New Texas law says franchisors are not employers of franchisees or their employees

This story was written by Edward L. Puzzo, J.D.

Texas has enacted legislation, effective September 1, 2015, specifying that franchisors will not be considered to be the employers of--or in a co-employment relationship with--either franchisees or the franchisees' employees for any purpose, including employment discrimination law, wage and hour law, minimum wage law, professional employer organization law, workers compensation law, or workplace safety law.

This follows the 2014 issuance of unfair labor practice complaints by the National Labor Relations Board (NLRB) against fast food franchisor McDonald;s and a number of its franchisees, finding them to be joint employers.

When Sen. Charles Schwertner introduced the legislation (Texas Senate Bill 652), he acknowledged that the impetus for the bill was "recent decisions by the NLRB that have expanded the definition of an `employer,' called the common understanding of a franchisor-franchisee relationship into question, and opened the door to lawsuits against franchisors for the actions of franchisees."

The legislation does provide an exception for situations in which a franchisor has been found by a court of competent jurisdiction in the state to have "exercisted a type or degree of control over the franchisee or the franchisee's employees not customarily exercised by a franchisor for the purpose of protecting the franchisor's trademark and brand."

British Columbia Law Institute Seeks Public Comment on Franchise Law Proposal

This posting was written by John W. Arden.

The British Columbia Law Institute (BCLI) is soliciting public comments on its recently-issued consultation paper recommending that the province enact franchise legislation similar to existing franchise laws in Alberta, Manitoba, New Brunswick, Ontario, and Prince Edward Island.

The BCLI intends its “Consultation Paper on a Franchise Act for British Columbia” to be “a catalyst for an informed discussion about franchise regulation in BC.” After consideration of responses received, BCLI will produce a report with final recommendations and draft legislation.

The consultation paper recommends, among other items, that:

 British Columbia should enact franchise legislation.

 Franchise legislation should be modeled generally on the Uniform Franchises Act and the Uniform Disclosure Documents Regulation.

 Franchise legislation should not provide for mandatory mediation on the demand of one party of the franchise agreement.

 Legislation should require presale disclosure of information to prospective franchisees.

 A franchisor may request and receive a fully refundable deposit before delivering a disclosure document.

 A disclosure document must state whether or not an exclusive territory is granted under the franchise.

 A disclosure document must state whether the franchisor reserves the right to directly market goods or services.

 An action for misrepresentation should extend to misleading or inaccurate financial or earnings projections.

 A franchisor should be able to use “wrap around” disclosure documents prepared in compliance with laws of another jurisdiction with additional information required by British Columbia.

 There should be a presumption of reliance by a franchisee on a disclosure document.

 The institute is requesting comment from franchisors, franchises, business and consumer organizations, and the general public.

Comments, which will be accepted through September 30, 2013, may be submitted by email at gblue@bcli.org; by fax at 604-822-0144, and by mail at British Columbia Law Institute, 1822 East Mall, University of British Columbia, Vancouver, BC, Canada V6T 1Z1.

U.S. Lawyers Should Not Draft Canadian Franchise Documents Without Consulting Local Counsel: Ontario Bar Association Group

This posting was written by Peter Reap, Editor of CCH Business Franchise Guide. 

The Ontario Bar Association Franchise Law Section posted a message on the ABA Forum on Franchising email listserv yesterday, warning U.S. franchise lawyers not to prepare Canadian franchise agreements, ancillary documents, and franchise disclosure documents without consulting Canadian counsel.

With the permission of the Chair of the ABA Forum, the 24-lawyer Executive group of the Ontario Bar Association Franchise Law Section sent an email to the Forum on Franchising membership, “so as to caution ABA Forum members on the inadvisability and risk of this practice.”

“While many U.S. lawyers will directly retain or arrange for their clients to retain qualified Canadian counsel to prepare or at least review these franchise documents, that is not always the case,” the message explained.

“We assume that most of the members of the ABA Forum are aware of the growing complexity involved in Canadian franchise documents, especially disclosure documents, as a result of various articles, papers, presentations at Forum programs, and messages on the Listserv,” it continued. “Courts in the Canadian provinces are regularly interpreting the provisions of provincial franchise laws and regulations, and making decisions that affect substantive provisions of franchise documents. Now with five separate provincial franchise laws, the preparation of Canadian disclosure documents has become even more complicated.”

Nevertheless, U.S. lawyers who are often highly qualified specialist in their own jurisdictions are preparing Canadian franchise documents containing significant errors or omissions, according to the group. “These lawyers are not professionally qualified to prepare Canadian franchise documents or give advice in respect of the laws of a foreign jurisdiction.”

The group expressed concerns about the risks to franchisors being advised on Canadian (and particularly, Ontario) franchise matters by lawyers not trained or qualified to practice law in the jurisdiction. “The statutory remedy of rescission for non disclosure or incomplete disclosure is very harsh, and has elevated the potential risk to lawyers who are not qualified to undertake this work. Unfortunately, this impact and risk can extend to those who sign disclosure document certificates and those involved in the sale and granting of franchises. Further, it may constitute the unauthorized practice of law in a particular province.”

U.S. franchise lawyers should consider whether their insurance provides coverage for professional negligence in preparing documents or giving advice on Canadian law, the group advised.

