Registration will begin at 5:00 P.M., with the program scheduled to start at 5:15 P.M. A networking reception with complimentary cocktails and hors d'oeuvres will follow. 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.
This "product" was listed on ThinkGeek's website on, you guessed it, April Fool's day. The product never existed, nor did ThinkGeek sell (or try to sell) any actual physical item that supposedly contained unicorn meat. It was clearly intended as a joke. However, that didn't stop the National Pork Board from hiring a law firm to send the 12-page long cease and desist letter.
To be sure, it's important for companies to actively monitor their trademarks as a matter of policy. This includes regularly and actively watching / conducting searches for other instances where the mark is being used. Trademark rights can be diluted or lost if the mark owner does not prevent third parties from using (infringing upon) the owner's marks. But it's also important for the owner of a famous mark to understand when a mark is being used for commercial gain, versus when the use would fall under "fair use," which is protected by law. Ordinarily, parody is protected as fair use.
To their credit, the people at ThinkGeek took the letter in good humor, issuing an apology an offering a discount on product purchases to anyone offended by the joke. As for me, I was a little disappointed to learn that the product doesn't exist -- I could use more "sparkles" in my diet.
The White House is at least aware of the problem. Recently, President Obama met with Buffalo Wild Wings franchisees to discuss the need for some changes at the SBA. In particular, Obama mentioned the need to raise the cap on SBA loans from $2 million to $5 million. But is a higher loan cap enough? The key problem in small business lending is that banks still aren't loosening up their lending criteria enough to help the majority of franchisees and other small business owners that really need and depend on credit. While loan cap increases are helpful, they don't really address this problem.
During a press conference that followed the franchisee meeting, President Obama recognized the need to "make sure that small companies are able to open up and expand." However, as long as the banks don't have the incentive -- or the confidence in the economy -- to lend, credit markets are likely to remain tight. And, as a result, entrepreneurs and small business owners will continue to have difficulty finding the capital they need to create, or expand, their businesses. In my view, only after that problem is recognized and addressed will the situation really improve.
Of course, this approach reminds me again of Domino's recent marketing strategy, which by all reports has worked like gangbusters. The approach is certainly a refreshing counterpoint to the circular blame game between BP, Halliburton, and Transocean regarding who is at fault for the oil spill. In a world full of finger pointers, it seems that contrition is king.
Having established my credentials as a serious film fanatic, I know you will believe me when I say that there really aren't very many movies that deal with franchising. Mind you, I'm not talking about product placement or suggestive advertising; I know that "Happy Gilmore" prominently featured Subway and that "Return of the Killer Tomatoes" plugged H&R Block (how's that for an obscure reference?). What I'm talking about are movies that include an aspect of franchising as some aspect of the story. As a franchise attorney, believe me when I say that I would notice these plot points where most people would not. So I really sat up and took notice when I watched the movie Meet Bill.
Meet Bill (or "Bill," as it was originally known) is a movie about a thirty-something executive that faces something of a midlife crisis when his marriage begins falling apart. His professional life, where he works for his wife's father as a bank executive, starts to go in the same direction. Seeking a change and professional independence, Bill looks into buying a fictional donut franchise called "Sweet Sweet." While considering this opportunity, you see Bill go through several of the steps of purchasing a franchise: he attends discovery day, he goes through training, and the Sweet Sweet executives help him with site selection. Although the film takes some liberties, it actually follows fairly closely the franchise sales process. In that, the film is unique as far as I can tell -- no other movie I've ever seen really demonstrates how franchising works. Indeed, the movie is a good primer for anyone who is interested in purchasing a franchise (keeping in mind, of course, that it is rated R and has some content that may be objectionable to some).
Best of all, Meet Bill is actually a pretty good movie. It's certainly not one that you will find on many (if any) critic's best lists, but it's an engaging and overall interesting story featuring talented and likeable actors like Aaron Eckhart, Jessica Alba, Elizabeth Banks, and the always-entertaining Kristen Wiig. So, if you're interested in seeing the only movie I know of that features franchising as a major plot point, I would recommend renting Meet Bill. If you do watch it, let me know what you think.
