Franchising Update - December 2010

International Franchise Association Items of Interest

Some quick takeaways from the 43rd Annual International Franchise Association Legal Symposium in Washington, D.C., a meeting of over 500 franchise lawyers:

  1. Tight financing continues to inhibit sales of franchises. Financing for franchisees was down over 40% in 2009 (from 2008). Also, new franchise systems were down significantly in 2009 from the peak years of 2007 and 2008.
  2. The trend continues toward sophisticated, multi-unit franchisees. In 2009, for the first time, a majority of franchise units nationally (53%) were owned by multi-unit franchisees, many of whom owned franchises in multiple franchise systems. Large, financially strong multi-unit franchisees are likely to continue to develop, and have significantly greater bargaining power and financial leverage with franchisors than single-unit franchisees.
  3. The use of Item 19 financial performance representations in Franchise Disclosure Documents (FDD) has almost doubled in the last five years, from less than 18% of all FDDs filed in 2004 to over 35% in 2009. We believe this trend is likely to continue.

Enforcement of the Red Flag Rules began on June 1, 2010

The Red Flags Rule requires certain businesses to develop and implement a written program to detect, prevent, and minimize the damage that could result from, identity theft. Franchisors may be covered by the Red Flags Rule if they are considered a “creditor” and have “covered accounts”. A “creditor” is any entity that regularly defers payment for goods or services or arranges for the extension of credit. Franchisors are creditors if they make loans to prospective franchisees, arrange third-party lending for prospective franchisees or bill franchisees for providing services. A “covered account” is a consumer account that allows multiple payments or transactions or any other account with a reasonably foreseeable risk of identity theft. A franchisor’s collection of payments from its franchisees in the ordinary course of business in connection with the operation of a franchise is not a “covered account”. So, a franchisor only has “covered accounts” if there is a reasonable and foreseeable risk of identity theft. If a franchisor is a creditor but does not have covered accounts, it is not required to comply with the Red Flags Rule. However, if a franchisor is a creditor with covered accounts, it must develop and implement a written identity theft prevention program. For more information about the Red Flags Rule, which began to be enforced on June 1, 2010, visit the Federal Trade Commission’s website at www.ftc.gov/redflagsrule or call Nicole Harrell at (757) 624-3306.

Confused About Franchise Ratings?

Entrepreneur Magazine’s Franchise 500; Franchise Times Fast 55; The Wall Street Journal; American Association of Franchisees and Dealers (AAFD). These sources, and many others, provide rankings or certifications of franchises. However, their criteria for their rankings (or certifications), and their resulting usefulness for potential franchisees, vary widely. For example, some rankings are based solely on system growth, some utilize proprietary ranking technology, others use franchisee satisfaction surveys. The AAFD certifies only those franchise systems whose agreements meet its criteria for fairness.

Because these methodologies vary widely, they are of varying utility to potential franchisees. Those systems that attempt to evaluate and rank franchise systems based on franchisee satisfaction, in our humble opinion, are of vastly more utility than rankings based upon system growth. However, all ranking systems should serve only as a starting point for any potential franchisee’s own due diligence process, in which the potential franchisee thoroughly examines the relative advantages and disadvantages of each franchise system under consideration. For more information contact Steve Story at (757) 624-3257 or Nicole Harrell at (757) 624-3306.

You Have a Federal Trademark, Now What?

You have been through the long process of registering your trademark and have received the official certificate from the United States Patent and Trademark Office (PTO). You have probably also received some “official looking” correspondence and are not sure what to do with it. This “official looking” correspondence is likely from one of several private companies asking you to sign up for their monitoring services, offering to list your registration in their database for several thousand dollars or offering to renew your trademark – this correspondence is not from the PTO and you can safely ignore this correspondence.

Now that you have registered your trademark, you want to make sure to protect it and keep the registration active. Between the 5th and 6th year after your trademark was registered, you must file a Section 8 Declaration of Continued Use. This declaration is a sworn statement that the trademark is in use in commerce. The PTO will cancel your trademark registration if the Section 8 Declaration of Continued Use is not filed in a timely manner. Between the 9th and 10th year after your trademark was registered, you must file a Section 9 Renewal Application along with another Section 8 Declaration of Continued Use.

In addition to the required filings to maintain your trademark registration, you have the option of filing a Section 15 Declaration of Incontestability. An “incontestable” registration is conclusive evidence of the validity of a registered trademark, of the registration of the trademark, of the owner’s ownership of the trademark, and of the owner’s exclusive right to use the trademark with the designated goods and/or services. A Section 15 Declaration of Incontestability may not be filed until the trademark has been in continued use in commerce for at least five consecutive years after the date of registration. If you elect to file a Section 15 Declaration of Incontestability, it must be executed and filed within one year following the 5-year period of continuous use of the trademark in commerce after registration of the trademark.

If you have any questions about the status of your trademark or questions about the registration, maintenance and renewal process, please contact Nicole Harrell at (757) 624-3306.

Guidance on Endorsements and Testimonials

The Federal Trade Commission recently released its Guides Concerning the Use of Endorsements and Testimonials in Advertising. These Guides are the FTC’s interpretation of existing law and are intended to help advertisers keep their endorsement and testimonial advertisements in compliance with the law. For the first time, these Guides cover testimonials and endorsements on the internet, such as by bloggers. For more information about the Guides or the laws relating to advertising, please contact Steve Story at (757) 624-3257.

Recent Engagements

The Franchise Section has recently been involved in the following matters:

  • Serving as franchise counsel to prepare the Franchise Disclosure Document, Franchise Agreement and related agreements for MiniLuxe, an upscale nail salon based in Boston, Massachusetts, which is now registered to offer franchises in New York and Rhode Island.
  • Obtained a refund of $75,000 in initial franchise fees paid by a franchisee to a franchisor who failed to complete its contractual obligation to timely locate suitable sites for location of the franchise.
  • Evaluation of a Tilted Kilt® franchise offering for a new Hampton Roads franchisee. Be on the lookout for a Tilted Kilt Restaurant opening soon.
  • Evaluation of a PostNet® franchise offering for a new Hampton Roads franchisee, which recently opened in the Ocean View section of Norfolk.
  • Evaluation of a School of Rock franchise offering for a new Hampton Roads franchisee. Hampton Roads’ only School of Rock franchise opened in Norfolk in September 2010.

Honors and Awards; Writing Engagements and Speaking Engagements

  • Steve Story was recently named to Best Lawyers in America 2011 (Franchise Law) and as a Virginia Super Lawyer 2010 (Franchise and Distribution Law). He is the only Hampton Roads lawyer so honored.
  • Nicole Harrell spoke at the International Franchise Association's 43rd Annual Legal Symposium on disclosure issues. Ms. Harrell will also serve a two year term on the International Franchise Association Legal Symposium Task Force.
  • Steve Story recently authored an article for Small Business Insight of Hampton Roads on how to franchise a business. The article is posted on our website and may be accessed by clicking here.

Suggested Reading

The Franchise E-Factor by Greg Nathan. To learn more about Mr. Nathan, the Franchise Relationships Institute or this publication, visit www.franchiserelationships.com.au.

Franchising Blog

Kaufman & Canoles has recently begun a blog, with posts on a variety of issues, including franchising issues. To view the blog, click here.

Upcoming Events

February 13-16, 2011 – International Franchise Association Annual Franchise Convention, Las Vegas, Nevada

April 1-3, 2011 – Franchise Expo, Washington, DC


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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