Forward Franchising - Las Vegas, Nevada Franchise Attorney Matt Kreutzer

Washington May Require Franchisors to E-File Registrations

Matt Kreutzer — 2018-03-07T16:26:40-08:00

As you may know, Washington is a franchise registration state, which means that a franchisor must file certain documents with the state, and obtain approval, before it can offer or sell franchises to someone protected by Washington's Franchise Investment Protection Act.

For several years now, the Washington State Department of Financial Institutions (Securities Division)("DFI") has accepted electronically-filed franchise registration applications and has been a leader among franchise registration states in electronic filing. Mandating electronic filing would be a significant next step towards going paperless.

The text of the announcement issued today by the DFI is below:

We are writing to inform you that the Washington State Department of Financial Institutions – Securities Division is considering mandating the filing of applications for registration of franchise offerings and franchise brokers, as well as for franchise exemption notice filings, through the Securities Division’s electronic franchise filing system.

In 2013, the Securities Division announced the availability of its online electronic franchise filing system (“e-filing system”). The e-filing system was intended to facilitate electronic submission of franchise registration and renewal applications, and post-effective amendments online, eliminating the need to make any paper or other physical submissions to the Securities Division. Since then, the Securities Division has expanded its e-filing system capabilities to accept franchise broker and franchise exemption filings.

A significant number of applicants have utilized the e-filing system since its inception. In 2017 alone, the Securities Division received 991 franchise registration filings through the e-filing system. Although the Securities Division currently accepts filings through the e-filing system and paper submissions, paper submissions require the Securities Division to manually receive, process and scan the filings, which may result in delays to the applicant receiving any follow-up correspondence or notice of effective registration. Requiring franchisors and franchise brokers to use the e-filing system will eliminate inefficiencies and result in a streamlined process for both applicants and the Securities Division.

This move to paperless filing is the logical next step for bringing the franchise registration process into the 21st century. I hope that the other franchise registration states take notice and follow Washington's example.

Virginia Proposes Amendment to Franchise Rules

Matt Kreutzer — 2017-11-12T10:00:53-08:00

The Virginia State Corporation Commission (the "Commission") is considering making some changes to its existing Virginia Franchise Rules ("Rules"). These changes come about in response to a recommendation from the Virginia Division of Securities and Retail Franchising to provide a new exemption to registration under the Rules.

Under the proposed amendment, franchisors would be able to claim an exemption from registration for the offer or sales of a single unit franchise where the minimum initial investment is above $5,000,000. To perfect this exemption, franchisors would be required to file an exemption form, a uniform consent to service of process, an entity resolution, and a copy of the franchise disclosure document on CD-ROM. The franchisor would also be required to pay an initial exemption fee of $500 and a annual renewal fee of $250.

Notably, this exemption would not be available where the $5 million threshold is met only by relying on a multi-unit investment, even where the franchisee is planning to build all of the units at the same time. As a result, this exemption will obviously only apply to a very small category of franchisors, presumably those in the hotel or sports franchising businesses. It's also interesting to observe that although this rule change (if adopted) would offer an exemption from registration, it does not provide an exemption from disclosure. In other words, even companies offering these very large initial investment franchises would be required to provide a franchise disclosure document to its prospective franchisees in Virginia, which is not the case under the Federal Trade Commission's Franchise Rule (which exempts franchises with initial investments greater than $1,143,100 from the disclosure requirement).

This change to the Rules is currently open for public comment. The public comment period ends on December 1, 2017. If you wish to submit a comment, you may do so by following the instructions available on the Commission's website at http://www.scc.virginia.gov/case.

Franchisors: Be Aware of California's Unique Law Before Amending a Franchise Agreement

Matt Kreutzer — 2017-08-22T09:00:00-07:00

Unlike most states, California’s registration and disclosure law (the California Franchise Investment Law, or "CFIL") does not stop applying when the franchise agreement is signed. An agreement between the parties to materially change (or amend) an existing franchise agreement is an event triggering California's requirement that the franchisor first register the changes and provide the franchisee with a disclosure statement.

