Franchise - New Jersey Law Blog

Buying an Existing Business -- What to Consider

rdeluca@stark-stark.com (Stark & Stark) — Mon, 29 Sep 2008 08:08:45 -0500

Cary S. Kvitka, member of Stark & Stark's Business & Corporate and Franchise groups, authored the article Buying an Existing Business — What to Consider for the September 2008 issue of Mercer Business Magazine.

Mr. Kvitka discusses the risks associated when opening a business - whether it is your first business or you are an established business owner looking to expand into a new market. Mr. Kvitka advises business owners to make sure that the transaction is properly structured, that you’ve exhaustively investigated the target business, and that the contract for sale is properly drafted.

You can read the full article here (PDF).

What Franchisors Can Expect in Bankruptcy

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Thu, 14 Aug 2008 08:07:08 -0500

In light of the recent high profile bankruptcy filings of dining establishments such as Bennigans and Steak N Ale, Adam Siegelheim leads a discussion with Bankruptcy & Creditor’s Rights Attorneys Timothy Duggan and Thomas Onder to outline what franchisors need to understand about the bankruptcy process.

In this podcast the franchise and bankruptcy attorneys discuss: what happens to the franchise’s intellectual property assets; what are the responsibilities of the franchisees; how does the bankruptcy filing impact the restrictive covenants which exist and how do potential third-party purchasers of the system come into play.

You can download the full podcast here. (10.3 MB)

The Franchise Relationship: Trends in the Law

rdeluca@stark-stark.com (Stark & Stark) — Wed, 16 Jul 2008 08:08:24 -0500

Adam J. Siegelheim, member of Stark & Stark's Franchise group, was a participant in the June 2008 franchise roundtable for GC Mid-Atlantic Magazine, titled The Franchise Relationship: Trends in the Law.

The panelists discussed topics related to the franchise industry including a discussion on the difference between a franchise and a license, what are the most common factors in disputes that arise among franchisors and franchisees and tips on how to how handle dispute resolution issues in a franchise agreement.

You can read the full article here.

Vermont House Bill Which Would Have Rendered Non-Competes Unenforceable Does Not Pass

jmacdonald@stark-stark.com (John E. MacDonald) — Wed, 25 Jun 2008 13:37:39 -0500

In a previous blog post I discussed House Bill 790 in Vermont which would have had a substantial negative impact upon franchising in Vermont. It would essentially void non-compete provisions in franchise agreements.

The Bill apparently languished in committee through the end of the May session, which effectively kills it for the time being. The danger of such bills is that they tend to leach into “sister” states. The demise of the Vermont Bill is a positive development for franchisors and helps strengthen the franchise community in general because it protects the general integrity of franchise systems.

How To Start A Business

rdeluca@stark-stark.com (Stark & Stark) — Thu, 05 Jun 2008 08:13:48 -0500

Cary S. Kvitka, member of Stark & Stark's Franchise and Business & Corporate groups, will present a seminar in association with SCORE of Princeton, Counselors to America's Small Business. SCORE offers free and confidential small business advice to help you build your business from idea to start-up to success.

The seminar will focus on what you need to know when starting a business. Mr. Kvitka will discuss:

The pros and cons of the three options: buying an existing business; purchasing a franchise; or building your own business.
Intellectual property issues, such as trademark or copyright concerns.
How to negotiate commercial leases and other vendor contracts.

You can access additional information, and registration information, here.

On Franchising

rdeluca@stark-stark.com (Stark & Stark) — Wed, 07 May 2008 08:39:53 -0500

Adam J. Siegelheim, member of Stark & Stark's Franchise Group, was quoted in the article On Franchising in the May 6, 2008 edition of the Wall Street Journal. The article addresses some of the most common issues facing new franchisors and some new concerns franchisors need to be aware of before starting a franchise of their own. Mr. Siegelheim comments on some of the factors that franchisors need to take into consideration when starting a new franchise, and some tips to ensure the longevity of your franchise concept.

You can read the full article on the Wall Street Journal Online (registration required).

