May 20th, 2013
In the opening General Session of the International Franchise Association (“IFA”) Legal Symposium on May 6, 2013, Aziz Hashim
, President & CEO of NRD Holdings, LLC (Multi-Unit Franchisee of Popeye’s, Checkers, and Domino’s Pizza) & the IFA’s current Secretary, and Kenneth L. Walker
, formerly IFA Chairman and the Chairman of the Board of Driven Brands, Inc. (franchisor of Meineke Car Care businesses), commented on franchise agreements and franchise relationship management in an interview-style program moderated by Joel Buckberg. Their comments, which are summarized below, demonstrate both the promise and the challenges inherent in franchising.
Franchise Agreement “Turn-offs”: Hashim’s “bad marks” when evaluating franchise agreements all relate to the security of the franchisee’s equity investment in the business, and are:
1. Franchisor’s right to a liquidated damages award following termination for any reason;
2. Unlimited personal guarantees required by the franchisee’s owners, particularly after an approved sale of the owner’s interest in the franchisee;
3. Franchisor’s right to require the buyer of a location to sign the franchisor’s then-current form of franchise agreement, which might have higher fees or weakened territorial rights;
4. Franchisor’s right to require “periodic” remodeling, without limitations on the frequency, timing or cost of the facility changes.
Walker did not list any concerns with franchise agreements, which is not surprising given his background as a franchisor executive. However, he did emphasize that one of his biggest “turnoffs” when he was CEO (from 1996 until 2012) was having the first contact in a negotiation coming from a franchisee’s lawyer rather than the franchisee executive himself. He was much more likely to negotiate an issue with a franchisee who first approached him directly, even if the final agreement might be worked through by each party’s counsel.
Use of Marketing Funds: Walker expressed a preference for wide franchisor discretion in deciding how to use franchisee contributions, as long as the uses were devoted to growing franchisees’ businesses. Hashim agreed, but with the caveat that franchisees had to be actively engaged and consulted as to the franchisor’s proposed uses of the monies. Hashim objected to use of such funds to cover part of franchisor’s executive salaries (such as for a Chief Marketing Officer) or to conduct product development analysis. He supported flexible uses such as contributing towards the remodeling and rebranding of franchisee restaurants. Walker agreed that franchisee engagement and “buy-in” is critical, on the basis that it is better to have a somewhat flawed marketing plan that is widely executed than an outstanding plan that the franchisees refuse to implement.
Territorial Rights: With regard to franchisees’ territory protections, Walker argued that if the brand as a whole is losing market share to competitors with its existing network of locations, then it should be able to “backfill” with additional franchises. Hashim seemed to agree, as long as the plan protected franchisees who were properly executing the system and meeting expected revenue targets.
Supply Chain Controls: Hashim argued that franchisors should not require purchases of commonly available supplies or ingredients from more expensive sources, if the franchisees can obtain the same items less expensively through other means. He said that at a minimum, there should be clear disclosure to prospective franchisees of how the franchisor makes money from the supply chain.
Facility Remodeling and “Upgrades”: The panelists agreed that it is critical for franchisors to efficiently monitor the quality of goods and services being provided and to discipline franchisees who are not meeting such standards. However, Hashim argued that franchisors need to “make the business case” as to how facility updates or remodeling are going to benefit the profitability and value of the franchisees’ businesses rather than just drive revenue growth. He also believes that “smart franchisors” help fund the costs of facility updates to obtain rapid adoption by most franchisees.
Transfer: Walker emphasized the need to make sure that approval of a transfer is unlikely to harm the viability of a location. Hashim said that it is critical that the franchisor’s rules for obtaining approval are clear, objective and disclosed to active franchisees, and if the criteria are changed the franchisor should be able to explain why change is necessary. Hashim recommends this simple test: “If you would sell this person a new franchise, then you should approve a transfer to that same person.”
