Put Your Best Mark Forward: Why It’s Smart to File A Word Trademark First
As a business owner, protecting your company’s intellectual property is of paramount importance. Trademarking your names and logos can go a long way in safeguarding your brand identity. In a perfect world, we would all have the resources to immediately file applications for each and every brand-identifying element right at the launch of any business venture. Unfortunately, we live in the real world, where resources are not always available all at once and prioritizing is key. The question this very real set of circumstances often brings with it is “do I file for my name or logo first?” While both play important roles in characterizing your business, the answer, in most cases, is to file for a standard word mark before proceeding with a trademark application for your logo. Here’s why:
1. Flexibility of Use
A “standard word mark” is a trademark that protects your brand name itself. It does not matter how the words are stylized, what font or color is used, or if they are featured in conjunction with artwork, so long as the words (and punctuation, if applicable) remain the same. Once this trademark registers, the name is protected.
A design mark, on the other hand, protects the specific design elements as submitted, including the stylization of the text and any images or graphics. If you change the design of your logo (even in small ways, like adding or removing elements or updating the layout), protection conferred by a registered logo trademark becomes irrelevant, as you are using a different, unregistered design. Without use, the previously registered trademark can be considered abandoned.
Particularly in the early days of a business, or in the initial stages of a rebrand, the logo you start with might not be the logo you ultimately wind up using in commerce. Therefore, prioritizing your word mark, and filing a trademark application for this first, offers brand protection while allowing flexibility for future design changes.
2. Broad Protection
Word marks simply offer a broader range of protection than design marks. While visual branding is invaluable, and you certainly want to protect your logos, if you only have a design mark, your scope of protection is limited. Even if your logo features your brand or product name, without a standard word mark, you have not protected the name by itself. Competitors could potentially use the same or similar words in their branding. If you have a word mark, no one else can use it, regardless of the design, font, or color they use – doing so would be infringement on your trademark rights.
3. Cost Efficiency
Trademarks are a cornerstone of any business’s IP portfolio and integral to most marketing strategies, but the process of trademark registration can be costly and time-consuming. Therefore, it is sometimes necessary to be strategic in how and when you allocate funds for new applications. Presumably, the name of your business or flagship brand will remain the same, if not forever, for a very long time. Logos, on the other hand, can sometimes be more fluid. Rebrands happen, and this potential eventuality should not deter you from registering a design you plan to use for an extended period. However, if you aren’t fully committed to one version of a design and need to file a new application with every iteration, the costs can quickly add up. Until you have decided on a permanent logo, a standard word mark can do a lot of heavy lifting on the trademark front.
4. Easier Enforcement
Part of trademark maintenance is remaining vigilant about enforcing your trademark rights. This means keeping an eye out for other users infringing on your trademarks and either reaching out to these unauthorized users directly or consulting with legal counsel to do so. But trademark enforcement can be tricky when there is any room for interpretation and enforcing a word mark can be easier than a design mark since it focuses on something more concrete (specific words in a specific order for a specific thing). Unauthorized use of a similar logo can sometimes be skirted by arguing minor differences in composition or layout. A word mark is less open to interpretation, and can thus be more straightforward to enforce, something you want when it comes to your primary brand. Focusing on – and enforcing – a word trademark can also help bolster your ability to enforce future design marks that incorporate your name.
While both word and design marks are important components of any brand’s trademark strategy, there are clear advantages to prioritizing the registration of your word mark. This initial step provides flexibility for future logo changes, broad protection against potential infringements, cost efficiency in filing, and an easier path to trademark enforcement. Once a standard word mark is secured, you can look ahead to fleshing out your trademark portfolio from a relatively secure vantage point, ensuring robust and well-rounded protection for your brand.
Is Your Chosen Auditor Legally Qualified to Perform the Audit?
With certain phase-in exceptions, federal and state franchise disclosure laws require that the FDD include an audited financial statement. Some regulators have started to verify an auditor’s professional qualifications as part of the FDD review process. Essentially, the regulators are checking to see whether the “certified public accountant” is actually certified, meaning currently licensed.
States laws require that persons holding themselves out as CPAs actually have licenses. These laws typically have professional responsibility and continuing education requirements. A properly licensed CPA can lose that status as a result of a disciplinary action, or simply failing to stay current a state’s post-certification requirements. An unlicensed accountant is not certified.
To avoid this pitfall, it is important that the franchisor verify the qualifications of the person or firm it is hiring to perform the audit. You can do that by:
- Checking with your state’s board of accountancy (or its equivalent). Most states make it easy to search for an individual or firm online.
- You can also check the website CPAverify.org, if the state in which the auditor is located participates in the program; and most states participate.
