Top 5 FDD Updates for 2019
Everyone gets a fresh start in January – franchisors included! While individuals are coming up with their resolutions for the new year, franchisors should be thinking of updates they want to make to their franchise disclosure documents (FDDs). Some franchisors will increase their initial franchise fees and royalties while others may modify their franchisees’ marketing obligations. Aside from all of the required annual updates, here are the Top 5 updates that every franchisor should be making this year.
1. Joint-Employer Liability Issues
If you’re a member of the International Franchise Association, you’ve probably gotten a ton of emails from their awesome team about the recent joint-employer issue. At its heart, joint-employer liability means whether a franchisee’s employee can sue the franchisee and the franchisor as joint-employers. For instance, if an employee is sexually harassed by a manager, can they sue the franchisor in addition to the franchisee? This all boils down to control. If the franchisor has its hands in the franchisee’s hiring process, then the franchisor will likely be considered a joint employer of the offender, and then they may be liable for damages.
We’re making sure all of our clients’ FDDs don’t include language that would lead a reader to believe the franchisor either oversees or actively participates in their franchisees’ hiring process. A good rule of thumb is for the franchisor to prescribe staffing levels and maybe basic qualifications for store managers. However, the franchisor should not approve of or make edits to all employment contracts, interview employees, or recruit employees for their franchisees. You would think that’s common sense, but we’ve seen it all!
2. Non-Competition Clauses
“Upon the expiration or termination of this agreement for any reason, you shall not do X, Y or Z for a period of two (2) years within XX miles of any franchise location…” We’ve all seen non-competition clauses, but have you ever had to enforce one? We have. Courts across the country are only willing to enforce non-competition clauses that are reasonable in time, territory and the type of prohibited conduct. While there are majority rules out there, each state has its nuances in what its courts consider “reasonable.” Don’t even try to enforce a non-competition clause in California!
3. Non-Solicitation Clauses
You probably prohibit your franchisees from soliciting their former employees, other franchisees, or employees of other franchisees upon the expiration or termination of their franchise agreement. Did you know that this was recently seriously frowned upon by several federal courts? In some places, this is considered an unfair restraint of trade. We’re looking to make sure that these are drafted properly to ensure our franchisor clients don’t find themselves defending a lawsuit with the tables reversed! These have recently been labeled “anti-poaching provisions.”
4. Price Setting Clauses
Do you set specific prices for products or services that your franchisees have to follow? Burger King did that – remember $0.99 cheeseburgers? I bet it was fun for them to defend a lawsuit against almost all of their franchisees. Their franchisees argued that Burger King was gouging their profits by fixing this price, and the Supreme Court agreed. The highest court in the country essentially ruled that franchisors can give a maximum and minimum price range that their franchisees can be required to adhere to.
5. Default Provisions
We’re finding that more and more franchisors are willing to work things out with franchisees that are struggling financially or otherwise. Many defaults used to be non-curable or cause for automatic termination of the franchise agreement. However, the trend is to provide thirty-day cure windows for franchisees that run afoul of the terms of their franchise agreements. Allocating these requirements between curable and non-curable defaults is an art. You have to think about the entire default process and what the “road to termination” looks like from both the franchisor and the franchisee’s perspectives.
Aside from the above hot issues, it’s important to revisit Item 7 initial investment numbers, Item 19 representations, and obviously the Item 20 tables. All of those numbers must be up to date for the FDD to remain federally compliant. Don’t forget to disclose whether you use brokers and whether your franchise fees are uniform or if you’ve cut any deals. If you’ve been required to defer in any registration states, there are ways to get past that requirement as well.
If you have questions about any of these updates, or if you’d like to talk about updating your FDD for 2019, give us a call at (980) 202-5679. Franchise renewal season is almost here, and now’s your chance to tighten up your FDD and franchise agreement!