the Attorney General's office will review applications and reserves the right to deny any request.   

Speaking of Domino's Pizza, I'm on my way to New York city this weekend, and looking forward to seeing the company's live-feedback billboard in Times Square (I wrote about the billboard here).  Stay tuned -- I'll post a picture of it on this blog.

As a consumer, I am pleased with this decision.  As you will know from my earlier blog post on this topic, as a longtime customer I was not happy with the potential split in my service.  And, as an industry observer, I'm impressed.  It seems almost too obvious to repeat here, but one of the keys to a successful business is understanding what your customers want and reacting appropriately.  This type of response indicates that Netflix is listening to its subscribers and that it cares about what they want.  I can't say the same thing for every company. 

If you do want to negotiate with a California prospect, what should you do to comply with the law? If your negotiation is the first one within a twelve-month period, then you do not need to make any special filing or disclosure to your prospect. After the deal has closed, however, you will need to determine whether the negotiated terms, on the whole, confer additional benefits to the franchisee. This is usually the case.

Depending on how you answer the benefits question, you may need to either prepare a "summary description" of the negotiated terms and provide that description to any California prospects, or you may need to file a "Notice of Negotiated Sale of Franchise" with the California Department of Corporations and amend your franchise disclosure document (see my earlier blog post on this subject for more information about this). In any event, because negotiation with a California prospect necessarily implicates the state’s negotiated sales law, you should consult your franchise attorney to ensure that you remain in compliance.

The purpose of the law is to control favoritism among franchisees by attempting to level the playing field between franchisees that are sophisticated enough to negotiate their contracts and those that are not. However, the law can act as a trap, ensnaring a franchisor that is unaware of its requirements. The problem is a significant one because California state administrators are given wide latitude in the statute to assess penalties for violations, no matter how large or small the amount of actual damage caused to franchisees.