If the person or firm that performs the audit of a franchisor’s financial statements is not properly licensed, the franchisor may pay the price. At best, the regulator identifying this deficiency will refuse to register the FDD, because it will have a deficiency, being that its financial statements were not properly audited by an independent certified public accountant. At worst, if the deficiency is identified after the FDD has already been registered, the franchisor may be charged with a franchise law violation and could even be required to offer franchisees rescission.
Super Bowl Trademark & Copyright Rules 2022
Sounds simple enough, right? Just wipe down the bar, turn on the TV, and watch your beloved craft patrons flow while your taps flow out. Like most things in life, it isn’t that simple, and legal issues may come into play (pun intended). Here are the most updated Super Bowl trademark & copyright rules in 2022.
What are the Super Bowl Copyright Rules
The NFL owns the copyright to the Super Bowl. Think about it – how many times have you heard or read “Any other use of this telecast or any pictures, descriptions, or accounts of the game without the NFL’s consent is prohibited” when watching a football game? So many times that it’s permanently engraved into your brain? Yeah, us too.
Here’s a quick refresher on copyright law. According to the Copyright Act, a copyright owner has the following five rights:
- Reproduce the copyrighted work
- Prepare derivative (spin-off) works based on the work
- Distribute copies of the work to the public
- Perform the copyrighted work publicly
- Display the copyrighted work publicly
Like playing music in your taproom (check out our blog on that here), we are concerned with number 4, the right to perform the work (the Super Bowl in this case) publicly.
Do You Need Legal Rights to Broadcast Super Bowl
You must have the legal right to broadcast the game to the public. One way to get that right is to use a commercial television service such as a DirecTV or Xfinity business account. The key here is that it’s a “business” account. You can’t use your personal DirecTV login to show the game at the brewery. Business accounts typically cost more than consumer accounts because they include the licenses needed to show the programming publicly. The same is true for many streaming services – you need a specific type of account authorizing you to stream its content to the public.
Can You Broadcast Super Bowl Without a Business Account
What if you don’t have one of these business accounts? Thankfully, there is another way to show the game legally. And it’s old school. Remember when you had rabbit ears on the TV to watch any of the four broadcast channels? If you don’t, we need to check your ID. Well, copyright law allows you to broadcast TV from an antenna in your brewery (or other business) so long as you meet these requirements:
- Your brewery is no larger than 3,750 square feet
- You don’t require customers to pay to access the space where you show the game (i.e., a cover charge)
- You don’t show it on more than four TVs total (and each TV airing the game is in a different room)
- The TV screens airing the game are 55” or smaller
- You aren’t playing the audio on more than six total loudspeakers (and there aren’t more than four loudspeakers broadcasting the game in a single room)
Super Bowl Copyright Exceptions for Breweries
We know that sounds pretty bizarre, but those are the rules. If you’re a larger establishment, you may be concerned about the square footage requirement. Don’t worry, though. If we dive deeper, there is a dream within a dream – I mean an exception within an exception, sorry. Even if your brewery is larger than 3,750 square feet, you can still avoid copyright infringement if you confine the viewing area to a space less than that particular square footage. For example, if you have multiple tap rooms in your brewery, only broadcast the game in a single room that doesn’t exceed the maximum square footage requirement.
Super Bowl Trademark Rules
Just like you’ve trademarked the name of your favorite brew (if you haven’t, drop us a line), the NFL has trademarked the name of its favorite game. And like most corporate giants, the NFL can be pretty sensitive about the unauthorized use of its trademarks. So, establishments advertising themselves as a place to watch the “Super Bowl” should proceed with caution.
Under trademark law, a brewery could use another company’s registered trademark if:
1) The use does not suggest a relationship between the advertiser (brewery) and the trademark owner; and
2) The trademarked goods or services cannot be readily identified without using the trademark. This is called “nominative fair use.”
The first part isn’t challenging to achieve. A phrase like “come watch the Super Bowl” probably doesn’t suggest a relationship. At the same time, “get your Super Bowl beers at Brewery X” is more likely to imply an association or sponsorship.
In this case, the second part of nominative fair use is harder to navigate because you can probably find a way to advertise that you are showing the Super Bowl without actually using the words “Super Bowl.” Most Americans will know what you mean when you say, “come watch the Big Game with us!”
How to Avoid Legal Issues With Trademarks
To be safe, just try to avoid using the NFL’s trademark. Do something clever like “come to watch expensive commercials and an American Football game this Saturday” or another similar phrasing. You can call it a “Football Watch Party,” “The Sports Game Watch Party,” or “Game of Touchdowns”; we don’t care. Just don’t use the term “Super Bowl.”
So get your favorite beer, watch commercials and cheer for your team. GO SPORTS!
