Forward Franchising - Las Vegas, Nevada Franchise Attorney Matt Kreutzer

Reports From International Franchise Association Convention Cite Optimism For 2012

If you, like me, did not attend the 2012 IFA Convention, you may be interested in reading a couple of stories from those who did.  First, Nation's Restaurant News reports here on the top 3 takeaways from the convention. The second link, here, is to a more in-depth story from the same source.  The bottom line appears to be that, although franchisors will continue to face challenges to expansion throughout 2012, most are optimistic that this year franchise companies will see some rebounding growth.  I certainly hope they are right. 

Coalition for Interstate Tax Fairness & Job Growth Launches

Here is a press release from The Coalition for Interstate Tax Fairness & Job Growth, an organization formed to support the Business Activity Tax Simplification Act.  For more on the Business Activity Tax Simplification Act (which is supported by the International Franchise Association), read my blog post here.

Washington, D.C., Feb. 14, 2011 – The Coalition for Interstate Tax Fairness & Job Growth, a group representing the interests of small and large businesses nationwide, re-launched today with a new name, website and strategy to combat unfair state and local corporate income taxation. 

Formerly the Coalition to Protect Interstate Commerce, the Coalition for Interstate Tax Fairness and Job Growth is urging Congress to enact the Business Activity Tax Simplification Act, which makes clear that a state can impose corporate income taxes and similar taxes only on companies that have a meaningful physical presence in that state. The measure would help thousands of small businesses and millions of consumers by encouraging business growth and job creation. The proposal, which does NOT affect sales taxes, would also finally clarify in law traditional legal principles.

To better articulate its views and more thoroughly educate the public about the issue, the Interstate Tax Fairness and Job Growth Coalition is also unveiling a new website: www.interstatetaxfairness.com. There, the public, consumers, government officials, legal scholars and members of the media can quickly learn about the overly aggressive actions by some states to tax businesses that aren’t even located there and the bipartisan legislation designed to end the practice. The website helps users understand the issue with a state-by-state map of corporate income tax laws and a detailed set of examples of unfair state tax practices.

“As a newly re-launched organization, the Coalition for Interstate Tax Fairness and Job Growth will be even more effective in urging Congress to adopt the Business Activity Tax Simplification Act and ensure that all businesses – both small and large – are treated fairly,” said Jack O’Rourke, chairman of the group. “The stakes of doing nothing are too high. Businesses are being forced to pay these unfair taxes or undertake costly lawsuits to combat them and, as a result, are not investing in more employees, higher payrolls or new operations. That’s a loss for everyone and doesn’t make economic sense.”    

In addition to a new name and website, the Interstate Tax Fairness and Job Growth Coalition continues to add supporters in the business community. The Business Activity Tax Simplification Act, which was approved last summer by the House Judiciary Committee, is well on its way to passage in Congress. Its enactment this year is the Coalition’s No. 1 priority.

Supporters of the legislation can be found here: www.interstatetaxfairness.com/who-we-are/

Kansas City Franchise Business Network: Spring 2012 Meeting

The next meeting of the Kansas City Franchise Business Network is scheduled to occur on Wednesday, March 7, 2012 at the Kansas City office of Armstrong Teasdale, 2345 Grand Boulevard, Suite 1500, Kansas City, MO 64108. The topic of the meeting is "Effective Management of Litigation" and will feature guest speaker Marcus A. Banks, Senior Vice President - Litigation and Government Relations of Wyndham Worldwide Corporation.  Mr. Banks, who oversees all of the corporation's litigation, will discuss evaluating and assessing litigation risk, negotiating and resolving litigation (including pre-suit resolution strategies), and identifying and securing insurance coverage for claims. Other topics to be covered include strategies for managing discovery, as well as recommendations for limiting vicarious liability claims.     

This meeting of the Kansas City Franchise Business Network is being hosted by Armstrong Teasdale.  The Franchise Business Network is a program of the International Franchise Association.  For more information about the purpose and history of the Franchise Business Network, please visit the IFA's website.

Registration will begin at 11:45 A.M., with the program scheduled to start at 12:00 P.M. Lunch will be served.  The meeting is open to all members of the franchise community. There is no cost to attend, but please RSVP in advance to Mary Rodell at (800) 243-5070 ext. 7489, or mrodell@armstrongteasdale.com.

