September 25, 2012

Focused on Franchise Law - September 2012

Lewitt Hackman

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BARRY KURTZ AND KURTZ LAW GROUP FEATURED IN LOS ANGELES DAILY JOURNAL

On September 14, 2012, Barry Kurtz and Kurtz Law Group were showcased in the Los Angeles Daily Journal article "Franchise Player". Click here to see the article.

FIRM VIDEOS NOW ON WEBSITE

Our firm's new website videos now appear at www.kurtzfranchiselaw.com. The videos were produced by Richard Clayman at www.cloudwalkerfilms.com and highlight the firm's franchise law practice.

FRANCHISOR 101: EXPLORING EXEMPTIONS UNDER CALIFORNIA'S FRANCHISE INVESTMENT LAW-PART 2

Franchisors claiming exemptions must be certain they truly qualify-a determination that can sometimes be difficult. As pointed out in last month's discussion, some California exemptions relieve the franchisor from registration and presale disclosure requirements, while others merely excuse the franchisor from registration. These exemptions release a franchisor from both requirements:

A: Experienced Franchisee Exemption: An offer is exempt from registration and disclosure if 1) one or more owners of at least 50% of the purchaser, not controlled by the franchisor, has 24 months experience w/in the last 7 years conducting the financial and operational aspects of a substantially similar business; AND, 2) the franchisor files the specified notice with the Department of Corporations (the "DOC") and pays the required fee within 15 days of the sale.

B: Insider-Controlled Franchisee Exemption: An offer is exempt from registration and disclosure if 1) one or more owners of at least 50% of the purchasing franchisee, not controlled by the franchisor, has been, within 60 days of the sale, an officer, director, managing agent or 25% owner of the franchisor for at least 24 months; AND, 2) the franchisor files the specified notice with the DOC and pays a fee within 15 days of the sale.

C: Additional Franchise Exemption: An offer is exempt from registration and disclosure if 1) the purchaser is an existing franchisee or an entity that has an officer, director, managing agent or 25% owner who is an existing franchisee and who has 24 months experience within the last 7 years conducting the financial and operational aspects of a substantially similar business; AND, 2) the franchisor files the specified notice with the DOC and pays a fee within 15 days of the sale.

D: Accredited Franchisee Exemption: An offer is exempt from registration and disclosure if each purchasing franchisee is either 1) an Entity with total assets over $5,000,000; OR, 2) an Individual with a net worth over $1,000,000 or gross income over $300,000 individually, or $500,000 with his or her spouse; OR, 3) an insider of the franchisor or its corporate general partner; AND, 4) the franchisor reasonably believes the purchaser can evaluate the risks and merits to protect his interests; AND, 5) the purchasing franchisee intends to conduct the business, not resell or distribute it; AND, 6) the initial investment does not exceed 10% of purchasing franchisee's net worth; AND, 7) the franchisor files the specified notice with the DOC and pays a fee in advance of the sale.

The sale of a franchise erroneously believed to be exempt is a sale of an unregistered franchise forbidden by California law. See the attached summary of California franchise exemptions.

FRANCHISEE 101: SAY "NO" TO UNIFORM PRICING AND PROMOTIONS MANDATES

After Steak N Shake Enterprises, Inc. ("SNS") entered into 5 franchise agreements (the "Franchise Agreements") with Stuller, SNS adopted a policy (the "Policy") requiring franchisees to "follow set menu and pricing ..., and to offer all company promotions as published." Stuller refused to comply with the Policy because, Stuller said, compliance was not required under the Franchise Agreements and mandating compliance was contrary to the company's long standing policy, as stated in SNS' FDD, of allowing franchisees to set their own pricing. SNS threatened to terminate the Franchise Agreements, but the district court granted Stuller a preliminary injunction. On appeal, SNS argued it could set a pricing and promotions policy to maintain a uniform "System". But, neither the definition of "System" in the Franchise Agreement, nor the operating manual stated uniform pricing or mandated promotions were intended parts of the "System". According to the 7th Circuit Court of Appeals, "While the Illinois Franchise Disclosure Act ("IFDA") provides that a marketing plan or system can include specification of price [or promotions], it does not require [they] be part of the franchise agreement."

SNS also argued that pricing and promotions were, by law, required elements of a franchisor's "System" under the IFDA. In rejecting this argument, the court held that while price and promotions may be part of a franchisor's "System," neither will be unless intended by the parties to the franchise agreement. The court found that here, since they were not included in the definition of "System" in the Franchise Agreements and because of SNS's long standing policy of allowing franchisees to set their own pricing, they were not intended as part of the "System." The court said SNS would likely violate the terms of its franchise agreements if it enforced the Policy and upheld the lower court's injunction prohibiting SNS from terminating Stuller's 5 Franchise Agreements.

Illinois franchisees will likely take another look at their franchise agreements and operations manuals to see whether price and promotions are specifically listed or required as part of their franchisor's "System".

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.