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Penalties Can Be Steep for Franchise Law Violations


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On a private bus tour hosted by Gray Plant Mooty Monday evening, the Willard Hotel's lobby, shown above, was said to be the source of the word "lobbyists," because President Grant would hang out here and everyone would come to petition him. Others dispute the tale. The IFA's Legal Symposium runs May 7-9.

Library of Congress

Franchise attorney Beata Krakus has a sure-fire way to make certain her clients stay awake when she conducts training on compliance with a myriad of franchise laws. “One of my first slides is a picture of a guy behind bars. That tends to get everyone’s attention real quick,” she said at a presentation yesterday.

Krakus, with Greensfelder Hemker & Gale, spoke Monday at the International Franchise Association’s Legal Symposium in Washington, D.C., with Martin Cordell, a senior enforcement attorney at Washington state’s Department of Financial Institutions. Their eye-catching topic: “We Broke the Law! Now What?”

Cordell outlined what he called “accidental franchisors,” the small-business owners who have no idea they are a franchise under the law—until they get a call from his office. There was the woman in Washington who saw hilltops full of blackberry bushes, which are terribly difficult to remove, and offered her service to the landowners: bush-eating goats that made quick work of the problem.

That was just fine, Cordell said, until she also started recruiting others to provide the service and pay her a fee to do so. Then her business became a franchise, and so she was required to file the necessary documentation.

His enforcers have also begun combing through Craigslist ads, and recently spotted one that went something like this: “Free franchise. Asian quick-serve restaurant. So many of you have asked for a location, I’ll sell it to you for $1. (Essentially free!)”

“I pick up the phone and immediately call the gentleman,” Cordell said. “I sent him a text. Fortunately I was the only one who responded to the ad.”

Cordell told the assembly of attorneys at the symposium: “You’re the first line of offense. You see a lot of franchisors, and you’re doing the hard job of educating. We would much rather prevent the violations than kind of, quote, fix the violations.”

Krakus, the Greensfelder attorney, said if a franchisor learns of a law violation, whether itself, via a franchisee or from a letter or call from an enforcement agency, first gather all the facts to determine everything that happened.

“I can assure you there’s nothing that infuriates an examiner more than getting partway through the investigation and finding out about two or three more violations,” she said. “Honesty will win the day.”

Also, check whether an action in one state is relevant in another. ”Don’t be sure that just because you dealt with a Washington enforcement action, doesn’t mean it will be the same in New York or Illinois. In New York, for example, you can only get rescission,” meaning paying back the franchisees, “for a willful violation.”

As for that jailbird slide she uses, Krakus noted that criminal penalties include jail time for certain franchise law violations.

The IFA’s 50th annual Legal Symposium continues through today, at the JW Marriott hotel in Washington, D.C. The conference wasn't all business, as shown in the photo and caption. Thanks to Gray Plant Mooty law firm for the invitation.

 

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The latest news, opinions and commentary on what's happening in the franchise arena that could affect your business.

Tom KaiserTom Kaiser is associate editor of Franchise Times. He can be reached at 612.767.3209, or send story ideas to tkaiser@franchisetimes.com.
 
Beth EwenBeth Ewen is editor-in-chief of Franchise Times. She can be reached at 612.767.3212, or send story ideas to bewen@franchisetimes.com.
 
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Mary Jo LarsonLaura Michaels is managing editor of Franchise Times. She can be reached at 612.767.3210, or send story ideas to lmichaels@franchisetimes.com.
 
Mary Jo LarsonMary Jo Larson is the publisher of Franchise Times Magazine and the Restaurant Finance Monitor.  You can find her on Twitter at
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Nancy WeingartnerNancy Weingartner is editor-at-large of Franchise Times magazine and the editor of the Food On Demand media project. You can reach her at 612-767-3200 or at nancyw@franchisetimes.com.
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