Hire Drumm Law as Your Trademark & Copyright Lawyers
Drumm Law is a virtual law firm. Unlike our competitors, we do not have an expensive downtown office and the overhead that comes along with it. We call, email, text, Skype, chat, “goto,” webinar, Facebook, Linkedin, meet, tweet, and greet our clients. We have attorneys throughout the country. While we have conference rooms available when needed, we prefer to meet our clients over lunch or drinks. Contact us to book a consultation!
How to Get Out of a Franchise Agreement: Ultimate Guide
They say all good things must come to an end. Unfortunately, that plays true to many franchise relationships as well (though if it’s ending, it may not have been all that good, to begin with). Keep reading to learn more about how to get out of a franchise agreement without any legal troubles.
How to End a Franchise Agreement
Franchise agreements can end either by some form of termination or by expiring by their own terms. When most franchise agreements expire, the franchisee will generally have an opportunity to renew the franchise agreement. When considering whether or not to terminate or not renew (which is similar to terminating) a franchise agreement, there are several essential things franchisors and franchisees should keep in mind about how to get out of a franchise agreement.
First and foremost, franchisees and franchisors should each keep detailed records. Far too often, one party will want to suddenly refuse to renew or terminate an agreement but didn’t take steps to set themselves up for success. These include documenting all defaults and putting the other side on notice.
What is a Franchise Termination
Typically, neither the franchisor nor the franchisee has the right to terminate the franchise agreement unless the other party has breached the contract. A franchisee is usually not allowed to terminate the franchise agreement unless the franchisor committed a material breach (which generally means they did not fulfill one or more of their obligations to the franchisee). They did not cure the breach after receiving notice from the franchisee.
Franchisors, however, can terminate the agreement in the instance of any default by the franchisee. Some of these defaults will require the franchisor to give the franchisee a chance to fix the problem, while others allow immediate termination. The terminating party will almost always need to provide written notice to the party being terminated.
Things to Consider Before Terminating a Franchise
In deciding whether to terminate a franchise agreement, franchisors should understand all applicable laws related to termination. Many states have franchise protection laws that require franchisors to have “good cause” for terminating a franchise agreement. In addition, virtually all states have good faith and fair dealing laws that franchisees can use in their defense to a termination.
Default/Bankruptcy
Many franchise agreement defaults will usually qualify as a good cause (such as non-payment of royalties for an extended period). Some defaults may be so minimal, unreasonable, or unnecessary that a state will not view their violation as a reason to terminate the franchise agreement. Many bankruptcies are also inherently subjective and can introduce ambiguity into whether a default has even occurred. Additionally, some states may require franchisors to provide additional or minimum cure periods to franchisees in cases of termination. Violating any of the notice, good cause, or cure requirements may entitle franchisees to receive monetary damages or reinstatement of the franchise agreement.
Future Lost Profits/Liquidated Damages
Franchisees should be aware of the implications of being terminated by a franchisor. Many agreements will require franchisees to pay franchisors for “future lost profits” (usually labeled as liquidated damages). Franchisees may also be responsible for fees, royalties, and losing the right to operate. They are also expected to pay the franchisor for the remaining term. This is similar to when a tenant’s lease is terminated, but they still owe rent for the remaining years of the lease term. Additionally, franchisors may continue to enforce the non-compete provisions of the franchise agreement, preventing the terminated franchisee from opening a similar business post-termination period.
Suppose you are a franchisor considering terminating your franchise agreement or a franchisee worried they may be facing termination. In that case, it may be time to speak with a franchise attorney about your rights.
What is a Franchise Non-Renewal
There are many reasons why a franchisor or franchisee may not want to renew a franchise agreement. Thankfully for the franchisee, there is nothing to stop them from closing up and walking away when the agreement expires. However, they would still be bound by any provisions that survive the expiration (confidentiality, return of items, etc.). Franchisees should understand their obligations that survive termination. Walking away from a franchise agreement often means losing their business. So it might be better to sell the business to a qualified buyer.
What is Franchise Renewal
Franchisors are limited in picking and choosing which franchisees they want to renew. Many states require that franchisors have good cause not to renew a franchisee. This does not mean they have no control over whether a franchise agreement can be renewed. Virtually all franchise agreements require the franchisee to comply with the agreement to qualify for renewal.
Most franchise agreements also have specific renewal requirements that must be met (paying renewal fees, signing a new franchise agreement, remodeling or renovating the business, etc.). The franchisor may refuse to renew the franchise agreement if a franchisee does not comply with any of these provisions.
Additionally, the franchisee wishing to renew their franchise would have to sign a new agreement and, unless otherwise locked in the old agreement, would be subject to the terms and conditions in the new one. Depending on how much the franchise system has evolved over the years, the new franchise agreement may look significantly different than the one the franchisee signed 5 or 10 years ago. If the franchisee is unwilling to agree to the terms of the new franchise agreement, that might also effectively allow the franchisor to deny renewing the franchise.