Under California Corporations Code §31125, it is unlawful to solicit the agreement of a franchisee to a proposed material modification of an existing franchise contract without first providing a written disclosure statement in a form required by the Department at least five days before the modification is signed. The statute does state, however, that the disclosure statement will not be required if the franchisor complies with the statutory requirements for an exemption.

Specifically, a material modification is exempt from the registration requirement if:

It is offered on a voluntary basis and does not “substantially and adversely impact the franchisee’s rights, benefits, privileges, duties, obligations, or responsibilities under the franchise agreement.”

It is not within 12 months of the day the franchise agreement was executed, and does not waive any of the franchisee’s rights under the CFRA; and
The franchisee receives the complete modification at least five days prior to signing it, or is given a right to rescind it within five days of signing; and
It is either:
- Made in connection with the resolution of a bona fide dispute between the parties, and is not offered on a system-wide basis; or
- Offered on a voluntary basis to fewer than 25% of the franchisees in the system within any 12-month period.

It is important to note that the statute does not require any type of additional disclosures where the changes made to the franchise agreement are not material. Specifically, where the changes are made as a result of discretionary power reserved to the franchisor under the franchise agreement, the changes are not “material” for the purposes of this section. R.N.R. Oils v. BP W. Coast Prods. LLC, 2011 Cal. App. Unpub. LEXIS 108, 31-33 (Cal. App. 2d Dist. Jan. 6, 2011) (change to a franchisor’s system was not a material modification where franchisor exercised a right expressly reserved in the franchise agreement).

Due to this unique-to-California law, it is important for a franchisor and its legal counsel to understand both the law and the available statutory exemptions any time it seeks to amend an existing franchise agreement with a California-based franchisee.

Nevada's New Law on Non-Competition Agreements Changes the Landscape for Franchisors

Matt Kreutzer — 2017-08-14T22:59:34-07:00

Nevada Governor Brian Sandoval recently signed Assembly Bill 276 (“AB 276”), which articulates new rules and requirements for non-compete agreements, some of which fundamentally alter the legal landscape for the enforcement of covenants not to compete. Most notable among the new law's requirements is the mandate that courts must revise language that might otherwise render non-competes unenforceable. The new law should provide comfort to franchisors operating in Nevada by closing a significant loophole left open last year by the state's Supreme Court.

New Requirements for a Non-Compete Agreement to be Enforceable

According to the new law, to be enforceable a covenant not to compete must:

Be supported by valuable consideration (the grant of a franchise or license will almost certainly be sufficient);
Not impose any restraint that is greater than necessary for the protection of the party for whose benefit the restraint is imposed;
Not impose any undue hardship on the restricted party; and
Impose restrictions that are appropriate in relation to the valuable consideration supporting the non-compete covenant.

Confidentiality and Non-Disclosure Agreements

The new law does not prohibit agreements to protect a party’s confidential and trade secret information if the agreement is supported by valuable consideration and is otherwise reasonable in scope and duration.

Courts are now Required to “Blue Pencil” Non-Compete Language that is Overbroad

This is by far the most significant part of the new law and the aspect that should give franchisors with Nevada-based franchisees the most comfort. But first, a bit of background.

Generally speaking, courts across the country have adopted one of three approaches when addressing over-broad restrictive covenants; these approaches are generally referred to with some variation of the term "blue penciling." When a court faces a non-compete that it finds objectionable based on some aspect of the provision, a court may use one of these approaches:

The court may reject the restrictive covenant in its entirety. In other words, because some aspect of the covenant goes too far in its restrictions, the court may refuse to enforce the covenant at all. This is known as “no blue penciling”.
The court may strike (delete) the parts of the covenant that it believes are overbroad, and leave the rest of the terms of the covenant unchanged. This is known as “strict blue penciling."
The court may choose to revise (rewrite) the restriction to make it reasonable. This is known as "general blue penciling" or "red penciling."

