Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

□ The New Brunswick Franchises Act will come into force on February 1, 2011, three-and-a-half years after receiving Royal Assent, according to Osler, Hoskin & Harcourt LLP. The statute (Bill 32) requires franchisors to make presale disclosures to prospective franchisees, imposes a duty of good faith and fair dealing on parties to franchise agreements, and guarantees franchisees the right of association. On June 10, 2010, New Brunswick published two franchise regulations. The first (Regulation 2010-92) established disclosure requirements similar to those of Ontario, Alberta, and Prince Edward Island, while the second (Regulation 2010-93) sets out a mediation procedure. Under the procedure, a party to a dispute may notify the other of the nature of the dispute and the desired outcome. The parties must attempt to resolve the dispute within 15 days. If it is not resolved, a notice to mediate may be delivered and the parties must then follow the mediation process set out in the regulation, which includes an option to decline by the party receiving the notice of mediation.

□ Tunisia has enacted two laws that form the framework of franchise regulation in that country, according to a Nixon Peabody Franchise Law Alert. Law No. 2009-69, enacted on August 12, 2009, defined a franchise agreement and franchise network and required a franchisor to provide a disclosure document to a prospective franchisee 20 days before an agreement is signed. Decree No. 2010-1501, enacted on June 21, 2010, lists the information that the disclosure document must contain, including the legal structure of the franchisor’s business, identity and address of the franchisor, history of the franchisor’s business, trademark registrations, a list of current and former franchisees in Tunisia, the nature and amount of investment required for the franchise business, and the franchisor’s financial statement. The Decree further requires franchise agreements to set out the rights and obligations of the franchisor and franchisee with respect to services provided by the franchisor, payments required of the franchisee, term of the franchise agreement, and conditions for renewal, termination provisions, and the geographical scope of the exclusive use of the trademarks. Further information can be found here in the September 29, 2010 Franchise Law Alert.

□ Although it seems hard to believe at times, some businesses have more than survived the Not-So-Great Recession. One of these success stories has been McDonald’s Corporation, which recently reported a 4.6% annual sales increase at stores open at least 13 months. According to an article posted on the Mintlife website (“How McDonald’s Thrived During the Recession,” September 21, 2010), the hamburger giant used the following strategies to prosper during the tough economic times:

Recession-friendly pricing. As early as November 2008, observers recognized the importance of McDonald’s “recession-friendly” Dollar Menu. “When recession strikes, cost becomes paramount.”

New Products for Different Markets. The introduction of new products-–from salads and premium coffee to fruit smoothies--gave more people a reason to visit the Golden Arches.

Reduced Advertising Costs. The franchisor took advantage of lower local television advertising rates to put on an all-out promotional blitz without having to substantially increase its advertising spend.

Improved Operations. Spurred on by President and CEO Ralph Alvarez, McDonald’s focused on improving operations and increasing efficiency throughout the company.

Rapid Price Adjustments. The fast food leader began using computer systems for in-store decision-making to rapidly adjust prices based on current customer demand.

McDonald’s Faces Class Action After Refusing to Redeem $5 Gift Card for Cash

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

The holder of a $5 McDonald’s gift card has standing to sue fast food giant McDonald’s under California law based on McDonald’s alleged failure to redeem the card for cash, the federal district court in San Diego has ruled.

The California gift certificate statute (CCH Advertising Law Guide ¶30,515) provides that any gift certificate with a cash value of less than $10 is redeemable in cash. The statute defines “gift certificate” to include gift cards.

In a class action complaint, the gift card holder asserted claims under the California Unfair Competition Law (UCL) and the common law of unjust enrichment based on violation of the gift certificate statute.

Standing

McDonald’s argued that the gift card holder lacked standing to assert a UCL claim because he could still redeem his gift card for McDonald’s products and therefore did not lose money or property as a result of the unlawful conduct.

The holder responded that he did not want McDonald’s products and that McDonald’s unlawful conduct had caused him to keep the gift card that could only be used for products he did not wish to consume.

The court held that the holder had standing to pursue the UCL claim based on his allegation that he was denied money to which he had a right under the gift card statute. Likewise, the holder had standing to sue on the ground that McDonald’s was unjustly enriched by its practice of refusing cash redemptions on unused card balances of less than $10.

False Advertising

The holder also brought a UCL claim based on the California False Advertising Law, but the court rejected this theory.

The holder alleged that a statement on the back of the card—“[t]he value on this card may not be redeemed for cash . . . unless required by law”—was deceptive and misleading. The holder maintained that the statement led average consumers to believe that they could not redeem gift cards for cash and failed to disclose the right to redeem cards with balances of less than ten dollars for cash.

The holder’s false advertising theory failed, in the court’s view, because he did not allege that he relied on the language on the back of the gift card and, as a result of that reliance, lost money or property.

The September 21, 2009 opinion in Marilao v. McDonald’s Corp. will be reported at CCH Advertising Law Guide ¶63,615 and CCH State Unfair Trade Practices Law ¶31,917.