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Legal Eagles sound off on hot topics

Big Trends to Watch
What is the biggest trend you’re watching in the next couple of years?

"Franchisors simplifying their franchise offering and their presentation of that offering is a major trend that I see accelerating in 2018. I am proactively working with my franchisor clients to simplify the offering and therefore sell more franchises.”

—David Cahn, Whiteford Taylor & Preston

"In 2019, Canadian trademark laws will be amended to eliminate the requirement that you must actually use a trademark in order to get it registered. It will be interesting to see how many brands take steps to apply for trademarks which they might never even use, just to make sure that nobody else beats them to it.”

—Chad Finkelstein, Dale & Lessmann

"Continued consolidation, especially by private equity and other investors, acquiring multiple franchise systems. Our approach is to counsel caution and due diligence, especially regarding impact on franchisees, who may be unhappy, leading to systemic strife, possible litigation.”

—John Dienelt, Quarles & Brady

"A significant trend is the increasing interest on the part of franchisees to form formal associations of franchisees for the particular brand in which they are operating. In that connection, we are also pleased to see that franchisors, in general, appear to be more open to recognizing, and sometimes even welcoming, associations of franchisees, and working with them collaboratively to address issues of common concern that will benefit the system.”

—J. Michael Dady, Dady & Gardner

"Franchisors appear to be bullish on pushing up their profits. Area developers and sub-franchisors are vulnerable in many systems because franchisors are looking to oust them and take their profits. We’ve gotten three preliminary injunctions against termination or non-renewal in the last month and intend to keep doing the same, if necessary.”

—W. Michael Garner, Garner & Ginsburg

 

The NLRB and Joint Employer
The topic du jour of 2016 has eased, but with some hiccups. What does the future have in store for joint-employer and National Labor Relations Board considerations?

"The NLRB has vacated its Hy-Brand decision and, for now anyway, Browning-Ferris is again operative law. Franchisors should not be overly alarmed. For the NLRB, in its touchstone franchisor-as-joint-employer proceeding against McDonald’s Corp. (very much grounded in the Browning-Ferris decision’s approach), recentlhy announced plans to seek a settlement with McDonald’s instead of continuing to pursue its three-year-old lawsuit that accused the QSR chain of being a joint employer of its franchisees’ employees co-liable for those franchisees’ labor law violations. And we are also quite confident that the recent NLRB announcement will only result in a subsequent reversal of Browning-Ferris through one avenue or another.”

—David Kaufmann, Kaufmann Gildin & Robbins

"While joint employer is certainly not dead, I think the immediate sting that the franchise community was preparing for is no longer so immediate. However, I do think that franchisors and franchisees and those connected to the industry will work hard this year to make sure that there is no retraction towards the progress made on clarifying the issue of joint employer over the last few months.”

—Justin Klein, Marks & Klein

 

FASB Changes
What do new Financial Accounting Standards Board rules mean for franchise systems?

"I’m watching to see how franchisors and regulators will react to the financial statement changes required by FASB ASC 606. Will franchisors revise fee structures in order to recognize more revenue upfront? Will regulators understand and adjust to the changes; or will they require an increased number of deferral, bond or escrow arrangements? April should be interesting. I don’t think it will be pretty.”

—Michael Levitz, Drumm Law

 

Sexual Harassment
With the #MeToo movement and other discussions bringing sexual harassment into the limelight, how do you approach the sensitive topic?

"I always remind clients that sexual harassment claims are not going to come sealed in a pretty little envelope marked ‘Sexual Harassment Claim.’ You need to pay careful attention to what your staff and crew are telling you.”

—Stephen Cohen, Stephen Cohen Law

"Some years back I defended the CFO of a franchisor accused of this, and managed to keep the situation quiet and the CFO kept his job. Writing a large check solved a lot of problems. Not sure the CFO would be as lucky today.”

—Carmen Caruso, Carmen D. Caruso Law Firm

"You must be as proactive as you can be and, when it seems inevitable you are reacting, you need to move quickly, decisively and with sensitivity to the allegations.”

—John Dienelt, Quarles & Brady

"Our advice is not to hope it doesn’t touch them. Policies addressing harassment must be reviewed and updated. It is not enough to follow guidelines that provide regulatory compliance. It is important that those policies speak to all staff, that there are no impediments to reporting, and that these policies are reiterated with total sincerity. People must be able to work and achieve their potential in the workplace environment. This applies to diversity policies as well.”

—Allan Dick, Sotos LLP

"One client told us they were implementing a system of getting waivers from their employees because it’s bound to happen. We advised them that’s a bad idea ...”

—Justin Klein, Marks & Klein

"To be brutally honest (and sexist), men need to get their collective mind set to the place where they acknowledge the value of each person with whom they deal because of the person’s quality of character and work ethic and not because of her booty. As humans, we cannot ignore the fact that we are sexual—but like so much in life, there is a right and wrong way to go about it. To paraphrase MLK: one must judge another by the content of his or her character and not by the way s/he fills out one’s clothing.  

Frankly for me, if a client does not believe in this, the person is not a client.”

—Michael Katz, Corporon & Katz

 

M&A
What advice do you have for clients approaching a large transaction in this hot mergers & acquisitions market?