The message concluded with an invitation to contact any member of the Section Executive group, whose names and email addresses were included. All or most of the members are associate members of the ABA Forum on Franchising, according to Section Chair Larry Weinberg, who sent the message.

New Franchise Rule FAQ Clarifies “Exclusive Territory”

This posting was written by Pete Reap, Editor of CCH Busines Franchise Guide.

The Federal Trade Commission Staff, on October 16, answered an additional frequently asked question (FAQ) regarding the 2007 amendments to its franchise disclosure rule.

The most recently answered question FAQ 37 is:

"May a franchisor state in Item 12 that it grants an "exclusive territory" if it reserves the right to open franchised or company outlets in so-called "non-traditional venues" like airports, arenas, hospitals, hotels, malls, military installations, national parks, schools, stadiums and theme parks?"

The FTC Staff replied:

"No. Pursuant to FAQ 25, a franchisor may state in Item 12 that it grants an "exclusive territory" only if the franchisor contractually "promises not to establish either a company-owned or franchised outlet selling the same or similar goods or services under the same or similar trademarks or service marks" within the geographic area or territory granted to a franchisee. A reservation of rights to open outlets selling the same goods or services under the same trademarks or service marks within a franchisee’s territory negates any such commitment and triggers the Item 12 requirement to include a disclaimer stating that franchisees will not receive an exclusive territory."

The entire series of questions and answers is reproduced at CCH Business Franchise Guide ¶6090 and here on the FTC website.

Treatise Helps Guide Professionals Through Maze of Distribution Law Issues

This posting was written by John W. Arden.

The world of product distribution has changed dramatically in recent years. Revolutionary marketing relationships, new business formats, international expansion, and business consolidations have all impacted the way products are distributed and the law that governs distribution.

To help steer attorneys and their clients through the maze of distribution law issues, Wolters Kluwer Law & Business has just issued a new edition of CCH Product Distribution Law Guide, a treatise by the law firm of Foley & Lardner LLP first published in 1999.

The CCH Product Distribution Law Guide provides expert analysis for a broad range of disciplines that affect product distribution—from franchise law and antitrust to product liability and e-commerce.

Twenty five attorneys from Foley & Lardner collaborated to offer practice tips, discussions from both legal and business perspectives, best practices, and strategies for obtaining desired results.

The Guide covers vital topics, such as structuring distribution, franchise, and purchasing agreements; understanding territorial rights; defining exclusive agreements; dealing with insolvency and bankruptcy; terminating or modifying relationships; acquiring a product line for a supplier or franchisor; complying with antitrust laws; establishing international distribution arrangements; handling litigation or alternative dispute resolution; preventing and defending product liability claims; initiating product recall programs; and integrating e-commerce into existing distribution chains.

The new edition of CCH Product Distribution Law Guide is available as a one-volume looseleaf publication and also on the Internet from CCH. For further information, call 800-248-3248 or visit the Product Distribution Law page on the Wolters Kluwer Law & Business website.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

 A new Consumer Protection Bill would “change the legal landscape” for franchising in South Africa, according to the March 2009 Nixon Peabody LLP Franchise Law Alert. Kandal H. Tyre and Andrew P. Loewinger write that the legislation, expected to be signed into law in the next few months, would explicitly include franchisees as “consumers”; would give franchisees consumer rights, such as the right to equality, privacy, and honest dealing; and would protect franchisees from false, misleading, or deceptive representations. The legislation would provide franchisees with presale disclosure of information and the right to cancel a franchise agreement without cost within 10 business days of signing the agreement. South Africa’s Competition Act already protects franchisees against tying of products and exclusive dealing by a dominant franchisor. The new Consumer Protection Bill would prohibit these practices regardless of whether the franchisor is considered dominant. Bundling or tying of products would be barred unless the franchisor can show (1) that the bundling results in economic benefits for consumers or (2) that the convenience of bundling outweighs any restriction on consumer choice. The bill would become effective 18 months after approval by South Africa’s stae president. The Alert (“New Franchise Legislation in South Africa”) appears here on the Nixon Peabody website.

 The State Bar of California’s Board of Legal Specialization (BLS) invites California franchise and distribution law attorneys to apply for board certification as a Franchise and Distribution Law Specialist. In 2007, California became the first state to certify specialists in this area of law. There are now approximately 20 board certified franchise and distribution law specialists.

To achieve this distinction, an attorney must practice franchise and distribution law for the past 5 years, pass a written examination, fulfill certain task and experience requirements, complete continuing education in franchise and distribution law or a related area, and be favorably evaluated by attorneys familiar with his or her work. Until July 2009, attorneys who meet the qualifications outlined in the alternative to the exam rule may apply for certification without taking the exam, but must meet the remaining requirements. Once certified, these specialists will be listed on the State Bar website, and they may identify themselves as “board certified.”

The specialization examination, the first step in the certification process, will be administered in San Francisco and Los Angeles, on Sunday, August 9, 2009 from 8:30 a.m. until 5:00 pm. This exam is given every other year and will be offered again in 2011. For more information about the specialization program, visit the franchise law page of www.californiaspecialist.org. A registration form for the exam appears here.