Prior to AB 276 becoming law, Nevada courts used the most conservative of all of these approaches. The Nevada Supreme Court held in the case Golden Road Motor Inn, Inc. v. Islam, 376 P.3d 151, 153 (2016) ("Golden Road") that Nevada law prohibited any form of blue penciling whatsoever, which meant that any part of a covenant not to compete the court determined objectionable would require the court to refuse to enforce the non-compete in its entirety.

Now, however, so long as a non-compete is supported by valuable consideration, Nevada’s courts are obligated to revise overbroad restrictions that impose a greater restraint than is necessary to protect the enforcing party’s interests and impose an undue hardship on the restricted party. The revisions must cause the limitations (e.g. time, geographical area, and scope of activity to be restrained) to be reasonable and no greater than necessary to protect the interest of the enforcing party. Stated differently, a Nevada court must now generally blue pencil (or red pencil) a covenant not to compete that the court believes is overbroad.

Bottom Line

AB 276 is a big victory both for employers and franchisors, which no longer need to worry about a court completely refusing to enforce a non-compete in the state. Agreements that may have been found to be void under Golden Road can now be revised and enforced in Nevada. As a result, franchisors can now enter the Nevada market with confidence, assured that courts in the state will not refuse to enforce the covenants not to compete that are commonly contained in franchise agreements.

- Special thanks to my employment law partner, Rob Rosenthal, who prepared a summary of the new law upon which this article was based (which also served as a first draft for this piece).

Franchises Added 26,000 New Jobs in September 2016

Matt Kreutzer — 2016-10-17T10:24:00-07:00

The ADP National Franchise Report states that the franchise industry added 26,000 jobs to the U.S. economy in September 2016. This is good news for franchising (an important engine of national growth) and the economy in general.

In a press release, Ahu Yildirmaz, vice president and head of the ADP Research Institute, said "[j]ob gains in September eased a bit when compared to the past 12-month average. We also observed softening this month in trade/transportation/utilities, possibly due to a continued tightening U.S. labor market and lackluster consumer spending."

Mark Zandi, chief economist of Moody's Analytics, said, "The current record of consecutive monthly job gains continued in September. With job openings at all-time highs and layoffs near all-time lows, the job market remains in full-swing. Job growth has moderated in recent months, but only because the economy is finally returning to full-employment."

California Franchising Bills Vetoed by Governor Brown

Matt Kreutzer — 2016-10-12T10:24:17-07:00

California Assembly Bills 1782 and 2637, which would have improved the regulatory climate for franchises in the state, have been vetoed by Governor Jerry Brown after being passed by an overwhelming majority of the legislature.

Assembly Bill 1782 would have created a new exemption to the California Franchise Investment Law (the "CFIL") that would have permitted a franchisor or prospective franchisor to exhibit at a trade show in California without first having to register with the Department of Business Oversight. AB 1782 provided that a prospective or actual franchisor seeking to take advantage of this new exemption would be required to file an exemption form with the DBO (in a format the DBO determines) and post a sign in its booth at the trade show explaining that the franchisor is not registered, and that it must become registered before it can legally offer a franchise for sale in California.

AB 2637 would have amended the CFIL by changing the existing law regarding negotiated sales. California has a unique requirement that requires a franchisor to make certain disclosures to prospective franchisees regarding terms that were negotiated with prior California franchisees that amended the standard agreement contained in the registered FDD. The bill would have modified the exemption by permitting a franchisor to freely negotiate with California prospects so long as the franchisor: 1) included a statement in its FDD that CA law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the FDD; 2) retained copies of the material negotiated terms for a period of 5 years; and 3) certified in its annual renewal application that it has complied with the statute. The requirement that a franchisor disclose (in any form) terms that it has negotiated previously with other California franchisees would have been deleted.

The two bills were originated by the California Franchise Law Committee (the "FLC"). The FLC, which is comprised of attorneys that represent primarily franchisees as well as attorneys that primarily represent franchisors, had worked on the bills for many years. The bills were widely favored by both constituencies of the franchise community, with the International Franchise Association ("IFA"), the Coalition of Franchisee Associations, and the American Association of Franchisees and Dealers all speaking publicly in favor of both laws. Following this widespread support, the California Assembly and Senate overwhelmingly passed both bills.