Can Holdover Franchisees Be Held Liable For Trademark Counterfeiting?

One of the most common lawsuits in franchising involves the “holdover” franchisee.  In these cases, the franchise agreement has either expired (because the term has ended, and the franchisee has failed to renew), or it has been terminated (usually due to an alleged breach of the franchise agreement by the franchisee).  The holdover franchisee, however, continues to operate his or her business as though nothing has changed and continues to use the franchisor’s trademarks and trade dress.

In a typical termination or expiration situation, a franchisee is placed on notice that the franchise contract is no longer in effect and is required to de-identify his or her business by removing all signs and other materials bearing the franchisor’s trademarks.  Additionally, it is mandatory under the contract for a terminated franchisee to alter the look and feel of the business (known as “trade dress”) to disassociate the former franchise from the franchise company.  These changes are required by the franchisor to ensure that the general public no longer associates the former franchised location with the franchise company. 

Sometimes, however, a franchisee will refuse to de-identify his or her business and will keep running it as though the franchise agreement was still in place.  Because the franchise contract has been terminated, however, the prior franchisee no longer has the franchisor’s permission franchisor to continue using the company’s trademarks, trade dress, systems, and methods of operation.  In those circumstances, the franchisor is almost always forced to seek a court order requiring the former franchisee to take down the signs, alter the trade dress, and otherwise force the holdover franchisee to comply with the post-termination obligations under the franchise contract.

Historically, courts have wrestled with the determination of the appropriate measure of monetary damages caused by holdover franchisees.  Under the United States Lanham Act (which protects trademark owners), a defendant in a trademark case can be found liable for either simple infringement – that is, unauthorized use of a trademark owned by another – or counterfeiting, which is using a false mark that is either “identical with, or substantially indistinguishable from, a registered mark.” 15 U.S.C. §1127. 

Lawsuit Regarding Strip Club Ad Highlights Importance Of Franchise Brand Management

A recent lawsuit filed by sandwich franchisor Capriotti’s underlines the importance of brand management for franchise companies. The franchisor sued its Las Vegas-based franchisee, seeking to terminate the franchise agreement and an injunction to prevent the franchisee from continuing to operate under the Capriotti’s name.

The franchisee is accused of engaging in an advertising campaign featuring the tagline "a match made in Vegas heaven: boobs and Bobbies." The allegation by Capriotti’s is that the franchise owner collaborated with the Las Vegas strip club Crazy Horse III to offer the Capriotti’s trademark turkey, stuffing, and cranberry sauce sandwich, the "Bobbie," during happy hour at the strip club. The problem with the attention-grabbing campaign, Capriotti’s claims, is that the franchisee never received permission from the company to run the advertisement. If the allegation is true, this very well could provide sufficient justification for termination of the franchise agreement.

Every well-drafted franchise agreement will have certain restrictions regarding the franchisee's ability to advertise. The franchisee will ordinarily be permitted to use any advertisements created by the franchisor's marketing department without obtaining advance permission. If the franchisee creates its own advertisements, however, the franchisor's written permission must first be obtained. Many franchise agreements will have a specific procedure for obtaining this written consent, including a time limitation for the franchise company to grant or deny permission to use the ad. Presumably, this is the provision that the Capriotti's franchisee has been accused of violating by failing to obtain the required approval.

The action by Capriotti's is understandable from a brand management point of view. The purpose of franchise agreement provisions that place limitations on a franchisee's ability to advertise is to protect brand integrity. If a franchisee is given carte blanche to use the franchise company's trademarks in any way that the franchisee sees fit, the overall brand image can be harmed if the franchisee is injudicious in the marks' use. In the Capriotti's example, the "boobs and Bobbies" ad could hurt the brand in the eyes of the public, which may not want to patronize a sandwich shop that associates with a strip club. Which is exactly Capriotti's point, as it contends in the lawsuit that the teaming up of the Capriotti's brand with an adult entertainment business will hurt the family-friendly reputation of the business.

The Capriotti's lawsuit provides important reminders for both franchisees and franchisors. For franchisees, the legal case underscores the absolute importance of obtaining franchisor permission and consent before using any marketing material that has not been created by the company's marketing department. For franchisors, the lawsuit is a reminder that it is critical for the franchise agreement to have appropriate controls for franchisee-created advertising, as well as strong remedies to address a franchisee's violation of those restrictions.