Training and Operations Support: Walker believes that in-person, live training and conventions continue to have value in fostering a team spirit among franchisees and an exchange of best practices information, as compared to Internet “webinars” or recorded trainings. Hashim expressed frustration that the ratio of franchisor field staff or “business consultants” to franchisees has been decreasing over time, and the experience level of those consultants has been decreasing. He said that periodic visits by qualified field representatives play in important role in franchisee satisfaction and success.
Termination and Damages: Despite his broad disapproval of personal guarantees and liquidated damages, Hashim agreed with Walker that, if a franchisee is not in financial distress but simply wants to quit the franchise to stop paying royalties, then it is appropriate to require that franchisee to pay termination compensation to the franchisor.
Concluding Comments: Hashim made the following noteworthy comments to franchisors:
1. Recognize that you are not bestowing franchise rights, but rather recruiting important business partners;
2. Don’t make your franchise agreement so harsh that it scares of good prospective franchisees, since quality franchisees drive a brand’s success;
3. Poll your best franchisees to find out their thoughts about the brand and franchisor staff;
4. Mystery shop your franchise salespeople, to find out what they are saying (and failing to say) to prospects; and
5. Employ a true ombudsman to address franchisee complaints and concerns before they mushroom into disputes.
In many ways this program showed the best that the IFA has to offer, since it brought together franchisor and franchisee perspectives for the purpose of furthering industry best practices. It also highlighted Aziz Hashim as a rising leader in franchising who bears watching in the future.
June 29th, 2012
For the first time the annual International Franchise Expo took place in New York City from June 15 until June 17, 2012, and it was a revitalized event worthy of The Big Apple. I visited on Friday, which has been the “slow day” of the Expo in the past during which suppliers could mingle and “network” with exhibitors. Accompanied by fellow Baltimoreans Jerry Blumenthal and Nick Courtalis of Business and Commercial Ventures
(business brokers) and Anne Paulus of 3D Signs
(signmakers), I arrived at 11:30 to find a truly packed exhibit hall!
The number of exhibitors was much larger than the sessions the past several years in Washington, D.C., and also included large franchisors such as Choice Hotels and 7-Eleven that I don’t remember seeing in D.C. However, as a counselor for emerging franchisors and for many franchisees of emerging systems, I always find innovative newer brands to be interesting. Here are a few that intrigued me, with the proviso that none of the descriptions are an endorsement of the franchise:
America’s Taco Shop: an authentic Mexican fast casual restaurant founded by America Corrales Bortin, who is originally from Culiachán, Sinaloa, Mexico. I met her husband Terry, who told me that America was named after the local soccer team in her Mexican town and not as any plan to immigrate, start a business or other ulterior motive. Nice coincidence! But seriously, their food is great.
Interpreters Unlimited: the first franchise system for the provision of interpretation services, including in-person, over the telephone, and by video conference, as well as document translation services. The company has some U.S. government contracts that the franchisee could fulfill in local markets. This “work from home” opportunity could be perfect for a good salesperson.
Joshua’s Shoarma Grill: founded by Israelis living in Europe, they have had some success there and are now seeking to grow here through area developers and masters. Have an interesting Middle Eastern fusion and healthy menu in a fast casual setting.
Team Makers: an education concept with group programs for children ages 5 to 12 to prevent bullying and other inappropriate behavior. The franchisee organizes and provides in-school workshops, after-school programs, birthday parties and carnivals or special events. This company is addressing an important societal need, and could be wonderful for a parent seeking to “re-enter the workforce” after focusing on child rearing.
Boneheads: A fast casual restaurant chain with a focus on fresh fish and Piri Piri spices, which are from Mozambique, Africa, were made popular by the Portuguese, and are now “all the rage” in Europe.
Gyu-Kaku: Japanese restaurant with a twist – the customers grill their own meat at the table! Sort of like Hibachi crossed with Fondue.