Conclusion
Franchisors should document any problems or defaults in their relationship with every franchisee. Much like a termination, sometimes the franchisee’s conduct merits non-renewal, and sometimes it does not. However, suppose the franchisor can’t show that the alleged defaults occurred and that they provided the franchisee with sufficient notice to fix the problems. In that case, it will likely face a more challenging road in ending the relationship.
Contact Drumm Law to Get Help on How to Get Out of a Franchise
Drumm Law is a virtual law firm. Unlike our competitors, we do not have an expensive downtown office and the overhead that comes along with it. We call, email, text, Skype, chat, “goto,” webinar, Facebook, Linkedin, meet, tweet, and greet our clients. We have attorneys throughout the country. While we have conference rooms available when needed, we prefer to meet our clients over lunch or drinks. Contact us to book a consultation!
The Importance of Franchise Record Keeping
Why Do I Need to Keep Records?
Keeping records gives you an additional reason to check and make sure that the documents are properly completed and fully executed. If a dispute arises, incomplete documents can cause major headaches for franchisors. Having complete records is also vital to running your franchise and enforcing your agreements. Without proper records, you may not be able to prove the terms of certain agreements if they are later challenged. Even more importantly, franchisors are required by federal and state law to keep complete records of their franchise dealings. Violating those laws can result in fines going in to the tens of thousands of dollars, which we generally advise against (sorry, bad joke).
What Records Should I Keep and How Long Should I Keep Them?
When thinking of what records you should keep, there are three main categories to consider: records related to your FDD another other “registration” type documents; records related to your franchise sales and agreement; and “administrative” records. As you might expect, the more documents you retain and the longer you retain them, the more you protect yourself in the event disputes arise. There is far more to cover here than could possibly be done in a single blog, but we are happy to answer any specific questions you have about record retention as it pertains to your specific business.
Registration. You should retain all copies of your FDD (including state-specific FDDs if you have them) and amendments that are made it to it. Additionally, you should keep all documents related to the state registration, filing, or exemption process. This includes any documents you submit, comment letters sent or received, and copies of any permits or registrations received. Some examples may include Seller Disclosure Forms, Consent to Service of Process and audited financial statements. The Federal Rule requires you to retain a copy of each materially different version of your FDD for at least three years after the close of the fiscal year in which it was used. Some state laws impose longer record keeping requirements (up to 6 years). However, for maximum security, it is wise to retain all documents that a franchise sale was based on until the expiration of termination of that agreement.
Franchise Sales. You should also retain all documents that were exchanged during the franchise sales process. If any of those documents contained signature lines, you should retain the signed copies of those documents. This includes the Franchise Agreement itself (you don’t want to be caught without a signed copy), any addenda or amendments, the Compliance Questionnaire, the Receipt of the FDD, and any communications (emails, letter, etc.) with the franchisee as these may be used as evidence in subsequent lawsuits. Like the FDD, the Federal Rule requires franchisors to keep copies of executed Receipts for at least three years. However, it is best to keep all documents related to the sale of a franchise until at least 3 years after the termination or expiration of the franchise agreement.
Administrative. This last category is sort of a catch-all for any documents left out by the other two that would either 1) serve to protect a franchisor in case they ever needed to prove they were in compliance with state or federal law, or 2) provide the franchisor with information to help maintain compliance. These documents may include, but are not limited to, registration tracking information, jurisdictional triggering information, instructions for any state-specific procedures that must be followed, and a regularly updated list of all individuals who may offer or sell franchises in the state. Retaining these documents is not required by law, and therefore does not have a set period of time for retention. But, like the other categories, it is best to maintain them as long as they may apply to any franchise agreement currently in effect.
How Should I Categorize My Records?
Keeping records won’t do you any good if you don’t know where to find or access them, so it is important to develop strict filing controls and procedures among you and your staff to ensure documents are kept in the proper location. You could file them based on the categories listed above, or potentially based on client, state or both. At the end of the day, this is truly up to you, and you should do so in whatever way is best for you and your business.
Mistakes to Avoid as a Franchisor
There is enough advice out there for franchisors to fill many books. But we have a few hints from another perspective. Our corporate department at Drumm Law often gets called in to help franchisor clients sell their business, and this is when many of the franchisors’ weaknesses really come to light. We’ve compiled a list below of best practices for franchisors from the corporate attorneys perspective.
1) Don’t forget to educate your sales team (both internal and external).
*During the negotiation for the sale of franchisors, old oopsies from the sales team can cause the buyer to ask for a reduction in purchase price (sales process oopsies = higher risk for buyer) or even derail the proposed deal altogether.