IFA Supports Business Activity Tax Simplification Act

One of the pieces of legislation currently pending before Congress that has the potential to significantly affect franchisors is the Business Activity Tax Simplification Act, or BATSA.  BATSA would clarify federal tax law by resolving the question of economic "nexus" that is required for a state to succesfully impose an income tax on out-of-state companies.  

As reported in my January 6, 2011 blog post, a number of states have begun taxing out-of-state franchise companies on income that the franchisors earn from their in-state franchisees.  Under the reasoning of these states, intangible property that a franchisor owns within the state – which can be company’s goodwill and the right to license its trademarks to in-state franchisees – creates a sufficient connection to the state to justify taxation on revenue generated within the state. Last year's KFC Corp. v. Iowa Department of Revenue case is only the latest in a line of cases that appears to validate this practice.  The United States Supreme Court's refusal to hear the KFC case appears to provide even further validation to this practice.

According to an op-ed piece in Roll Call by Reps. Bob Goodlatte (R-Va) and Bobby Scott (D-Va.), BATSA would provide a federal preemption law to prevent state departments of revenue from taxing out of state franchisors without a physical “nexus” in that state.  As the Congressmen state in their op-ed:

The legislation would clarify that a state or locality can’t levy a direct tax on a business unless the business has employees, an office or property in a state for more than two weeks during the year. The standard, if enacted, would reduce litigation, improve certainty and create greater investment in new jobs.

BATSA would apply to business-activity taxes, including income taxes and franchise taxes, but would NOT apply to transaction taxes, such as sales taxes. The famous, years-long battle over when sellers should collect state sales taxes on purchases made online is a separate question not affected by BATSA in any way.

BATSA is a pleasant anomaly in Washington: a thoroughly bipartisan bill with nearly as many Democrats as Republicans onboard. BATSA has also overwhelmingly been approved twice by the House Judiciary Committee.

The International Franchise Association is a strong supporter of BATSA, as it would lessen the administrative and financial burden on franchisors, who today face the very real threat of having to file income tax returns in each and every one of the states in which a franchisee is located.  To lend your support to the IFA's efforts urging passage of BATSA, contact Jay Perron at jperron@franchise.org. 

Recent Franchising Stories Focus On Funding And Incentives

At the beginning of 2012, the big story in franchising appears to be the same one that we have seen for the last several years: money.  Franchisors are still looking for answers to questions about growth in a time when it is difficult for prospective franchisees to find funding.  Are banks willing to lend money for small business?  What kind of qualifications does a prospect need to have to get a bank loan?  Are there good alternative sources for funding?  How can we attract new franchisees and support existing ones in a slumping economy?

There are a couple of good articles this week that demonstrate possible answers to these questions.  Yesterday's Wall Street Journal had an article relating to some of the creative incentives being given by franchisors to assist their franchisees in a continued down economy.  Papa John's and Denny's are establishing programs to lend money to their franchise owners, cut back on royalty fees, and assist owners in challenged or growth markets.  These are good examples of the types of programs that a franchisor can implement to help franchisees during challenging economic times. An article on restaurant-focused site MonkeyDish highlights the ways that small business owners can find funding in challenging capital markets.  This includes finding lending sources through relative newcomer Boefly.com (often called the "match.com" for small businesses), which has over 1500 participating lenders, and using middlemen such as Franchise American Finance and American Association of Government Finance, which can assist small business owners in wading through the red tape associated with Small Business Administration loans. 

Most prognosticators predict that in 2012, we will start to see economic growth.  One thing is certain: if more small business loans are made, the economy will get better.

Surprise! You Just Starred In Our Movie

One of my all-time favorite comedies is the movie Bowfinger, in which a down-and-out movie producer named Bobby Bowfinger (played by Steve Martin) makes a movie starring a well-known A-list actor named Kit Ramsey (played by Eddie Murphy) without Ramsey’s knowing participation.  Some of the best scenes in the movie occur when Bowfinger and his “crew” create situations around the increasingly-unhinged Ramsey, secretly filming his hilarious reactions to the ridiculous set-ups.  Apparently, life has (sort of) imitated art: in a recently-filed $3 million lawsuit, actor Jesse Eisenberg (star of The Social Network and Zombieland) claims that he was exploited in a similar manner by the producers of the direct-to-DVD movie, Camp Hell.

