Franchising in Ohio: What Every Lawyer Needs to Know PowerPoint Presentation

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1 Franchising in Ohio: What Every Lawyer Needs to Know PowerPoint Presentation Herbert A. Hedden Vorys, Sater, Seymour & Pease LLP Columbus, Ohio Brian N. McMahon Shumaker, Loop & Kendrick, LLP Toledo, Ohio Judith L. Marsh Vorys, Sater, Seymour & Pease LLP Columbus, Ohio James A. Meaney Zaino & Humphrey, LPA Dublin, Ohio

2 Franchising in Ohio: What Every Lawyer Needs to Know Herb Hedden Brian McMahon Judy Marsh Jim Meaney The Franchise Explosion! International Franchise Association studies Currently over 770,000 franchised businesses Total economic output of $2.3 trillion 11% of the private sector economy 8.5 million Americans employed in franchises 15% of all U.S. Jobs Franchise Law 1

3 U.S. Added 15,600 Franchise Jobs in April, According to ADP National Franchise Report Franchise Law 2

4 Franchise Law 3

5 30,000 Foot View Franchising in the U.S. - national practice Differences between a license, business opportunity and franchise Disclosure document requirements Franchise Law 4

6 Ohio Business Opportunity Plan Act and its place in the national regulatory scheme Litigating or arbitrating claims against on behalf of Ohio-based franchisees Representation of franchise buyers Overview of U.S. Franchise Laws Federal Trade Commission FTC North American Securities Administrators Association State Franchise Laws and Regulations State Relationship Laws State Business Opportunity Laws The Franchise Maze Franchise Law 5

7 History of Franchising Laws FTC Rule Federal Trade Commission Rule 2007 Amendment Franchise Law 6

8 FTC Rule Non-Preemption The FTC does not intend to preempt the franchise practices laws of any state or local government, except to the extent of any inconsistency with part 436. A law is not inconsistent with part 436 if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures. Franchising Basics Presale Disclosure Requirement Cooling Off Period Franchise Disclosure Document 23 Disclosure Items Franchise Agreement Development Agreement Franchise Law 7

9 NASAA North American Securities Administrators Association NASAA NASAA & State Franchise Laws Franchise Law 8

10 Franchise Disclosure Laws Franchise Disclosure Laws California Hawaii Illinois Indiana Maryland Michigan Minnesota New York North Dakota Oregon Rhode Island South Dakota Virginia Washington Wisconsin Franchise Law 9

11 Franchise Relationship Laws Franchise Relationship Laws Arkansas California Connecticut Delaware Hawaii Idaho Illinois Indiana Iowa Kentucky Maryland Michigan Minnesota Mississippi Missouri Nebraska New Jersey Puerto Rico Rhode Island Virginia Washington Wisconsin Franchise Law 10

12 FTC Rule No Private Right of Action Business Opportunity Laws (CCH Business Franchise Guide) Franchise Law 11

13 Business Opportunity Laws Alabama Alaska California Connecticut Florida Georgia Illinois Indiana Iowa Kentucky Louisiana Maine Maryland Michigan Minnesota Nebraska New Hampshire North Carolina Ohio Oklahoma South Carolina South Dakota Texas Utah Virginia Washington A Patchwork Quilt of Laws Franchise Law 12

14 License v. Franchise v. Business Opportunity License Franchise Business Opportunity License v. Franchise What is a franchise? 16 Franchise and 25+ Business Opportunity Definitions An agreement granting the right to engage in a business to operate under a marketing plan or required system (significant degree of control) Association with or license to use a trademark or logo or commercial symbol Payment of a fee $500 or more in first 6 months (FTC Rule) (some states have broader applicability = any amount) Franchise Law 13

15 Franchise Disclosure Document FRANCHISE DISCLOSURE DOCUMENT Fictional Franchising, LLC An Ohio Limited Liability Company 100 Fiction Street, Suite 100 Columbus, OH (614) The Finest Fictional Franchise 23 Disclosure Items Franchise Agreement Financial Statements List of Franchisees FDD Contents Any other Agreements Franchisee Required to Sign Receipts Franchise Law 14

16 Relationships Not Covered by the FTC Rule Exclusions Exemptions Inapplicable to relationship due to definition Relationships Not Covered by the FTC Rule Business Opportunities Foreign sales businesses to be located outside the United States Initial payment of less than $500 Fractional franchises Leased departments Franchise Law 15

17 Relationships Not Covered by the FTC Rule Petroleum marketers and resellers Large initial franchisee investment Large net worth franchisee Franchisor insiders Oral agreements Relationships Not Covered by the FTC Rule Employer-employee relationships General partnership relationships Cooperative associations Certification or testing services Single trademark license Franchise Law 16

18 Relationships Not Covered by the FTC Rule Relationships in which the licensee/ franchisee has no expectation of making a profit Ohio Business Opportunity Plans Act Franchise Law 17