The veto messages by Governor Brown were as follows:

AB 1782 (Limited Trade Show Exemption): "Registration gives the Department of Business Oversight the opportunity to review franchise disclosure documents and ensure that franchisors are providing accurate information to potential customers. Allowing unregistered franchisors to market at these events without verifying their eligibility to do business in California is a step in the wrong direction."

AB 2637 (Negotiated Sales): "While it is important to promote bringing new businesses into California, doing so at the expense of transparency could be detrimental to potential franchisees, as this bill proposes to do. The current process, which allows the Department to review contract changes, ensures that franchisees are not placed at a disadvantage in their final agreement."

These vetoes disappointed many in the franchise community. The IFA issued the following press release in response:

It is disappointing Gov. Brown has chosen to reject these bipartisan supported bills, both having passed the legislature unanimously, rather than promote franchise small business growth in California. Given the unanimous bipartisan support for this bill in the legislature, his veto of this pro-business legislation sends a signal to franchises and other small businesses that California is not open for business.

AB 2637 would have simplified the process by which prospective franchisees and franchisors negotiate with each other, thereby promoting small business growth in California. Current California law has a chilling effect on negotiations between prospective franchisees and franchisors. Passage of AB 1782 would have put California in a better position to retain and attract trade shows, while also leading to greater exposure of entrepreneurial opportunities to California residents. For years the West Coast Franchise Expo was hosted in California, but has now moved to Denver, Colorado.

We are interested to see and understand the Governor's reasoning to veto legislation that was unanimously passed by the bipartisan legislature and supported by California franchisees and franchisors.

As a member of the FLC and having testified several times before the California Legislature in support of these bills, I am personally very disappointed in the vetoes. It is unlikely that these bills will be brought back on the table for consideration for many years.

Two Franchising Bills Move Forward in California Legislature

Matt Kreutzer — 2016-05-10T09:36:46-07:00

Two bills are currently pending before the California legislature that can directly affect franchising in the state. Both of the bills originated from the California Franchise Law Committee (part of the State Bar’s Business Law Section) (the "FLC") and were the result of many years of work by the FLC. I was personally involved in the drafting of both proposals from the FLC (and heavily involved in the drafting of the bill on negotiated sales, discussed below). I’m pleased to report that both of them appear to be moving through the legislature with little opposition.

Assembly Bill 1782 would create a new exemption to the California Franchise Investment Law that would permit a franchisor or prospective franchisor to exhibit at a trade show in California without first having to register with the Department of Business Oversight. AB 1782 provides that a prospective or actual franchisor seeking to take advantage of this new exemption would be required to file an exemption form with the DBO (in a format the DBO determines) and post a sign in its booth at the trade show explaining that the franchisor is not registered, and that it must become registered before it can legally offer a franchise for sale in California.

AB 2637 would also amend the CFIL by changing the existing law regarding negotiated sales. California has a unique requirement that requires a franchisor to make certain disclosures to prospective franchisees regarding terms that were negotiated with prior California franchisees that amended the standard agreement contained in the registered FDD. The bill would modify the exemption and instead permit a franchisor to freely negotiate with California prospects so long as the franchisor: 1) includes a statement in its FDD that CA law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the FDD; 2) retains copies of the material negotiated terms for a period of 5 years; and 3) certifies in its annual renewal application that it has complied with the statute. The requirement that a franchisor disclose (in any form) terms that it has negotiated previously with other California franchisees would be deleted.

Both of the bills passed in the Assembly (no votes opposing either one of them), and are now before the Senate. If you would like a copy of either bill, please email me.

Report from California Franchising Day 2016

Matt Kreutzer — 2016-03-08T17:45:59-08:00

Today I attended the International Franchise Association's fourth annual California Franchising Day. During the course of the day, I had the opportunity to meet with Assembly Members (or their representatives) Hadley, Bigelow, Brough, Miller, Baker, and Gipson, and Senator Nguyen. My group talked with them about the many issues facing franchisees and franchisors in California, including concerns about rising minimum wages, high workers' compensation premiums, and other regulatory issues facing industry members in California.