CRAL: home services with layers – mold remediation, duct cleaning, ventilation, and lead abatement, with the telephone number 1-888-KIL-MOLD. Seems to indicate strong cross-selling possibilities, although also some operational complexity. Could be good for a veteran with strong operations skills – like a sergeant!
Cool De Sac: A “family entertainment center” with a modern healthy menu, “play stations” and birthday parties programs. Sort of like an upscale “Chucky Cheeses”.
The Expo included many educational seminars and other resources for prospective franchisees and those considering the franchising of their own business methods. The same company also has events in Los Angeles in October (West Coast Franchise Expo) and in Miami in January (Franchise Expo South). For more information, visit http://mfvexpo.com/.
May 7th, 2012
While the continuous growth of Internet-based commerce has to lower prices for many consumer shopping for goods, it has been a major problem for many “bricks and mortar” retailers and also has caused concerns for product manufacturers who want to insure quality experiences for customers purchasing their goods. The question is the extent to which manufacturers may, under applicable U.S. anti-trust and competition law, take steps to protect the image of their brand as well as stopping the “e-tailers” from “free-riding” on the promotion efforts of traditional retailers.
U.S. law applicable to manufacturer’s application of retail pricing requirements has been in flux since the Supreme Court’s decision in Leegin Creative Leather Products, Inc v. PSKS, Inc., 127 S. Ct. 2705 (2007). In that decision, the Court overruled the holding in Dr. Miles Medical Co. v. John D. Park & Sons Co., 31 S. Ct. 376 (1911), that any agreement not to sell a product at below a specific minimum price was per se illegal under Section 1 of the Sherman Act, the U.S.’s primary antitrust statute.
In Leegin, the Court ruled that, in determining whether Section 1 of the Sherman Act is violated by a series of express agreements in which dealers promise not to sell a manufacturer’s product at below a specific retail price, courts would apply the so-called “Rule of Reason” to determine whether such an agreement actually causes harm to competition. To boil this down, such an agreement will not violate U.S. antitrust law if (a) the manufacturer does not have more than 25% market share for the sale of that type of product, and (b) the minimum pricing program is not the result of the demands of a single dominant retailer or an agreement among retailers purchasing a substantial percentage of the goods to demand that the manufacturer adopt such policies (as opposed to individual retailers’ complaints).
An example of the “dealer cartel” scenario was a 2008 ruling in Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., in which Mack Trucks terminated a dealer who repeatedly sought sales of products in other dealer’s primary service areas by undercutting the local dealers on price. After numerous dealers complained about that specific discounter, and after Mack demanded that the discounter comply with pricing guidelines, Mack Trucks finally ceases supplying the discounter. Because Mack Trucks does have appreciable market power nationally in heavy construction equipment, the U.S. District Court refused to grant Mack summary judgment and the Third Circuit Court of Appeals upheld that decision.
A fact pattern in which a dominant retailer allegedly coercing several manufacturers into minimum pricing requirements is a 2008 ruling in Babyage.com, Inc. v. Toys “R” Us, Inc., which a court refused to dismiss a claim by an Internet retailer involving alleged actions by “Babies ‘R’ Us“ with regard to the sale of strollers and other baby products. Specifically, Babies ‘R’ Us allegedly threatened to cease buying the manufacturers’ items or to give them extremely unfavorable shelf space and promotion unless the manufacturer enforced a minimum RPM program with regard to Internet retailers. Because Babies ‘R’ Us has sufficient market power to coerce the manufacturers with such threats, its actions may have harmed competition at the consumer level and therefore violated the Sherman Act.
If a manufacturer has appreciable market power in a product market, then the risk of a series of minimum RPM agreements increases, particularly if manufacturers that also have substantial market share implement similar minimum RPM agreements and this “parallel conduct” causes an overall increase in pricing for “high-quality” apparel of this type. Such contracts may still be permissible under U.S. antitrust law if the manufacturer can demonstrate that it is driven by the desire to maintain the brand’s profile in high end (and high volume) traditional retail outlets, which would not be possible without such a program. If it can make the business case that such a move actually will result in higher total volume sales on a wholesale basis, then such contract clauses may be “pro-competitive” as envisioned by the Supreme Court in Leegin.