According to the lawsuit, in 2007 Eisenberg agreed to appear in Camp Hell as a favor to his friends.  He was on set for only one day of filming, and logged only a few minutes of total screen time.  Because he was only minimally involved in the movie, he was surprised to see that his face was prominently featured on the cover of the DVD, implying that he starred in the film.  His lawsuit asserts various California law causes of action, including claims for unfair business practices and publicity rights.  But, according to Hollywood law blogger Eriq Gardner, the lawsuit reads more like “a consumer class action, saying that the producers are ‘continuing to perpetrate a fraud on the public.’”

Overselling a famous actor’s involvement in a film is a common practice in the industry, although the Camp Hell example may be one of the worst offenders.  But, while there are agreements and rules among various creative unions in Hollywood relating to attribution and credit, there apparently aren’t any that specifically state the number of minutes of screen time that are necessary in a movie before an actor can be marketed as a film’s “star.” 

Fortunately, the franchising world has more explicit rules regarding how a franchise can be marketed and sold to potential franchisees.  Generally, the FTC Franchise Rule and a number of state laws require a franchise company to provide to a prospect certain types of disclosures regarding the business being marketed.  Through a legally compliant Franchise Disclosure Document, a possible franchise buyer will obtain a great deal of information about the franchise being sold, which information should support the marketing claims the franchisor makes generally.  Further, several states have specific restrictions on the types of statements that franchisors can make in advertising pieces, which restrictions are further designed to protect against misinformation to franchise buyers.  These laws work together to attempt to ensure that members of the public are not lured into buying a franchise based on puffery or overblown claims of success. 

It will be interesting to see how the Court handles Mr. Eisenberg’s lawsuit.  I wonder if the movie industry will, in the face of the Camp Hell situation, consider adopting more stringent rules about marketing actors?

I would love to hear from you -- have you ever watched a movie based on the claim that a movie was “starring” a certain actor, only to find out that the actor’s involvement was minimal?

New Law Boosts U.S. Employers' Costs For Deploying Workers To China

Foreign expatriates working in China are now required to participate in, and contribute to, China’s Social Security System under the recently passed "Interim Measures for Social Insurance Coverage of Foreigners Working within the Territory of China" ("Interim Measures"). Generally, the new law, which went into effect on October 15, 2011, forces expatriates working in China to contribute to the social security systems of both China and their home country and substantially increases the costs to employers for deploying workers to China.

Important facts to keep in mind in regards to the Interim Measures include:

• Both expatriates hired by local Chinese businesses (i.e. local hires) and expatriates hired in their home countries and dispatched to work in a Chinese branch or representative office of their employer (i.e. secondees) must contribute to China’s Social Security System.

• Both the employee and employer must make social security contributions. Contribution rates and the maximum amount of earned income the social security tax applies to are determined locally and thus vary depending upon the city in which an expatriate works. For example, an expatriate working in Shanghai must make an 11 percent social security contribution on the first RMB 11,688 (USD 1,843) of his or her monthly salary. The expatriate's employer must make a 37 percent contribution on the first RMB 11,688 (USD 1,843) of that salary. These figures are different for other cities including Beijing.

• Expatriates may start withdrawing payments from their social security contributions once they reach the statutory retirement age in China. If the expatriate leaves China before reaching the statutory retirement age, he or she may close their social security account and receive a lump-sum payment from their contributions.

• Failure to comply with the Interim Measures will result in stiff penalties. These range from 100 to 300 percent of contributions due, in addition to a daily late payment interest surcharge of 0.05 percent of the unpaid or underpaid contribution amount.

The McRib: A Marketing Success Story

For those of you who think I write too much about the success story of Domino's Pizza and its innovative marketing strategy, this blog post should provide some blessed relief.  A recent story in Inc. magazine talks about McDonald's advertising campaign for the McRib sandwich as a good example of great marketing. McDonald's has capitalized on the "rare" nature of the sandwich to engage with its audience.  This has inspired people to turn the hunt for the elusive McRib into something of a challenge, giving bragging rights to the person who is able to find it for sale (check out the unoffical McRib locator).  So, when the company does bring it back for sale chain-wide, interest in the sandwich reaches a fever pitch (even in spite of stories like this one).

If you are a McRib fan, you had better hurry.  According to the "McRib countdown clock," the sandwich is only available nationwide a little while longer...