*Franchising is a very litigious area, and franchisors get sued pretty regularly. If you (franchisor) make a mistake in the sales process (improper disclosure, insufficient waiting time, etc), your business has far more risk for the buyer, and that’s going to be costly for you.
*Solution: make sure you are educating everyone on your sales team about the regulations. Have processes in place, have your attorneys provide training, etc.
2) Be discriminating.
*All franchisors go through periods of time when they just really need to bring franchisees in the system. It’s tempting to accept any prospect who is interested. But keep in mind, you’re not considering dating this prospect. You’re considering marriage (ie, joining as franchisor and franchise).
*Solution: really make sure that your prospect is the right one: do they meet your financial, experience needs? Will you be able to work with this person? And be willing to reject prospects who are not the right fit. This will save you so much pain and suffering (and cold hard cash) in the long run.
*When I am working through the due diligence process of selling a franchisor, this comes up a lot. There are several (or even just one) problem franchisees: my client will have lost money on the franchisees during the franchise agreement. And then to make things worse, when my client tries to sell the system, the buyer wants reassurances about the problem franchisees. I’ve seen deals where the buyer only agrees to buy the franchisor if my seller-client takes all future monetary risk for the problem franchisees (the problem that never ends).
3) Details really do matter. Don’t forget to double check your documents just one more time; Keep good files.
*During normal operations, life gets busy, and it’s hard to attend to all the details. You may not read closely through your franchise agreement or addendum, or you may not keep files of all correspondence with your franchisee. It doesn’t seem like it will matter at the time, but these lapses can and likely will come back to haunt you at some time.
*If you do end up with a problem franchisee, you need to have access to these files. And when you sell your business, the buyer will want to see every document and correspondence.
*Solution: Hire one good person who is in charge of all of these details. This person will double check all agreements to be signed (do you have the correct name of the franchisee, all owners listed? Territory correctly described and not overlapping another territory?). This person will be in charge of maintaining a good consistent filing system. If you aren’t able to handle the filing system on your own, buy a software system to help you out.
4) Spend time getting to know your franchisees.
*I hesitate including this one because it’s so obvious. But it is a mistake I see over and over again. By and large, my franchisor clients are in their businesses out of passion, and they love sharing the business with their franchisees. But the mistake I see is when my franchisor-clients don’t spend time getting to know their franchisees and establishing that connection.
*Solution: the more you can establish a connection with your franchisees, the less likely you are to have disputes (which are time consuming, costly, and make your business less attractive to buyers). Hire team members that work well with people, and make sure the franchisees see the support you are providing and not just the policing.
5) Have compassion, but make sure to be consistent.
*We are called in often to help a franchisor create a strategy when their franchisee has gone off the straight and narrow. Sometimes the franchisee is going through a divorce, or has a death in the family or a health problem. Our franchisors want to provide support, but that can be tricky. Because if you offer a benefit to one franchisee, you have to assume that all other franchisees will find out about it. (For example, if you offer a benefit to a California prospect, keep in mind that all other prospects will receive a summary of the benefit you provided to the first prospect.)
*Solution: anytime you offer a benefit to one person (whether it is to a prospect or an existing franchisee), think through this option on a system-wide scale. Would you be willing to offer it to other franchisees? Other prospects? For example, if a franchisee is going through a health problem, you may want to offer management support or one on one support instead of a royalty waiver. And make sure that you would treat all franchisees in a similar position in the same consistent manner.
If you have any questions, always feel free to contact us here.
Who Does California Consumer Privacy Act (CCPA) Apply To?
By introducing the California Consumer Privacy Act, California continues its pattern of enacting legislation that has the potential to impact the franchise industry in a significant way. The CCPA applies to any company that “does business” in California (which is a broad category) and that meets the criteria explained below. If your franchise company is based in California, or (potentially) even if you have any franchisees in California, you need to be prepared to comply with this new law.
What does it mean to “do business” in California?
Because any California resident is protected by the CCPA, doing business in California does not require a company to have an office or a business operation in California. If a California resident visits your store or website and information is collected, you might be required to comply with the CCPA.
What does the CCPA do?
The CCPA grants California residents new rights relating to access to, opting-out of the collection of, deletion of, and sharing of personal information collected by businesses about them.
What is personal information?
Personal information is defined broadly to include any information that “identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” This definition includes items such as names, IP addresses, geolocation data, biometric information, and email addresses.
Who does the CCPA apply to?
The CCPA applies to businesses that “do business” in the State of California, where the business meets one or more of the following criteria:
- Has gross annual revenues in excess of $25 million*;
- Buys, receives, or sells the personal information of 50,000 or more consumers, households, or devices; or
- Derives 50 percent or more of annual revenues from selling consumers’ personal information.