We also talked to the Assembly members and Senator about Assembly Bills 1782 and 2637, and specifically about how those bills (if passed) will improve franchising and franchise regulations in California. I found all of the Assembly Members and Senators to be very receptive to the two pending bills and the reasons behind them, and willing to listen regarding the other issues that face members of the franchise industry in California.

I remain hopeful that ABs 1782 and 2637 will find support in the legislature, and that they will not be opposed by any major interest groups as they move forward. As promised, I will keep you posted on the progress of those bills here.

International Franchise Association's Fourth Annual California Franchising Day is Tomorrow

Matt Kreutzer — 2016-03-07T12:03:42-08:00

The International Franchise Association's (IFA) fourth annual California "Franchising Day" is set for March 8, 2016. The goal of Franchising Day is to inform California legislators about some of the key issues affecting the franchise industry. This year, the IFA's Franchising Day will "feature meetings with legislators and staff, allowing members of the franchise community to meet directly with lawmakers to discuss the benefits of franchising in California, as well as the legislative issues facing their businesses."

There are currently two key franchising bills in California. One, California Assembly Bill 1782, seeks to create a new exemption to the California Franchise Investment Law relating to franchise trade shows in the state. If enacted, this new law would permit franchisors and prospective franchisors to exhibit at franchise trade shows in California without having to first apply for a full franchise registration with the Department of Business Oversight.

The second pending bill is Assembly Bill 2637, which is designed to improve the state's law on negotiated franchise sales. As described in my previous posts here and here, the law -- intended to help California franchisees to give them an advantage during negotiations with their franchisors -- actually hurts franchisees in the state because many franchisors would rather refuse to negotiate completely than comply with the law, which franchisors view as burdensome. AB 2637 seeks to improve this situation by permitted franchisors and franchisees to freely negotiate with one another for so long as the franchisor meets certain simple disclosure and recordkeeping requirements.

Forward Franchising will be following these new bills and developments, and will keep you posted on them here.

U.S. Small Business Administration Suggests Rule Changes for Franchisor Affiliates

Matt Kreutzer — 2015-11-17T18:53:41-08:00

The U.S. Small Business Administration ("SBA"), in response to pressure by the International Franchise Association, recently changed its position regarding how it views franchise companies and their affiliates for purposes of determining loan worthiness. I quote from the SBA's press release below:

One of the more challenging components of SBA’s franchise affiliation determinations relates to affiliated entities. In the first of what is expected to be several Proposed Rule changes, SBA has listened to the concerns of franchisors as well as lenders, both of whom were aligned on this particular issue.

In 2014, SBA began applying affiliation tests not only to the franchise agreement associated with an SBA loan but also to any other franchise agreements that the borrowing entity might have had with other brands. All borrower agreements were being reviewed even though the requested loan proceeds were not being used for any other brands.

The IFA, with support from FRANdata, acted quickly to ensure that franchisors and their own comments became known so that the SBA knew the negative consequences of this interpretation. When SBA released a notice for public comment in late 2014, both the IFA and FRANdata sought to have as many franchisors as possible respond to this request. The response was swift and the result is that SBA has released a Proposed Rulemaking where such unrelated franchise agreements would no longer be considered for purposes of affiliation.

"The goal was to ensure that the industry's voice was heard by the US Small Business Administration, and that any planned change be made to the benefit of the franchise community - we are very happy to see that the current proposed rule looks to have the desired outcome we have been looking for" says Edith Wiseman, President of FRANdata, "much kudos needs to be given to the IFA for all the effort and care they have given to this issue."

The SBA plays an important role in the franchising industry. The SBA guarantees loans made by private lenders to qualified franchisees. Typically, the SBA is willing to guarantee a loan if the franchisor has met certain qualification requirements, which include having certain provisions and protections included in the franchise agreement. The SBA tracks these qualified franchisors through the Franchise Registry, which is operated by FRANdata.