June 2009

Franchise & Business Law Group and its founder, David Cahn, will participate in Maryland’s largest annual business event, the MD Biz Expo, on June 16 and 17 at the Baltimore Convention Center. Free tickets are available to associates and clients interested in taking advantage of this valuable two-day convention which focuses on supporting the entire Maryland business community.

Cahn will present a seminar on the topic of Franchising and the Role of the CPA on Wednesday, June 17 from 4:10 p.m.-5:00 p.m. The seminar will provide an overview of franchising and its regulation and address how a CPA and/or business advisor can add value to a client who is exploring franchise opportunities. Other issues to be covered in Cahn’s seminar will be business planning, auditing and tax, from the perspective of a non-CPA attorney whose primary practice is counseling franchisors and franchisees.

MD Biz Expo features more than 40 workshops, over 100 exhibits, extensive networking opportunities and four general sessions. Free tickets are available on the MD Biz Expo website: http://www.mdbizexpo.com/register/attend.aspx.

PERSPECTIVES...from the desk of David Cahn

IFA Legal Symposium 2009 Provides Timely “Food for Thought”
The annual International Franchise Association Legal Symposium is billed as the conference “Where Legal and Business Minds Come Together,” and from this slogan was truer than ever in 2009. Some highlights this recent event in Washington, D.C. were:
• There is still interest among private equity firms to invest in well-run franchising companies. For example, Roark Capital Group of Atlanta is invested in 14 different franchise brands and was the primary sponsor of the event.
• For franchisors seeking to position themselves to attract venture capital or private equity investment, or to sell the company, two key factors for success are: (1) strong “unit-level economics” at the franchise level, i.e. successful franchises; and (2) being able to prove your past compliance with franchise sales laws and having all contracts and franchisee files well organized for inspection by the buyer. A Roark representative said that an inability to provide legal compliance documentation will cost a seller at least 10% off of the purchase price.
• “Everyone” is negotiating lease concessions with landlords – are you helping your franchisees to do so? If you are a franchisee or business owner, have you renegotiated your lease?
• Successful franchisors make sure that their franchisees provide them monthly or quarterly profit and loss statements and then provide valuable feedback on how franchisees can improve their bottom line. One way to get cooperation on this is to provide only those who send in the periodic P & L with a report comparing franchisee performance (anonymously) and establishing benchmarks for profitability, such as “cost of labor should be 27% of gross sales.”
• More than 40% of franchisors who registered to sell franchises in Maryland provided some sort of Financial Performance Representation (or “Earnings Claim”) in their Franchise Disclosure Document. Illinois reported a similar finding among franchisors registering in that state. This is a major jump from the typical ratio of just 20 – 25% just five years ago.
• Lots of franchisors are having problems with contract defaults this year. Franchisors should not compromise on the quality of franchised operations and probably should increase quality control inspections. Franchisors are offering financial compromises for franchisees, including royalty forgiveness if they stay in business and are “full payers” in future years.
• What are you doing to make sure that your employees (and you) communicate effectively through e-mail? When communicating with business partners (such as your franchisor or franchisees), try to keep your comments as objective and factual as possible.
• If you charge (or pay) royalties on a percentage basis, is there regular audit schedule to make sure that franchisees are honestly reporting gross sales? Little Caesars (the pizza franchisor) audits each of its franchisees every 12 to 18 months.
• Does your attorney really get to know your business and its needs? Does she advise you as to types or levels of risks in taking courses of actions, or just say “No” all the time?
In short, franchising remains a vibrant and flexible way to grow a brand nationally and internationally, but these challenging times are forcing franchisors and their advisors to be creative to keep their brands moving forward. At FBLG we continue to invest in our future and stand ready to act as your advisor to help franchisors and franchisees continue to progress and succeed.

General Assembly Reinstates Ban on Minimum “Resale Price Maintenance” in Maryland
David L. Cahn and Jeffrey S. Fabian

Legislation recently passed by the Maryland General Assembly and signed by Governor Martin O’Malley has amended the Maryland Antitrust Act to nullify the effect of a recent decision by the United States Supreme Court’s within the state of Maryland.

Prior to the Supreme Court’s decision in the case of Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007), Leegin it was “per se unlawful” for manufacturers and wholesalers to set minimum prices for resale of their products. While setting maximum retail prices was permitted, setting minimum retail prices was expressly outlawed. Under Leegin, however, under U.S. antitrust law minimum pricing restraints are now judged by a “rule of reason” standard, under which courts must analyze whether a minimum pricing restraint amounts to “an unreasonable restraint on competition,” or whether it has “pro-competitive effects” that benefit the interests of consumers. Effective July 1, 2009, Maryland has reinstated the “per se prohibition” in this state and has extended it to the provision of services under a service mark license agreement.

Leegin involved a dispute between a high-end leather products manufacturer and one of its retail distributors. Leegin, the manufacturer, instituted a policy of refusing to sell its products to retailers who discounted below Leegin’s suggested retail prices, in exchange for limiting the number of retailers to whom it sold the products. When PSKS, a retailer, lowered its prices below this threshold, Leegin cut off its supply to PSKS. PSKS filed suit alleging that Leegin’s actions violated U.S. antitrust law. After the lower federal courts affirmed a substantial jury verdict in PSKS’s favor by applying the per se standard, the Supreme Court reversed and remanded the case for retrial under the new rule of reason analysis.

The Maryland legislation amends the Maryland Antitrust Act to provide that “a contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade.” Thus, the Bill will not only again make “resale price maintenance” per se unlawful in Maryland, but also extend the per se treatment to services provided under a common service mark. The application of the per se ban to pricing for services was not clearly established under the Supreme Court’s precedent prior to Leegin, and this extension could have widespread implications for the world of franchising in particular. Business format and service business franchisors would be restricted from setting minimum prices in the same manner as wholesale product distributors.

Currently pending before the U.S. Congress is the “Discount Pricing Consumer Protection Act”, which would overturn the Leegin decision in the same manner as the Maryland legislation. This same bill was introduced midway through the last Congress and was co-sponsored by former Senators Joseph Biden and Hillary Rodham Clinton. Thus, the proposed Maryland statute may ultimately align with federal law, but for now Maryland is on the forefront of the backlash against the Leegin decision.

The proposed legislation favors downstream retailers, who, under the per se ban on minimum resale price maintenance, are able to retain more control over the pricing of their products and services. In the context of franchising, this can be particularly important for franchisees that operate in markets where competitive prices are below the national standard. It may be detrimental to the ability to add new suppliers in certain types of product markets, however, since those suppliers may not be able to convince successful retailers to stock their products without providing some protection on minimum resale prices so that they can avoid “undercutting” by discount retailers or Internet sellers.