*Keep in mind that it’s not clear whether the State of California would try to aggregate all the franchisees plus the franchisor in calculating this $25 million figure, or aggregate the franchisor and its affiliate entities. For example, if your annual revenues were $15 million, and the revenues of all of your franchisees together was another $15 million, would the CCPA apply to you and each of your franchisees? There is no guidance yet on how this figure will be calculated.
What are the new requirements?
A businesses subject to the CCPA must:
- Maintain a privacy policy that is in compliance with the California Online Privacy Protection Policy and is updated to comply with the CCPA.
- Provide notice to consumers at or before data collection.
- Create procedures to respond to requests from consumers to opt-out of collection, and to know of and delete personal information.
- Respond to requests from consumers to opt-out of collection, and to know of and delete personal information.
- Include a “Do Not Sell My Info” link on any website or mobile app.
- Verify the identity of consumers who make requests to know of and to delete personal information, whether or not the consumer maintains a password-protected account with the business.
- Disclose financial incentives offered in exchange for the retention or sale of a consumer’s personal information and explain how it calculates the value of the personal information. A business must also explain how the incentive is permitted under the CCPA.
- Maintain records of requests and how the business responded for 24 months.
How is a franchisor or franchisee affected?
The CCPA defines a business as “a sole proprietorship, partnership, limited liability company, corporation, association, or other legal entity that is organized or operated for the profit or financial benefit of its shareholders….” A business is further defined as one such legal entity that utilizes “common branding”, which means a shared name, servicemark, or trademark. Franchisors and franchisees could be subjected to the CCPA if any personal information is collected from a California resident (either as a prospective franchisee of the franchisor or as a customer/client of the franchisor or a franchisee) and does not comply with the requirements of the CCPA.
What are the consequences for noncompliance?
As currently written, the CCPA subjects businesses to fines up to $2,500 for each violation and up to $7,500 for each intentional violation, if a business fails to cure an alleged violation within 30 days of notice of noncompliance from the California Attorney General. Also, if unencrypted personal information is acquired by others and the business failed to have a reasonable security program, the business may be directly liable for the costs after a 30-day cure period.
When does the CCPA take effect?
The CCPA took effect on January 1, 2020 and final rules were approved on August 14, 2020.
Please let us know if you have any questions and how we can help. Click here to contact us.
Franchise Advertising by State
Franchise for sale! Only fifty cents (well, not really but you get the idea). You have some amazing advertising pieces to sell your franchise. So you can just use them however and wherever you want, right? No. This would be too simple.
Certain states require you to pre-file advertising materials and wait a specified time before using them in the state. Some states require that you register your franchise offering before you can advertise it.
Which states require you to pre-file advertising materials?
You must submit franchise advertising before it is used in 6 states, and the advertising must be on file for 3 to 7 days to give state examiners time to review and comment:
| State | Number of Days |
| California | 3 business days |
| Maryland | 7 business days |
| Minnesota | 5 business days |
| New York | 7 calendar days |
| North Dakota | 5 business days |
| Washington | 7 calendar days |
If you don’t hear back from the state within these time frames, you can start using the advertisements in that state. You may also want to contact the examiner to confirm that the advertising filing was received.
There is no filing fee to pre-file advertising materials.
Are there any other states with rules on advertising?
A total of 20 states require an advertising filing (i.e. registration or notice filing):
| State | Required Filing |
| California | Registration & Pre-Filing |
| Connecticut | Notice Filing |
| Florida | Notice Filing |
| Hawaii | Registration |
| Illinois | Registration |
| Indiana | Registration |
| Kentucky | Notice Filing |
| Maryland | Registration & Pre-Filing |
| Michigan | Registration |
| Minnesota | Registration & Pre-Filing |
| Nebraska | Notice Filing |
| New York | Registration & Pre-Filing |
| North Dakota | Registration & Pre-Filing |
| Rhode Island | Registration |
| South Dakota | Registration |
| Texas | Notice Filing |
| Utah | Notice Filing |
| Virginia | Registration |
| Washington | Registration & Pre-Filing |
| Wisconsin | Registration |
And don’t forget: every state requires that you first have a finalized FDD that complies with the FTC Rule before advertising.
Is there an exception for internet advertisements?
Did you know that Internet advertising and company websites are also considered advertising? Thankfully there are exemptions for these “advertisements.”
Internet advertisements and company websites are exempt from the pre-filing requirement if you meet certain requirements:
- You disclose the website URL on the cover page of your registered FDD or file a notice with the state within 5 days of publishing the internet advertisement, and
- The advertising is not directed to any person in the state.
