March 22nd, 2012
On March 22, 2012 I attended the Maryland Chamber of Commerce
Business Development Council event at Under Armour
(“UA”) world headquarters in south Baltimore, located right next to Baltimore’s harbor. The presentation included an inspirational history lesson concerning UA’s growth since its 1996 founding to a $1.5 Billion company with about 5,000 employees, and also a fun tour of part of the sprawling headquarters — which includes a basketball court and a cafeteria with a very large “Living Wall” composed of actual plans.
However, the heart of the presentation was by Mark Gillen, Director of Strategic Procurement, who described what UA seeks in suppliers, which provides insight to seeking business from a nearly “large cap” company. Key takeaways were:
UA brand apparel is generally more expensive but a better value than competitors’
Founder Kevin Plank has long term vision and stable position as CEO
UA analyzes the intangible benefits of associating with suppliers, not just price
An UA executive will have at least one conversation with each prospective supplier
UA has a “Center led procurement” process, which means Mark sets guidelines for division leaders to follow when directly deciding many of UA’s supplier decisions
The key question is how supplier helps to protect and enhance the UA brand
UA seeks long term value = quality products and service, plus reasonable price
How does the supplier innovate and grow in its business methods?
UA seeks suppliers who will save us money through good ideas, even at risk to their short term profits, and view relationship with UA as a long term asset
Supplier must be nimble, comfortable with UA’s fast paced and hectic company culture
Must be willing to provide quality support & training; example cited was software platform used.
UA does seek supplier diversity and tracks its procurement to identify locally owned, small and minority or veteran owned businesses.
In charitable endeavors, UA supports women’s health projects, Habitat for Humanity, “wounded warriors”, and Ronald McDonald House, among others.
UA expansion in south Baltimore’s Locust Point neighborhood will include adding a new building and a retail store expansion. Company owns the many acres of land on which its headquarters sits.
March 20th, 2012
In Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc.
, 646 F.3d 983 (7th Cir. 2011), the U.S. Court of Appeals for Illinois, Indiana and Wisconsin held that the national Girl Scouts organization, a nonprofit incorporated by an Act of Congress, violated the Wisconsin Fair Dealership Law by dissolving a local Wisconsin chapter of the national organization “without good cause.” The 2011 decision is notable both because of its author, the extremely well-known, respected and conservative Judge Richard Posner, and because of the language used by the Court in rejecting the Girl Scouts of the United States’ arguments for immunity based on its nonprofit mission. This article is designed to help the leaders of nonprofit organizations and associations identify ways to mitigate risks posed by this decision.
Under the Wisconsin law, a “dealer” is one who is granted the right by contract to “use [the grantor's] trade name, trademark, service mark, logotype, advertising or other commercial symbol” and has “a community of interest” with the other party to the contract “in the business of offering, selling or distributing goods or services at wholesale, retail, by lease, agreement, or otherwise.” The Girl Scouts of the United States argued that its contract with the affiliate was not “commercial” and that the affiliate was not “in business.” To that, the Court said:
. . . one doesn’t usually think of nonprofit enterprises as being “commercial” and engaged in “business.” Or didn’t use to–for outweighing these hints is the fact that nonprofit enterprises frequently do engage in “commercial” or “business” activities, and certainly the Girl Scouts do. Proceeds of the sale of Girl Scout cookies are the major source of Manitou’s income. The local councils sell other merchandise as well. Sales of merchandise account for almost a fifth of the national organization’s income, and most of the rest comes from membership fees and thus depends on the success of the local councils in recruiting members; that in turn depends on the councils’ revenues and thus gives the national organization an indirect stake in the cookie sales.
646 F.3d at 987. The Court went on to emphasize that, when competing with for-profit entities in commercial enterprises and endeavors, nonprofits may be held to the same legal standards of conduct.
Laws that prohibit termination or cancellation of a dealer or franchisee, except for “good cause,” are called “franchise relationship” laws. Wisconsin’s definition of a “dealer” is similar to the definition of a “franchise” under the franchise relationship laws of Arkansas, Connecticut, Delaware and New Jersey. Another 11 states have franchise relationship laws, but require the “franchisee” to prove that it was required to pay some sort of “fee” as a condition of selling goods or services under the “grantor’s” trademark. Such “fees” have been deemed charged if the “franchisee” was required to pay the “franchisor” for a policies and procedures manual, for its director to attend a training conference, or even for marketing materials to distribute to prospective customers of the good or service.
The 15 states that have laws regulating the granting of a franchise, typically known as “franchise sales laws,” mandate certain disclosures be provided to prospective franchisees and that the franchisor refrain from certain actions in recruiting franchisees. All of those laws also contain a requirement that the “grantee” directly or indirectly pay some sort of “fee” to the grantor as a condition of operating under the grantor’s trademark. Most of those laws do not require that the fee be paid up front, and thus the fee could be a percentage of the grantee’s cash received in operating the business. However, payments from the grantee to the grantor for products at their “bona fide wholesale price” cannot be franchise fees, and the payment of commissions to the grantee when it has acted as a bona fide sales agent of the grantor are excluded. However, if the fee element is satisfied and there is substantial association with a common name, then Judge Posner’s reasoning on what is a “commercial endeavor” and operation of a “business” could be meaningful in proving the existence of a franchise.
The Federal Trade Commission also has a trade regulation rule that contains disclosure requirements and recruitment prohibitions that are similar to the state franchise sales laws. Fortunately for nonprofit organizations, the FTC has issued several advisory opinions finding that a nonprofit engaging in transactions that would otherwise be considered franchising were exempt from the Franchise Rule provided that (a) the licensor is not engaged in the relationship “for its own profit or the profit of its members,” and (b) the licensees are also bona fide non-profits. The first requirement is driven by the limit of the FTC’s jurisdiction, since it may only regulate a company “which is organized to carry on business for its own profit or that of its members.” 15 U.S.C. § 44. However, when the nonprofit associations of glass makers and insurance agents collaborated to form “The Glass Network” to enable the insurers to obtain lower cost auto glass replacement services and the glass makers access to that market, the FTC staff found that “network” to be covered by the Franchise Rule, notwithstanding its ownership by nonprofits. The Glass Network, LLC, FTC Informal Staff Advisory Opinion 04-4 (2004).
What follows are some key questions to ask in determining whether your chapter or affiliate program could be deemed a franchise system, or should otherwise focus on franchise law matters:
1. Are your members for-profit companies or professionals?
2. Is there an upfront affiliation fee or annual dues to maintain affiliate status, or a requirement that the affiliate purchase certain quantities of goods or services, regardless of customer demand?
3. Do your affiliates pay you a share of membership dues they receive, or does the affiliate receive membership commissions from you?
4. Is your association’s name or logo a prominent or significant part of the affiliate’s name or identity, from the perspective of its members?
5. Do your affiliates provide direct business development opportunities for their members (as opposed to general promotional benefit)?
6. Does a substantial portion of each of your affiliates’ revenues come from the sale of the same type of products or services, and are those products or services also sold by for-profit companies? Examples besides cookies are travel tours, function facility space, summer camps, or sports leagues.
7. Do your affiliates have exclusive territorial rights?
8. Is there a minimum quota of memberships that the affiliate must maintain?
9. Is good cause required to terminate the affiliate’s charter?
10. Is there a covenant not to compete after revocation of the charter, and if so who does it bind (i.e., just the affiliate as a nonprofit entity, or also its officers and directors)?
If a nonprofit organization or association answers “yes” to many of these questions, it may be advisable to review the chapter or affiliate structure – and applicable affiliation agreement – to mitigate the risk of inadvertently being considered to fall within the franchise laws.