I attended the 47th Annual American Bar Association Forum on Franchising a few weeks ago. This year’s theme, “Franchising Heats Up,” was appropriate both for the location (Phoenix) and the content. This year, there was a huge focus on managing franchisor-franchisee relationships from a contractual, regulatory, and operations perspective. The key takeaway is proactively managing legal risk by establishing a company culture focused on partnerships and mutual respect and embedding that culture into disclosures, contracts, brand standards, operations, consumer relations, and regulator interactions. By doing so, franchise systems are more likely to have “cool heads” at the table when things “heat up.”
The following are my key takeaways:
- Federal and state regulators are attempting to improve transparency and efficiencies: Representatives from the Federal Trade Commission (FTC) and state regulatory agencies from Maryland, California, and Washington provided regulatory updates and practical franchise registration guidance. Key state regulatory updates include the enactment of California Senate Bill No. 919, which requires franchise brokers to register with the state and provide standardized disclosures, and NASAA’s proposed Model Franchise Broker Registration Act, which aims to regulate franchise brokers across states. The FTC has a new webpage dedicated to franchising located at www.FTC.gov/franchise. Filing updates highlight the development of California’s new online filing system, FRANSES, which aims to improve the efficiency and transparency of the franchise filing process. Minnesota updated its electronic filing system, ComOnline, to enhance user experience. Finally, state regulators also offered practical advice on best practices for preparing and submitting Franchise Disclosure Documents (FDDs) to improve regulatory interactions in the filing process and increase the efficiency of the approval processes.
- Franchisors and Franchisees must be mindful of the development of unfair and deceptive trade practices: The FTC is actively addressing unfair and deceptive practices that impact franchising to ensure a fair and competitive market. The FTC has issued policy statements, guidance documents, and/or proposed rules to protect franchisees and consumers. For instance, the FTC has warned franchisors against using contract provisions restricting franchisees from communicating with the government about potential law violations. Additionally, the FTC has proposed rules, making it easier for consumers to cancel recurring subscriptions or membership plans and fair disclosure of “junk fees,” and privacy of personal information. The bottom line: Franchisors should pay attention to the FTC’s recent actions on its relationship with their franchisees and its brand standards as applied to the ultimate consumer.
- Franchisors should strategically navigate joint-employer and vicarious liability issues: By now, everyone should know that joint-employer is a big issue in franchising. To address joint-employer and vicarious liability concerns, businesses should clearly define the independent relationship between franchisors and franchisees, focusing on the results, not the means, through the franchise agreement and brand standards rather than employment and operations practices. Franchisors should limit direct involvement in franchisee employment decisions and day-to-day operations, provide training to ensure compliance, and maintain comprehensive documentation and insurance coverage to protect against potential claims. Regular audits and consultations with an attorney and HR professionals can also help ensure ongoing compliance and mitigate risks.
- Franchisors should invest in comprehensive reviews of their governing documents: Franchisors should not fall into the trap of the habitual annual review and revisions of FDDS and Franchise Agreements, especially when a Franchise Agreement has a lengthy term. FDDs, Franchise Agreements, Brand Standards, and Operations Manuals are dense and should be written so that the average franchisee can easily comprehend them. Additionally, regulations and court decisions are changing franchising as fast as technology and operational innovations. Annual comprehensive reviews and revisions of these key franchise documents are crucial to adapting to these changes, ensuring the long-term success and stability of the franchise system, and improving franchisor-franchisee relationships with transparent communications.
The insights from the 47th Annual American Bar Association Forum on Franchising underscore the critical importance of fostering a collaborative culture within franchise systems. By prioritizing mutual respect and clear communication, franchisors and franchisees can navigate the complexities of their relationships more effectively. As regulatory landscapes evolve, staying informed and proactive in compliance efforts will be essential. Embracing these principles not only mitigates legal risks but also strengthens the overall health and sustainability of the franchise system. Ultimately, a commitment to partnership and transparency will pave the way for long-term success and growth in the franchising industry.