"One, put on your seat belt. During the 20 years that I have been doing M&A deals, the deals have changed a little, but client expectations have changed a lot! In recent years, I’ve noticed a trend: Clients expect M&A deals to close within days after negotiations start. So, I generally tell clients that I will try to push the deal as quickly as humanly possible, but that they should fasten their seat belt, and sit back because it tends to be a long ride.

Two, follow the money. Often M&A negotiations will get caught up in complex details. I like my clients to remember that like most things in business, M&A negotiations really are just about one issue:  money. How much risk (money) are you willing to take, in exchange for how much benefit (money). So, don’t get too caught up in the details, and try to keep your focus on the goal.”

—Elissa Deitch, Drumm Law

"It has been very interesting to see franchise growth patterns in many franchise systems that are similar to pre-recession times. It’s creating an interesting paradox—on one hand there’s a lot of excitement in the private equity community about tapping into some fast-growing systems, but at the same time there’s some fear about the sustainability of those systems. It has led to some very interesting discussions.”

—Beata Krakus, Greensfelder, Hemker & Gale

 

Menu Labeling
It’s been delay after delay and change after change, so what is going on with menu labeling?

"Clients operating in the foodservice and hospitality sectors are confused by the menu labeling moving targets. Delays, then comment periods; and just when it appeared that the final rule would take effect, it was delayed and again delayed. The law is now scheduled to become effective on May 7, but legislation just passed in the House, if enacted into law, will result in another delay, and more changes.

To be fair, H.R. 722, passed in the House on February 6, would make some revisions favorable to the industry, like giving operators flexibility in the way calories for multi-serving menu items may be presented; and eliminating a private right of action, precluding class action litigation on account of violations.”

—Michael Levitz, Drumm Law

 

Odd Jobs
What’s the most interesting or unique legal issue you’ve worked on in the past few years?

"Are franchisee’s listings on third-party websites such as Yelp, including ‘star ratings’ and customer reviews, assets that the franchisee can keep at the end of the franchise term as long as the franchisor’s trademarks are removed? This was a key issue in negotiating an agreement between my franchisor client and a departing franchisee.

The franchisee wanted to avoid the post-expiration non-compete, and my client was willing but wanted the franchisee to have to ‘start over’ in the business and not trade on goodwill developed under the franchise. There was no case law that we could find governing that internet issue. The agreement struck was a compromise in many respects, and of course that may lead to litigation in 2018 between the former franchisee and my client.”

—David Cahn, Whiteford Taylor & Preston

"The Simon / Starbucks lawsuit has put the question of enforceability of operating covenants back on the map. This needs to be watched carefully given the volatility of the industry.”

—Stephen Cohen, Stephen Cohen Law

"We’re seeing clients who have launched a franchise without the use of an attorney using a template FDD from unethical consultants. It is a real problem when franchisees get signed up, sometimes even in registration states in clear violation of state and federal law. Fixing those systems and trying to clean up the mess is both challenging and rewarding when done right. It seems over the last few years more and more unscrupulous consultants are helping people franchise their business while steering them away from getting proper legal advice and guidance. It’s a dangerous trend that negatively impacts the entire industry.”

—Tom Spadea, Spadea Lignana

"Restaurants, in particular, embracing the opportunities presented by and seeking to understand the challenges posed by cannabis legalization. What’s interesting is that we are all learning this new frontier together with equal amounts of experience, or lack thereof.”

—Chad Finkelstein, Dale & Lessmann

 

New Legislation
We’re over a year into the presidency of Donald Trump, and tax reform has been the big legislative change thus far. What do you see coming from Washington and the statehouse?

"Unfortunately it would be surprising if the U.S. Senate acts on the Save Local Business Act, H.R. 3441, as passed by the House, since it has not yet been referred to any Senate committee and the Senate’s Republican leaders likely will focus on completing other legislation that has a larger public impact. So other than perhaps a few additional state laws protecting the franchise relationship from joint employer, I do not expect great change over the next year.”

—David Cahn, Whiteford Taylor & Preston

"The tax cut has had a dramatic impact on optimism. The first few months of 2018 have been record-breaking in terms of our clients wanting to do new deals. The general pro-business attitude and pull back on over-regulations has also had a dramatic impact on optimism, which is a key driver for investment and new projects. For the first time in many years, legislative changes are driving optimism instead of fear.”

—Tom Spadea, Spadea Lignana

 

NASAA Item 19 Guidelines
Does new guidance from the North American Securities Administrators Association means uniformity in the Item 19?

"There is some anxiety about the new Item 19 guidelines. They are not necessarily that difficult to comply with, but the proof is in the pudding—how they will get interpreted by state examiners. I suspect there may be more comments on Item 19 this year than typical, which may make the annual renewal stressful to many franchisors.”

—Beata Krakus, Greensfelder, Hemker & Gale

"The Item 19 disclosure is always confusing. When a prospective franchisee tries to compare them from system to system, there wasn’t an easy way to do that. Hopefully with the new NASAA Guidelines for Item 19 there will be more uniformity that will make it easier for a prospective franchisee to compare different systems’ Item 19.”

—Nancy Lanard, Lanard and Associates

 

CONTENTS: Legal EaglesHot topicsThe Consolidators • The New ClassThe Hall of Famers

 

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