Washington, D.C., Feb. 14, 2011 – The Coalition for Interstate Tax Fairness & Job Growth, a group representing the interests of small and large businesses nationwide, re-launched today with a new name, website and strategy to combat unfair state and local corporate income taxation.
Formerly the Coalition to Protect Interstate Commerce, the Coalition for Interstate Tax Fairness and Job Growth is urging Congress to enact the Business Activity Tax Simplification Act, which makes clear that a state can impose corporate income taxes and similar taxes only on companies that have a meaningful physical presence in that state. The measure would help thousands of small businesses and millions of consumers by encouraging business growth and job creation. The proposal, which does NOT affect sales taxes, would also finally clarify in law traditional legal principles.
To better articulate its views and more thoroughly educate the public about the issue, the Interstate Tax Fairness and Job Growth Coalition is also unveiling a new website: www.interstatetaxfairness.com. There, the public, consumers, government officials, legal scholars and members of the media can quickly learn about the overly aggressive actions by some states to tax businesses that aren’t even located there and the bipartisan legislation designed to end the practice. The website helps users understand the issue with a state-by-state map of corporate income tax laws and a detailed set of examples of unfair state tax practices.
“As a newly re-launched organization, the Coalition for Interstate Tax Fairness and Job Growth will be even more effective in urging Congress to adopt the Business Activity Tax Simplification Act and ensure that all businesses – both small and large – are treated fairly,” said Jack O’Rourke, chairman of the group. “The stakes of doing nothing are too high. Businesses are being forced to pay these unfair taxes or undertake costly lawsuits to combat them and, as a result, are not investing in more employees, higher payrolls or new operations. That’s a loss for everyone and doesn’t make economic sense.”
In addition to a new name and website, the Interstate Tax Fairness and Job Growth Coalition continues to add supporters in the business community. The Business Activity Tax Simplification Act, which was approved last summer by the House Judiciary Committee, is well on its way to passage in Congress. Its enactment this year is the Coalition’s No. 1 priority.
Supporters of the legislation can be found here: www.interstatetaxfairness.com/who-we-are/
This meeting of the Kansas City Franchise Business Network is being hosted by Armstrong Teasdale. The Franchise Business Network is a program of the International Franchise Association. For more information about the purpose and history of the Franchise Business Network, please visit the IFA's website.
Registration will begin at 11:45 A.M., with the program scheduled to start at 12:00 P.M. Lunch will be served. The meeting is open to all members of the franchise community. There is no cost to attend, but please RSVP in advance to Mary Rodell at (800) 243-5070 ext. 7489, or mrodell@armstrongteasdale.com.
In a typical termination or expiration situation, a franchisee is placed on notice that the franchise contract is no longer in effect and is required to de-identify his or her business by removing all signs and other materials bearing the franchisor’s trademarks. Additionally, it is mandatory under the contract for a terminated franchisee to alter the look and feel of the business (known as “trade dress”) to disassociate the former franchise from the franchise company. These changes are required by the franchisor to ensure that the general public no longer associates the former franchised location with the franchise company.
Sometimes, however, a franchisee will refuse to de-identify his or her business and will keep running it as though the franchise agreement was still in place. Because the franchise contract has been terminated, however, the prior franchisee no longer has the franchisor’s permission franchisor to continue using the company’s trademarks, trade dress, systems, and methods of operation. In those circumstances, the franchisor is almost always forced to seek a court order requiring the former franchisee to take down the signs, alter the trade dress, and otherwise force the holdover franchisee to comply with the post-termination obligations under the franchise contract.
Historically, courts have wrestled with the determination of the appropriate measure of monetary damages caused by holdover franchisees. Under the United States Lanham Act (which protects trademark owners), a defendant in a trademark case can be found liable for either simple infringement – that is, unauthorized use of a trademark owned by another – or counterfeiting, which is using a false mark that is either “identical with, or substantially indistinguishable from, a registered mark.” 15 U.S.C. §1127.
In the case of ordinary infringement, a court is given the discretion to award treble (three times) the actual damages suffered to the injured plaintiff. 15 U.S.C. §1117(a). In the case of counterfeiting, a court is required to award to an injured plaintiff either: (a) treble damages incurred by the plaintiff; (b) treble profits obtained by the defendant due to the counterfeiting; or (c) statutory damages ranging from $1,000 to $2,000,000, depending on whether the violation was willful. 15 U.S.C. §1117(b) and (c). As a result, trademark owners often seek claims for counterfeiting – rather than ordinary infringement – as the damages in a counterfeiting case will usually be more significant.
In the recent case Century 21 Real Estate, LLC v. Destiny Real Estate Properties, 2011 WL 6736060 (N.D. Ind., Dec. 19, 2011), the United States District Court for the Northern District of Indiana faced the question of the proper measure of damages where a franchisee continued to use Century 21’s mark after being terminated. The Court considered the argument that the holdover franchisee’s use of the trademark was not actually “counterfeit” because the mark the franchisee used was actually, at one time, authorized by the franchisor (in other words, pre-termination the marks used by the franchisee were genuine). In rejecting that argument, the Court noted that it could:
[C]onceive of no reason why an ex-franchisee should escape liability for counterfeiting simply because that person had access to a franchisor's original marks because of the former relationship and therefore did not need to reproduce an identical or substantially similar mark. Indeed, as [General Elec. Co. v. Speicher, 877 F.2d 531 (7th Cir. 1989)] points out, the risk of confusion is greater when an original mark is used to designate inauthentic goods or services.
Century 21, 2011 WL 6736060, at *4. As a result, the Court found that the holdover franchisee’s unauthorized, post-termination use of Century 21’s marks constituted counterfeiting within the meaning of the Lanham Act. Id. The Court awarded the franchisor damages in the amount of two times the fees lost by the company due to the counterfeiting, plus liquidated damages as required by the parties’ franchise agreement.
There is some disagreement between courts on the issue; notably, in U.S. Structures, Inc. v. J.P. Structures, Inc., 130 F.3d 1185 (6th Cir. 1997)), the U.S. Court of Appeals for the Sixth Circuit reached the opposite result, in finding that a holdover franchisee’s use of a genuine trademark could not counterfeiting. However, if it is upheld and followed by other courts, Century 21 v. Destiny potentially represents an important new development in franchise case law. For franchisors, the case provides a potentially powerful new tool in dealing with holdover franchisees. For franchisees, the case serves as a strong warning about the potential consequences of refusing to de-identify their businesses after termination.
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:
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.
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