Yes, but What About State Antitrust Laws?
As the Supreme Court emphasized in a 1989 opinion, “Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies”, and states are free to enact laws that further the purposes embodied by U.S. anti-trust law of “deterring anticompetitive conduct and ensuring the compensation of victims of that conduct.” California v. ARC America Corp., 490 U.S. 93 (1989). In somewhere between 11 and 14 different U.S. states, including California, Illinois, Maryland, Michigan, New York, New Jersey and Ohio, it is illegal to enter into any contract requiring another party to agree to not to sell a product or service below a specific price. The manufacturer cannot enforce an express minimum RPM agreement with any retailer that is headquartered in any of those states, and it is possible that such retailers could prevail in a state law civil antitrust claim if the manufacturer refuses to sell and the retailer can prove damages from not being able to obtain the manufacturer’s products.
Moreover, in eight states (including California, Illinois, Michigan, New Jersey and New York), consumers have standing as “indirect purchasers” to pursue claims for damages in the amount of inflated prices caused by resale price maintenance programs. The decision of the Supreme Court of Kansas in O’Brien v. Leegin Creative Leather Products, Inc., Case No. 101,100 (decided May 4, 2012), Kansas’ highest court reversed summary judgment against the plaintiffs in a class action case brought under Kansas’ anti-trust statute against the same manufacturer of Brighton leather goods that had won the U.S. Supreme Court victory in 2007. Under the Kansas law, the practice of implementing and enforcing a retail pricing policy to be a per se violation of Kansas anti-trust statute, which that court summarized as follows:
There are alternate theories under which a Kansas restraint of trade plaintiff may proceed [under the state’s statute]: A plaintiff may prove the existence of an arrangement, contract, agreement, trust, or combination between persons designed to advance, reduce, or control price, or one that tends to advance, reduce, or control price. Mere arrangements between persons are within the scope of the statute; a plaintiff does not have to show a relationship rising to the level of an agreement. In addition, it is enough to show that the arrangement is designed to or tends to control prices; a plaintiff does not have to show that the arrangement actually succeeds in increasing prices.
It remains to be seen whether other states with statutes that more specifically address resale price maintenance follow this opinion and find that a practice intended to maintain a brand’s retail pricing is a violation, even if it is not embodied in a formal agreement between the manufacturer and its retailers.
Manufacturer’s Unilateral Use of a Pricing Policy
If a manufacturer sells at wholesale through purchase orders or other less formal means than written dealer agreements, there is little need for any reciprocal written agreement with retailers. Instead, in accepting purchase orders a manufacturer might unilaterally state, “Our products will be delivered to you with minimum suggested retail pricing (“MSRP”) for each item. If you sell any of our products at below the MSRP, we reserve the right to refuse to supply you with our products at wholesale in the future.” Such a policy is not a considered a “contract, combination or conspiracy” in restraint of trade, but rather the unilateral act of the seller. United States v. Colgate, 250 U.S. 300 (1919). See also, Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1236 (10th Cir. 2006) (holding that similar “rights reserved” language in a standard written, bilateral distributor agreement constituted unilateral action permissible under Colgate).
California and New York courts have confirmed that proper implementation of a Colgate policy is not a violation of their state antitrust laws. State of New York v. Tempur-pedic International, Inc., 916 N.Y.S.2d 900 (N.Y. County Sup. Ct. 2011) and Chavez v. Whirlpool Corporation 93 Cal. App. 4th 363 (Cal. Ct. App. 2001). However, the New York Attorney General’s office appeal of the adverse trial court ruling in Temper-pedic is currently pending.
