While You Were on Vacation—FTC Issues “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act”

Franchisors should be aware of the “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act” that was issued in August, representing the first formal policy statement regarding the FTC’s standalone authority under the “[u]nfair methods of competition” prong of Section 5 of the FTC Act.  Time will tell whether the policy statement merely reflects broadly accepted principles or whether it portends of an increased use of standalone Section 5 authority by the FTC.

ThinkstockPhotos-476176878Most in the franchise industry are aware that Section 5 of the FTC Act declares unlawful “unfair or deceptive acts or practices in or affecting commerce.”  15 U.S.C. §45(a)(1). Indeed, a violation of the Franchise Rule also constitutes a violation of Section 5(a)(1) of the FTC Act.  15 U.S.C. §57a(d)(3). More than 30 years ago, the FTC issued policy statements regarding the concepts of unfairness and deception under Section 5 of the FTC Act.  See Fed. Trade Comm’n, Commission Statement of Policy on Scope of the Consumer Unfairness Jurisdiction, 104 F.T.C. 1070, 1071 (1984) (appended to In re Int’l Harvester Co., 104 F.T.C. 949 (1984)); Fed. Trade Comm’n, Policy Statement on Deception (appended to In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174 (1984)). Those policy statements set forth a detailed analysis of the concepts addressed.

Section 5 of the FTC Act also prohibits “[u]nfair methods of competition in or affecting commerce.” This phrase has been generally understood to reach conduct beyond conduct that violates the Sherman Act or the Clayton Act. However, the question has been—how much broader is the FTC’s authority under Section 5? With a dearth of cases over the past five decades interpreting this aspect of Section 5, and with an expanding use of Section 5 by the FTC in recent years, an increased interest in guidelines regarding the FTC’s application of Section 5 arose, including among some of the Commissioners themselves. For example, Commissioner Joshua Wright proposed a policy statement in 2013 that was not adopted.

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Franchisors Take Note: FTC’S Authority to Regulate Corporate Data Security May Affect You

iStock_000019422828SmallThe Third Circuit Court of Appeals recently upheld the Federal Trade Commission’s power to regulate corporate privacy and data security procedures under the Federal Trade Commission Act. Wyndham Worldwide was hit by three separate hacker attacks in 2008 and 2009, which resulted in the loss of personal and financial data for more than 600,000 consumers. The FTC filed suit, alleging that Wyndham’s cybersecurity procedures, which had failed to protect this data, violated the FTC Act’s prohibition on “unfair” acts or practices by a business. See 15 U.S.C. § 45(a).

Wyndham, which franchises and manages hotels, and sells time shares, runs the property management system for the whole enterprise. This system collects and processes consumer information, including names, home addresses, email addresses, telephone numbers, payment card account numbers, expiration dates, and security codes. The FTC’s lawsuit alleges that Wyndham failed to implement reasonable data security procedures, including (1) allowing Wyndham-branded hotels to store payment card information in readable text; (2) allowing the use of easily guessable passwords; (3) failing to use firewalls and other readily available security measures; (4) allowing franchisees and others to connect to the network without appropriate precautions; (5) failing to adequately restrict access to its network and servers; (6) failing to utilize reasonable measures to detect and prevent unauthorized access; and (7) failing to follow proper incident response procedures.

Wyndham disputed the FTC’s lawsuit, arguing (1) the FTC had no authority to regulate cybersecurity as an “unfair” act or practice; and (2) it had not received “fair notice” of what the FTC was requiring. In its decision, rejecting Wyndham’s challenge, the Third Circuit held (1) that the FTC Act’s prohibition on “unfair” acts and practices is broad enough to grant the FTC authority over business data security practices, and (2) Wyndham, based on the plain language of the Act and FTC statements, did in fact receive “fair notice.”

The Third Circuit sent the case back to the trial court for a decision now on whether Wyndham’s data security practices were—as the FTC alleges—so lax as to be an “unfair” act or practice affecting commerce.

Stay tuned.

Is Your Franchise System Due For A Legal Audit?