What's particularly interesting about Rutkauskas's blog is that it gives the reader a first-hand look at the experiences of a person who grew his business from one small unit located in a mall in Tulsa, Oklahoma to a multinational franchising success story. For example, in a recent post, Rutkauskas talks about his initial decision to franchise his business, and gives advice to entrepreneurs who are looking at building their own businesses. In this way, Rutkauskas's blog serves as a window into the mind of a true franchising success story -- much like the books written by Chick-Fil-A founder S. Truett Cathy. For business owners who are new to or considering franchising, Rutkauskas's blog can be a valuable resource.
Rutkauskas's blog can be found at davidrutkauskas.com.
For those of you that have not heard of Awuah, the case involved a suit by franchisees against their franchisor, a janitorial cleaning service (Coverall North America). The franchisees claimed in the lawsuit that Coverall had misclassified them as independent contractors under the Massachusetts Independent Contractor Act (the "Act"), and that they were in reality employees. Under the Act, a party claiming independent contractor status must show all of the following:
In reviewing the relationship between Coverall and its franchisees, the federal court in Massachusetts focused on the second prong of the test. In finding that Coverall did not produce sufficient evidence to show that the contractors (its franchisees) were performing a service outside of Coverall's usual course of business, the court found that franchising is not a "business" in itself. Instead, the court reasoned that franchising is a means to distribute goods or services to final end users in a cost effective manner, and that the goods or services being distibuted to those end users determine the character of the franchisor's business. In the case of Coverall, the court found that Coverall and its franchisees were in the same business -- that of selling janitorial cleaning services to the ultimate end users. In this way, the court likened the franchise relationship to a "modified Ponzi scheme."
The Awuah decision puts at risk many of the fundamental assumptions governing the franchise relationship. Of particular concern is that the court rejected Coverall’s argument that “franchising,” i.e. the development of a system using a trademark, licensing a system, and training franchisees how to operate a business according to the system, is a business that is separate and distinct from the business of franchisees. Although the statute at issue applies only to contracts touching
The fundamental questions now being asked are: (1) how likely is it that the reasoning in Awuah will be upheld in Massachusetts; and (2) will that reasoning be adopted by other state courts? The speakers at the Legal Symposium were not encouraging in their views and outlook on the issue. Apparently, relatively recent decisions of other state courts have used similar reasoning to reach the same result, albeit with no statements that could be converted to attention-grabbing soundbites. The long-term effects of the decision remain to be seen, but it's safe to say that the cause for concern is genuine. Franchisors should pay close attention to this issue and watch for new court decisions and legislation as the law in this area continues to develop.
As an update to my March 23 "Hurt Locker" post, Domino's has reported that its makeover strategy has paid off. In an advertising blitz conducted in January and February 2010, Domino's executives admitted that the company's pizza taste quality was not up to snuff, and used that "narrative" as a way to introduce the public to its new and improved product offering. According to Domino's, same-store sales have increased a whopping 14.3% in the first quarter of 2010 over the same period in 2009.
This story underscores the effect that a compelling narrative can have on sales. When a business finds a new and interesting way to connect with its customers, the results can be remarkable. That being said, only a quality product or service will keep them coming back.
In the case of Domino's, the long term effect of its marketing campaign remains to be seen. Customers were obviously convinced to give Domino's another try through the unusual but memorable ads. But now that they have tried the pizza, will they keep coming back?
In reviewing California’s requirements on negotiated sales, I again noted a disparity between the statute (cited above) and the regulation covering the same issue, which was enacted by the Department of Corporations (“DOC”). The two provisions use different approaches to address the same issue, as explained further below. By researching the background of the statute and the regulation, I was able to determine why they are different and, most importantly, what options a franchisor has to comply with their requirements.
Purpose Behind the Provisions
Ostensibly, the purpose of the law (as well as the regulation) is to control discrimination or favoritism among franchisees. If one franchisee obtains the benefit of special terms, the reasoning is that all other franchisees should be able to see those terms and possibly use them as a basis for negotiating similar changes for themselves. In that way, the playing field among franchisees is somewhat leveled – those franchisees who are not savvy or aware of the franchisor’s willingness to negotiate additional or different terms to the agreement are given the benefit of those that are.