In addition, California requires you to provide this information on their own form when you register or renew the FDD.
What disclaimers do I need to include on my advertisements?
Your advertising materials needs to include a disclaimer. The disclaimer should be customized to the content of your advertisement and the states where you are using it. Below are some example disclaimers:
General Disclaimer
“This advertisement is not an offering. An offering can only be made by a Franchise Disclosure Document filed with the referenced state, which filing does not constitute approval. [FRANCHISE] franchises will not be sold to any resident of any such jurisdiction until the offering has been exempted from the requirements of, or duly registered in and approved by, such jurisdiction and the required Franchise Disclosure Document has been delivered to the prospective franchisee before the sale in compliance with applicable law. The following states regulate the offer and sale of franchises: CA, HI, IN, IL, MD, MI, MN, NY, ND, RI, SD, VA, WA and WI. If you reside in one of these states, you may have certain rights under applicable franchise laws.”
State-Specific Disclaimers and Franchisor Information
Some states require specific disclaimers or information to be included in advertisements as follows:
| State | Disclaimer/Information |
| California | Include this language: THIS FRANCHISE HAS BEEN REGISTERED UNDER THE FRANCHISE INVESTMENT LAW OF THE STATE OF CALIFORNIA. SUCH REGISTRATION DOES NOT CONSTITUTE APPROVAL, RECOMMENDATION, OR ENDORSEMENT BY THE COMMISSIONER OF BUSINESS OVERSIGHT NOR A FINDING BY THE COMMISSIONER THAT THE INFORMATION PROVIDED HEREIN IS TRUE, COMPLETE, AND NOT MISLEADING. |
| Maryland | You must include the franchisor’s name, address, and phone number. |
| Minnesota | You must include the franchisor’s name, address, telephone number, and state registration number. |
| New York | Include this language: THIS ADVERTISEMENT IS NOT AN OFFERING. AN OFFERING CAN ONLY BE MADE BY A FRANCHISE DISCLOSURE DOCUMENT FILED WITH THE DEPARTMENT OF LAW OF THE STATE OF NEW YORK. SUCH FILING DOES NOT CONSTITUTE APPROVAL BY THE DEPARTMENT OF LAW OF THE STATE OF NEW YORK. |
Disclaimer for Using Financial Performance Representations
“[Gross revenues/net profit/etc.] figures based on unaudited financial information as submitted by franchisees operating from [DATE] to [DATE] and as published in Item 19 of our [ISSUANCE DATE] Franchise Disclosure Document (FDD). As of [DATE] there were [NUMBER] [FRANCHISE] outlets in operation. Some outlets have sold/earned this amount. Your individual results may differ. There is no assurance that you’ll sell/earn as much. Written substantiation for the financial performance representation will be made available to the prospective franchisee upon reasonable request. See Item 19 of our [ISSUANCE DATE] FDD for a definition of gross revenues and for further information.”
Keep in mind that if you want to include earning claims in your advertisements, you can only include figures that already appear in Item 19 of your FDD, without any alteration.
We’d recommend you always first send your advertising materials to a franchise attorney for review, even if you aren’t using them in a pre-submission state. This helps to avoid inadvertently saying something illegal or that you’ll later regret.
Learn more about franchising here.
California’s Assembly Bill No. 5 Affects Franchising
Many franchisors are wondering what changes they should make in response to California’s AB-5 that went into effect on January 1, 2020. In a nutshell, we don’t think it makes sense to make any significant changes to a franchise system because the applicability of AB-5 to franchisors isn’t fully determined, and there will likely be changes to this law in 2020.
The purpose of AB-5 is to crack down on companies like Uber and Lyft that treat their employees as independent contractors when they should (according to California) be treated as employees. California wants to be able to collect taxes and unemployment contributions, and they want to be sure employees receive benefits, overtime, and minimum wages.
What does this mean for franchise systems in California? Franchises are not specifically mentioned in the bill, but currently they are also not exempted from it. So, in theory, unless a franchisor can show that its franchisees meet certain conditions, the franchisor would have to treat its California franchisees as employees and pay employment taxes and provide certain benefits. However, the issue is far from settled, and most franchise attorneys agree that making any changes in response to AB-5 now would be premature. Our understanding is California intends to modify the law in 2020, and the author of the law, Lorene Gonzales, recently tweeted, “AB-5 is not intended to interfere with independent businesses.”