In the franchise world, the old adage “if you’re not moving forward, you’re falling behind” applies. Franchise systems cannot remain viable and healthy without consideration of new products and services which add additional opportunities for profit, thereby enhancing brand strength. In so doing, franchisors need to be careful that they step back in a timely fashion with a jaundiced look to analyze their systems to see if they are in compliance with their own rules, regulations, and policies. Also, franchisees’ compliance is critical and that monitoring can start at the franchisor’s home office and not with a site visitation.

ThinkstockPhotos-504653065We all know that annual disclosure updates are required. Also, we all recognize that if there are changes to management, serious litigation or critical reversals of fortune, we need to cease franchise sales. But in a healthy franchise system, there are so many additional moving parts. The concept of periodic legal audit has merit and should be considered.

Let me pose some examples. With respect to registration states, franchisors are mindful of the deadlines, but do they always file the quarterly sales information required by certain states? Do they update their disclosure document with necessary post-effective amendments? If they exceed the number of sales in any state they have indicated in a given year, do they adjust that number? If a Financial Performance Disclosure Representation is made, has anything occurred since the most recent filing that would make it arguably inaccurate and potentially misleading? Relative to their trademarks, are there any new products and services requiring new trademark applications to be prosecuted? Are the marks being adequately policed to protect against infringers?

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Arizona Franchise Excellence Award Winners Announced

Franchise_Awards2_2015Congratulations to all the finalists and award recipients recognized on Thursday, May 7, at the 2015 Arizona Franchise Excellence Awards sponsored by Quarles & Brady in partnership with the Phoenix Business Journal. With many franchisee and franchisor leaders from the Phoenix area in attendance, the event was a huge success in bringing the franchise community together for the first time to celebrate and honor the contributions that franchisees and franchisors make to the economic success of our community.

The award winners are:

Lifetime Achievement – Tom Barnett, Barnett Management
Franchisor of the Year – Dave Crisalli, Message Envy Spa
Franchisee of the Year – Ed Holmes, Papa Murphy’s
Franchise Supplier/Professional of the Year – Harriet Moser, FranNet of Arizona
New Concept of the Year – Steven Morris, Garbanzo Mediterranean Grill Arizona
Community Impact Award – Ron Lynch, Tilted Kilt

Click here to see the full list of finalists. Click here for photos from the evening.

We applaud all of this year’s nominees, finalists, and award recipients for their hard work and dedication. Thank you for your contributions and commitment to promote franchising and to the betterment of the Phoenix community.

Pitched Battle In The Fight Over Joint-Employer Status Rages On

187848640Hearings recently opened in the National Labor Relation Board’s controversial case accusing McDonald’s and its franchisees of anti-union activity under a joint-employer theory. Those consolidated hearings are set to occur in three locations, New York, Chicago and Los Angeles, with the trial portion likely to start in mid May 2015. The case is being closely watched given the potential to expand liability to franchisors for the employment decisions and obligations of their franchisees and franchisees’ workers.

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Arizona Franchise Excellence Awards Finalists Announced

PrintQuarles & Brady is a proud sponsor of the Phoenix Business Journal’s Arizona Franchise Excellence Awards. For anyone in the franchise industry in Arizona, this is an event you do not want to miss. This event is the first of its kind to spotlight and honor Arizona’s top franchisors, franchisees, and franchise-related businesses. Nearly 80 nominations were submitted for consideration.  The finalists, listed below, were announced by the Phoenix Business Journal on Friday, April 3, 2015. The winners in each category will be announced at the awards ceremony on May 7, 2015, at the JW Marriott Camelback Inn Scottsdale from 5:30 pm to 8:30 pm.

To register for the event and for more information click here.

Joe Bourdow will be the keynote speaker at the event. Mr. Bourdow is a successful entrepreneur and corporate executive with nearly forty years of experience in franchising, advertising sales and broadcasting. He has spent thirty-five years in franchise ownership and franchisor leadership and sales management positions with Valpak Direct Marketing Systems, Inc.