Another method of mitigating risks is to use a Minimum Advertised Price (“MAP”) policy, rather than MSRP. Such a policy would merely restrict the advertising of the product for sale below a specific price. It does not restrict retailers from discounting at checkout, whether at a physical location or the “shopping cart” of a website, if the discounting is evenly applied to all goods sold by the retailer and is not specific to the manufacturer’s products.
There are disadvantages to using a Colgate policy. First, the manufacturer cannot offer more favorable pricing or terms for retailers who explicitly agree to adhere to the MSRP, since that would turn the policy into a bilateral agreement. Second, the manufacturer’s sole remedy is to cease selling to the retailer without issuing any additional warning. Confronting the retailer and demanding that it comply with policy risks waiving the Colgate defense to a claim of unlawful conspiracy, particularly if (as is usually the case) the confrontation is prompted by complaining dealers. Under Colgate, the manufacturer is free to “cut off” the discounter after receiving complaints from other retailers (subject to the “dealer cartel” issue explained above), but it cannot try to coerce the “violator” into complying.
Kansas Supreme Court’s decision in O’Brien v. Leegin Creative Leather Products, Inc. demonstrates the difficulty of proving that a pricing program’s implementation was truly “unilateral” by the manufacturer. While acknowledging that truly unilateral conduct by “Brighton” by issuing a pricing policy and then cutting off violating retailers would not prove a “combination” that is necessary to violate Kansas’ antitrust law. However, the Court found that two emails from Brighton’s chief operating officer to retailers, one denying a retailer’s request to offer discounted pricing and another explaining why compliance with the policy was important for all retailers of Brighton products, was sufficient evidence to show a knowing “arrangement” between Brighton and independent retailers to maintain the prices paid by consumers to Brighton’s suggested retail price. That court was clearly influenced by the facts that Brighton has a substantial direct to consumer retail sales division, including its own retail stores in Kansas, and also that Brighton “cut off” at least one Kansas retailer after receiving complaints about its discount pricing from another independent Kansas retailer.
The one “inducement” that a manufacturer may be able to provide and remain within the Colgate exemption is promotional assistance to retailers who comply with MSRP or the MAP policy. If the manufacturer catches one of the retailers violating the policy, it can inform that retailer that it is no longer eligible for the allowance. The manufacturer should not “bargain” with the retailer after sending such a notice, i.e., agreeing to resume the assistance if the retailer agrees to comply with the policy. It can continue to supply the retailer and monitor its retail pricing and sales practices, and if that retailer starts complying then the manufacturer can resume providing promotional assistance. However, this type of program may be risky to use in the states identified above in which RPM programs are or may be per se unlawful.
Even if individual retailers’ complaints (or threats) have led the manufacturer to decide to implement an MSRP or MAP policy, when implementing the policy the manufacturer should make clear to all of its wholesale customers that they are not to discuss retail pricing among themselves and that the manufacturer has the exclusive right to determine what steps to take if a customer does not comply with the policy. The manufacturer should then put in place a program to monitor compliance with the policy, either through internal staff or through a third party monitor. These steps are important to avoid converting a vertical manufacturer to retailer restraint into a horizontal conspiracy with complaining retailers that could be a per se violation of U.S. antitrust law. This is especially true if the manufacturer also sells direct to consumers on a retail basis.
As an attorney licensed in Maryland and the District of Columbia, I am qualified to provide a summary on U.S. anti-trust law as it concerns this subject, whereas I do not provide legal advice on other countries’ competition laws. However, as a general matter most other countries have yet to follow Leegin and continue to treat any manufacturer practices designed to set minimum retail price levels as per se illegal, and given that disposition are unlikely to look favorably on Colgate-like arguments regarding unilateral conduct in “cutting off” a seller who sells below the desired minimum price. In addition, European courts have issued decisions indicating that restrictions on the re-sale of products through the Internet will generally be considered violations of European competition law. See Pierre Fabre Dermo-Cosmétique SAS (European Court of Justice, March 3, 2011).