The new law assumes anyone compensated for labor or services is an employee. In order to be exempt from this, a hiring entity (potentially a franchisor) must satisfy all three parts of the AB-5 test:
(1) Show that the person is free from the control and direction of the hiring entity, on paper and in practice. This is similar to the joint-employer concerns that have been on the radar for several years already. Most franchisors can overcome this requirement through use of targeted language in the FDD, franchise agreement, operations manual, and standard operating procedures;
(2) Show that the person performs work that is outside the usual course of the hiring entity’s business. This part of the test could be more difficult for a franchisor to overcome, especially if there are company-owned outlets or the franchisor advertises that the “company” (by use of general references to the system name) provides certain services; and
(3) Show that the person customarily operates independently through a business, occupation, or trade that is the same nature as the work performed. Franchisors would need to show that their franchisees are customarily involved in the same industry (for example, a plumber who purchases a plumbing franchise).
Another factor that may help a franchisor steer clear of AB-5 is to avoid using any structure that makes franchisees look like employees. We recommend you:
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Ensure franchisees use a business entity to operate the franchise;
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Require franchisees to hire employees to avoid a situation where a franchisee is the sole employee of the franchise; and
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Avoid any structure that could be interpreted as a system where a payment is made from the franchisor to franchisees for services performed.
Every franchise system is unique, and it would take a case-by-case evaluation to judge whether a system's franchisees could fall within the scope of the law. For the time being, we expect there to be changes to the law in 2020, and there are ongoing lobbying efforts to revise the bill’s definition of “employer” or include a statutory exemption for franchises.
Update: On November 16, 2020, the International Franchise Association (IFA) and others filed a lawsuit against California to stop the state from enforcing AB-5 against franchises. They argue the law “fails to take into account the basis of our basic business model.” This case is currently pending in federal court in the Southern District of California.
Also, several ride-share and food delivery companies, including Uber, Lyft, and DoorDash scored a win on election day when Proposition 22 passed, allowing them to continue treating employees as independent contractors. Ironically, this means the very companies that were the target of AB-5 are now essentially exempt from the law. Unfortunately for the franchise industry, franchises are still potentially subject to the law and will have to wait for the litigation to play out to get more clarity.
Our team will keep researching this issue as it unfolds. If you want to talk to a franchise attorney about these issues, please contact us.
Item 19 Financial Performance Representations & COVID
You’ve probably heard the phrase, “COVID ruined everything” more than once. And unfortunately, we’re here to tell you the same likely applies for Item 19 financial performance representations (FPRs).
Any operating results presented in Item 19 must have a reasonable basis and cannot be misleading. If COVID has caused (1) a drop in revenue, (2) temporary or permanent store closures or (3) changes to the business model/operations, then presenting 2019 or earlier financial data may no longer have a reasonable basis and might be misleading. This means the FPR will most likely be rejected by franchise state examiners and may result in franchisee litigation in the future.
Drop in Revenue
Issue: If franchisees’ revenue during periods impacted by COVID is lower, it may be misleading to show only the results from operations when revenue wasn’t impacted by COVID.
Solution: Include operating results during period impacted by COVID. The registration states have universally approved including data that compares monthly revenues prior to 2020 to periods impacted by COVID. This data should cover time periods impacted by COVID and should include the same reporting group that is used for any data already presented. This disclosure allows prospective franchisees to make their own judgements about how the pandemic may impact operating results.
Temporary/Permanent Closures
Issue: If franchised businesses temporarily closed during the pandemic or went out of business, it may be misleading to show only the results from a period when franchised businesses were operating full-time or before they permanently closed.
Solution: Include closure data in the Item 19. In addition to including a year-over-year comparison (see above), the Item 19 should be updated with information on temporary and permanent closures. This information can be included in an introduction or footnote and should provide details on when franchised businesses closed and re-opened—or when they closed permanently—and the number of franchised businesses affected. Any financial data should include the operating results of the franchised businesses that temporarily or permanently closed (i.e. revenue would be reduced or equal to $0 for those franchised businesses).
Changes to Operations
Issue: If franchised businesses had a shift in their business model or operations (e.g. a dine-in only concept that begins offering delivery or adds drive-thru), it may be misleading to show only results from a period before operations changed.
Solution: Re-draft or remove Item 19. If changes to operations are significant enough, then there is likely no reasonable basis for including results prior to the pandemic (e.g. you can’t use operating results from franchised businesses that don’t operate a business that is “substantially similar” to the franchise being sold). If the changes are minor, then at a minimum these changes to operations should be described in the Item 19.
Cautionary Note for Using Different Item 19s
Keep in mind that if a franchisor revises or removes an FPR in one state, it’s risky to keep using the existing FPR in other states. The Federal Trade Commission suggests that any Item 19 changes made to comply with one state’s requirements must also be reflected in every other state (https://www.ftc.gov/tips-advice/business-center/guidance/amended-franchise-rule-faqs#38). For this reason, we generally recommend franchisors always use the same Item 19 in all states.
Be sure to see our blog on FPRs at https://drummlaw.com/blog/financial-performance-representation/.