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Planning the FDD Update Process

Renewal season is upon us. Franchisors with fiscal years coinciding with the calendar year are now in the throws of updating their Franchise Disclosure Document. Given strict deadlines and the inherent difficulty in collecting the required information, having a plan for the updating process is critical. Here are five tips that can help your FDD updating process be more efficient this renewal season:

1. Know Your Deadlines. A franchisor violates federal and state franchise sales laws by offering or selling franchises with an out-of-date FDD or expired registration. Under the Franchise Rule of the Federal Trade Commission, the FDD expires 120 days after the franchisor’s fiscal year end. So, if the franchisor operates on a calendar year, the FDD expires on April 30. On the state side, registration periods vary. Some states set registration periods tied to the franchisor’s fiscal year end, while other states determine registration periods based on the franchisor’s original effective date in that state. Moreover, franchisors should be sure to check states laws for automatic renewal deadlines and treat them as the real filing deadline, rather than the registration expiration date. Missed deadlines could force the franchisor to suspend all solicitation activities in the state. In sum, know the deadlines in each jurisdiction in which you sell or offer franchises, docket and track those deadlines, and keep your sales staff apprised of any lapses in registrations.

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Quarles & Brady Franchising Workshop in Phoenix, Arizona

Franchise_Blog_IconJoin Quarles & Brady on April 9, 2015 in Phoenix for the second of three complimentary workshops on franchising topics titled, “Leveraging and Protecting Your Franchise Brand with the Right Marketing Mix.”

Creating a successful franchise brand requires the right combination of traditional and online marketing efforts; franchise development to attract the best franchisees; and properly selected and registered trademarks, trade names and logos. Heather Buchta of Quarles & Brady and Matthew Jonas of TopFire Media will discuss ways to protect, leverage and market your franchise brand. Anyone considering franchising their business, or anyone who is currently a franchisor, should attend these workshops.

For more workshop details or to RSVP click here.


2015 IFA Conference Recap

Money and Justice iStock_000014343429MediumThe 2015 International Franchise Association Conference recently held in Las Vegas served as a reminder of the growing issues with organized labor in the franchise industry. In particular, the traditional roles of franchisors and franchisees are being challenged by labor unions alleging franchisors and their franchisees are violating the rights of the franchisee’s employees.

The arguments are taking form on two fronts:

  1. Those supporting an increase in the minimum wage are seeking to classify franchise owners differently from traditional small business owners by aggregating all of the employees across a franchise system under one umbrella to require franchisees implement higher minimum wages more quickly than their competitors. The result disproportionately affects, and disadvantages, franchisees vis-a-vis their competitors.
  2. A National Labor Relations Board’s General Counsel ruling that McDonald’s is a “joint employer” of their franchisees’ employees allows employees to assert claims for wage violations against McDonald’s and its franchisees collectively, and, if successful, would support unionizing employees within a franchise brand.

In response, the IFA announced renewed lobbying efforts and a grassroots education outreach addressing minimum wage and joint-employer issues through the Coalition to Save Local Businesses. Franchisors can learn more about these efforts at www.savelocalbusinesses.com.

Twenty Years After Stella Liebeck, Plaintiffs Are Still Suing McDonald’s Over Hot Coffee

Hot_CoffeeIn 1994, one of the most famous civil verdicts in American history was rendered.  On August 18th of that year, a New Mexico jury awarded 81-year-old Stella Liebeck nearly $2.9 million in damages after she was burned by McDonald’s coffee that had spilled in her lap.  The case sent shockwaves through the legal community, became a poster child for tort reform, and continues to be a running pop-culture joke even now, two decades later.

But believe it or not, plaintiffs are still suing the fast-food giant over the temperature of its coffee.  In a recent New York case, Khanimov v. McDonald’s Corporation, 2014 WL 5461641 (N.Y. Sup. Ct. App. Div. Oct. 29, 2014), the plaintiff sued both McDonald’s and the franchisee who owned and operated the restaurant.  The plaintiff claimed that he slipped and fell at a Brooklyn McDonald’s and was burned by hot coffee that he had just been served.  He alleged that the coffee was unreasonably hot and therefore dangerous.  Initially, the trial court dismissed the suit.   Continue Reading