There is some basis for a position that the competition laws of other countries will not be applicable to vertical pricing restraints in which both the manufacturer and their wholesale customers are small enterprises that do not have substantial market share in the relevant product types. However, an analysis of the applicable law of the foreign jurisdictions must be made through qualified counsel before a manufacturer pursues any programs to restrict minimum retail price.
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.
December 2nd, 2009
by David Cahn
With the recent boom in popularity of social networking websites, more and more companies are looking to these forums for ways to promote their business. Sites like LinkedIn, Twitter, Facebook and Yelp! are rapidly becoming the go-to resources for establishing and maintaining relationships, finding referrals, and conducting competitive recognizance. Blogs and consumer forums also are becoming more and more popular for sharing customer experiences – both good and bad – with a virtually unlimited audience.
I recently attended an International Franchise Association regional program near Washington, D.C., during which Paula Valentine, Senior Director of E-Commerce for Choice Hotels, presented an interesting summary of the uses of social networking by Choice Hotels and other businesses with a national presence. Ms. Valentine emphasized that expanding your Internet presence beyond the traditional website and online business listings can serve to: (i) reach current and potential customers on a more personal level; (ii) better enable you to track customer reviews and complaints; and (iii) help you to monitor the actions of your competitors.
When used in a professional manner, social networking sites can be valuable tools for reaching potential customers, and maintaining relationships with existing customers. Ms. Valentine noted the following examples of legitimate and professional uses of social networking forums:
- Posting business profiles on LinkedIn, Facebook, Yelp! and other true social networks to create a personality for your company and to promote your brand identity;
- “Tweeting” about innovations, developments and accolades;
- Offering discounts or specials to Facebook “fans” and Twitter “followers”;
- Searching social media websites for posts about your company;
- Posting courteous responses to posts about your company; and
- Maintaining a blog to post information relevant to your potential customer base.
Ms. Valentine stated that franchisors can also use Facebook as a cheaper alternative to the traditional franchisee intranet, and to promote interaction and feedback between and among franchisees and the franchisor’s support team. Likewise, franchisees can use social networking profiles to promote their businesses and give local updates, subject of course the limits imposed by their franchisors on online advertising and use of the franchisors’ trademarks.
Of course, all franchisees’ and employees’ use of social networking media should be carefully monitored to ensure the quality, accuracy and legality of each public statement. Remember, you are using the Internet because it allows information to spread quickly in a recorded audiovisual format—you do not want this to be used against you. Also, if you use Facebook to facilitate franchisee interaction, be sure to place limits on the types of topics discussed to avoid unintended disclosure of your confidential information.
Tracking Customer Opinions
Ms. Valentine also discussed how social networking websites can provide an easy and non-confrontational means for customers to share their opinions about a company’s product or service. By tracking relevant consumer websites and searching social media for references to its brand, products or services, a company can gain valuable insight into its public perception. In addition, Ms. Valentine stated that direct responses to posts – and even to the posters themselves – can go a long way toward building consumer confidence and lasting customer relationships.
Finally, Ms. Valentine noted how social media can also be used to conduct competitive recognizance on a variety of levels. Businesses can track their competitors’ uses of social media to make sure they are not falling behind the curve. They can also track customer complaints against competitors to look for trends and preferences among the body of relevant consumers.
Tracking competitors’ use of social media can also be used to make sure that your trademarks and copyrights are not being misappropriated or infringed. While there are certain competitive rights of “fair use”, enjoining unlawful misuse of your intellectual property is important – and can be essential – to protecting your legal rights. False and damaging posts may also be actionable under the law of defamation or as false advertising, and taking legal action to have such content deleted or rectified can also be essential to protecting the image and value of your brand.
A calculated and concerted social media campaign can be an invaluable tool for your business. Social media provide virtually limitless possibilities for promoting and protecting the interests of your company. By effectively using online social networking tools, you can take steps to ensure that your company maintains a reputation of quality and remains prominently on the front lines in the bid for your customers’ business.