While the purpose of California’s law on negotiated changes is to promote fairness in franchising among franchisees in California, many argue that in reality, the law has the opposite effect: it acts as a disincentive for franchisors to negotiate with California-based franchisees at all. There are at least two reasons why this is so. First, the provision creates an additional burden on franchisors, which must disclose (and potentially file with the DOC) all negotiated changes to subsequent franchisees for a rolling 12-month period. Second, franchisors that would otherwise be inclined to amend a contract to sweeten the pot for a franchisee risk having every subsequent prospect ask for the benefit same terms – regardless of whether the deal made with the first franchisee was based on special considerations that were unique to that transaction.
The negotiated changes rule and regulation present one more significant problem. The law can act as a trap that can ensnare a franchisor that is unaware of the law, regardless of the franchisor’s innocent intentions. As presently written, the DOC is given wide latitude in the statute to assess penalties for violations, no matter how large or small the amount of actual damage caused to subsequent franchisees.
As far as I know, California and Wisconsin are the only states that specifically regulate the disclosure of negotiated terms. The Federal Trade Commission and other states, to the extent that they do address the possibility of negotiated changes, give franchisors and franchisees wide latitude to negotiate agreements as they see fit. For example, the Washington Franchise Investment Protection Act states that it “does not preclude negotiation of the terms and conditions of a franchise at the initiative of a franchisee,” and specifies that a franchisor “need not provide an amended offering circular” due to its agreement to the negotiated changes. See RCW 19.100.184. This hands-off policy encourages free negotiation between the parties, which is consistent with the goals of franchise regulations in general.
Resolving the Apparent Inconsistency Between the Law and the Regulation
The other problem is that the current status of the law on negotiated sales is confusing to even experienced franchise practitioners. Specifically, the statute on negotiated sales (Cal. Corp. Code §31109.1) requires a franchisor to disclose to prospective franchisees “a summary description of each material negotiated term that was negotiated for a California franchise during the 12-month period” immediately prior to the offer. This summary description does not have to be included as an exhibit to the FDD, but instead can be given to a prospect as a “separate appendix.” Then, if a prospective franchisee asks, a franchisor must give to the prospect copies of the actual negotiated terms (as opposed to the “summary description” of the terms given to the prospect with FDD). Importantly, however, the statute does not require the franchisor to file either the summary description or copies of the negotiated changes with the DOC.
The regulation is different, and is more burdensome than the statute in two ways. First, the regulation a franchisor that makes negotiated changes is required to file a “Notice of Negotiated Sale of Franchise” with the DOC within fifteen business days after the negotiated sale is consummated. For active franchisors, this added filing requirement creates more work for the franchisor in order for it to stay compliant. Second, the franchisor is also required to amend its FDD to state that it has made negotiated changes, and to attach all negotiated sales notices as an exhibit to the FDD. Because all FDDs filed in the State of California are available for download online (link), this potentially makes the negotiated terms available to prospective franchisees everywhere – not just those covered by California law.
So, given that the two provisions are inconsistent with one another, what should a prudent franchisor do to comply? First, the franchisor must determine whether the negotiated terms, on the whole, confer additional benefits to the franchisee (which is usually the case). If not, then the franchisor must comply with the more rigorous requirements of the regulation. If the provisions do, however, confer additional benefits on the franchisee, the franchisor has two separate and distinct paths available for compliance – it can follow either the statute or the regulation. Most franchisors will prefer to follow the statute, since no filing is required and the negotiated changes will not be available publicly.
Given that the practical effect of the negotiated sales provisions is to discourage franchisors to negotiate with their franchisees, both provisions (the statute and the regulation) should be re-examined by the State to determine whether they should even remain on the books. If the State is determined as a matter of policy to retain a law on negotiated changes, then one or both of the provisions should be amended to avoid future confusion by franchisors and practitioners.
My own personal observations seem to back this up. Companies are once again beginning to explore the possibility of expansion through franchising or distribution models. More franchises are being sold. The Las Vegas Strip and casinos look busy. Restaurants are starting to look crowded again. New businesses are being built (gasp!), and commercial leases are being signed.
Of course, we're not out of the woods yet. But the news is certainly encouraging. Now, can we just get real estate prices to stablize?