19 Ohio Business Opportunity Plans Act Ohio Revised Code Chapter 1334 Enacted in 1979 to provide Attorney General with tool to combat scam offerings Enforcement activities have waned since 1990 Amended in 1991, 1994, 1996 Major Amendment in 2012 Ohio Business Opportunity Plans Act Ohio s unknown franchise law Broad definition of business opportunity plan Franchisor exemption in Section other exemptions in Section Requires pre-sale disclosure to purchaser Franchise Law 18

20 2012 Amendments to Ohio Business Opportunity Plans Act Ohio Substitute Senate Bill No Amendments Franchisor exemption revised Except for division (H) of section and section of the Revised Code, sections to of the Revised Code do not apply to: Any transaction that complies in all material respects with the trade regulation rule of the federal trade commission, disclosure requirements and prohibitions concerning franchising, 16 C.F.R et seq., as may be amended from time to time, that is in effect on the date of the transaction;.... Franchise Law 19

21 2012 Amendments Maximum dollar amount of plan increased -- $50K to $100K Definition of initial payment revised Infinite right to cancel scaled back to one year 5 year statute of limitations from date of agreement 2012 Amendments Ohio Act represents a fundamental public policy for this state Voids waivers by purchaser and choice of venue/choice of law provisions that deprive a purchaser who is an Ohio resident of the benefits of the Ohio Act Franchise Law 20

22 Franchise Dispute Resolution in Ohio Begin at the End Mediation Arbitration Choice of Law Venue Selection ORC Amended Date of Deal? Franchise Law 21

23 Atlantic Marine Decision 2013 U.S. Supreme Court (8-0) Contractual Forum Selection Clause Enforce Contract - Transfer Case - No Dismissal No Private Interests Not a franchise case Public Policy Exception? R.C Ohio s Super Exemption O.R.C Certain Transactions Exempted FTC Rule Compliance - Recently Amended Fully Complies v. Complies in all material respects Liberalizes compliance Franchise Law 22

24 Once You Clear the Hurdles O.R.C Private Right of Action Rescission of Deal Treble Damages or $10,000 whichever is more Class Action Attorney Fees Statutes of Limitations - Amended (A)(2) 5-day Right to Cancel 1 year Overrides RY/EH, Inc. v. Arthur Treacher's, Inc., 115 Ohio App. 3d 332, 685 N.E.2d (A)(1)(a) Rescission 3 years (C) 5 years from date of agreement or date of violation whichever is earlier Franchise Law 23

25 Which Version of Chapter 1334 Applies? Date of Deal? Amendments not retroactive Prospective Only Amended Sections apply to deals entered into on or after September 28, 2012 The Big Hook FINANCIAL PERFORMANCE REPRESENTATIONS FDD ITEM 19 Ohio Case: Miksch and M.I.K., Inc. v. T-Shirt Plus, Inc. ORC Franchise Law 24

26 Common Law Fiduciary Duty No Fiduciary Duty in Franchise Relationship Saydell v. Geppetto's Pizza & Ribs Franchise Systems, Inc. Franklin Park Lincoln-Mercury, Inc. v. Ford Motor Company Officer Liability Yo-Can, Inc. v. Yogurt Exchange, Inc. Officers and Directors not personally liable under Ohio Business Opp Act just because of their corporate positions But, may be personally liable as agent or employee when directly engaged in misrepresentations personal transgressions Franchise Law 25

27 Common Law Fiduciary Duty No Fiduciary Duty in Franchise Relationship Saydell v. Geppetto's Pizza & Ribs Franchise Systems, Inc. Franklin Park Lincoln-Mercury, Inc. v. Ford Motor Company Attorney Fees Unilateral Shift Contractual Prevailing Party or Just One Party Pays Allied Industrial Scrap v. Omnisource 6th Circuit decision based on Wilborn v. Bank One One Party Pays Clause Enforceable No duress commercial parties Franchise Law 26

28 Representing Franchise Buyers Section II in Paper Fundamental Franchising Equation Franchise Success = Franchisor + Unique/Proven System + Dedicated Franchisees Franchise Law 27

29 Understanding the Mindset Role of Franchise Counsel Franchise Law 28

30 Fundamental Question What can This Franchisor do for me that I cannot do for Myself? Role of Franchise Counsel Franchisee Assistance Trusted Advisor Educate Client Teach Patience Cost of Franchising Expenses FDD Review & Analysis Unit Economics Item 5, 6 & 7 Review Audited Financials Item 21 Outside Financial Investigation Franchise Law 29

31 Importance of Trademark Franchise Buyer s Due Diligence Franchise Law 30

32 Franchise Buyer s Due Diligence Contact Existing Franchisees Financial Statement Review CPA Discovery Day Understanding Dispute Resolution Issues Operations Manual SBA Loan Performance Trends in Franchising World Aging Baby Boomers and Pets Franchise Law 31

33 Current Issues in Franchising National Labor Relations Board Franchisor and Franchisee as Joint Employers Minimum Wage Laws Multi-Unit/Multiple Concept Franchisees Questions? Franchise Law 32