NJ Legislature to Consider Applying the Franchise Practices Act to "Mobile" Franchises

jmacdonald@stark-stark.com (John E. MacDonald) — Wed, 23 Apr 2008 08:09:33 -0500

House Bill 2491 and Senate Bill 1539 of the New Jersey Legislature seek to expand the type of franchises, which are subject to the New Jersey Franchise Practices Act. In general, the New Jersey Franchise Practices Act currently applies to franchises where: 1) the franchisor has granted the franchisee a license, mark, trade name, etc.; 2) there is a “community of interest” in the marketing of goods and services; 3) where the franchisee has established or maintains a “place of business” in New Jersey; 4) where the gross sales between franchisor and franchisee are more than $35,000 in the prior year; and 5) more than 20% of the franchisee’s sales are derived from the franchise. The proposed change in the statute would apply the provisions of the Franchise Practices Act to “mobile” franchises, in other words, franchises that do not have a brick and mortar location. Under the proposed Bill, a “place of business” would include a location where the franchisee “displays for sale or at which or from which the franchisee sells the franchisor goods.” This would include an office or warehouse from which franchisee personnel visit or call upon customers or, perhaps more importantly from which the franchisor’s goods are delivered to customers.

Potentially more significant than the proposed changes to the definition of “place of business” is the additional language that the Bill would tack on to the “general purpose” section of the Franchise Practices Act. The proposed Bill would add the following language:

“…and to protect franchisees from unreasonable termination by franchisors that may result from a disparity of bargaining power between national and regional franchisors and small franchisees. The legislature finds that these protections are necessary to protect not only retail businesses, but also wholesale distribution franchisees that “through their efforts” enhance the reputation and goodwill of franchisors in this State. Further, the legislature declares that the courts have in some cases more narrowly construed the Franchise Practices Act then was intended by the legislature”.

This additional language should concern franchisors doing business in New Jersey, since it is unnecessary to achieve the expansion to the “place of business” definition that is the focus of the Bill. This tougher language may indicate that there are further changes to the statute being considered. Certainly, the inclusion of the proposed language would be used as a justification by judges to give much broader application to the Act than has been the case in years past.

The two Bills are currently in the initial stage of the legislative process, and will probably not be acted upon until May or June of this year. The current sponsors of the two Bills are Assemblyman Joseph Cryan – District 20 (Union County) and Senator Bob Smith – District 17 (Middlesex and Somerset Counties). The legislation was introduced in the House on March 10, 2008, and in the Senate of March 17, 2008.

Vermont Legislature Introduces Legislation That May Render Non-Compete Provisions in Franchise Agreements

jmacdonald@stark-stark.com (John E. MacDonald) — Mon, 07 Apr 2008 09:05:26 -0500

The Vermont legislature introduced House Bill No. 790 on February 1, 2008. The Bill would render non-compete provisions of franchise agreements void unless the franchisor can prove to the Court’s satisfaction that the franchise agreement is: (1) consistent with public policy; (2) necessary to protect the franchisor; (3) not a contract of adhesion; and (4) reasonable considering the subject matter and conditions. Clearly the third requirement is problematic.

A “contract of adhesion” is legal-speak for “non-negotiable” and is “take-it-or-leave-it” in nature. Most franchise agreements are non-negotiable because it is important for the system to maintain uniform and consistent standards. However, various courts have deemed franchise agreements to be contracts of adhesion because of the superior bargaining power of the franchisor. Since most franchise agreements are contracts of adhesion, and if this Bill passes, it will be extraordinarily difficult for franchisors to enforce non-competition agreements among franchisees in Vermont.

One can only hope that this idea does not spread beyond the borders of the Green Mountain State. Vermont’s legislature appears intent of following this strange course of action, which is out of step with the other states. Watch this log for more updates.

Two Stark & Stark Attorneys Named Legal Eagles in Franchise

rdeluca@stark-stark.com (Stark & Stark) — Tue, 01 Apr 2008 08:01:10 -0500

Rachel Lilienthal Stark, Shareholder in Stark & Stark's Franchise group, and Adam J. Siegelheim, member of Stark & Stark's Franchise group, have been named Legal Eagles in the franchise industry by Franchise Times Magazine.

Legal Eagles are chosen annually from hundreds of nominations across the country. Legal Eagles are recognized for their strong reputations among their peers, an active involvement in the franchise community through organizations such as the International Franchise Association and the American Association of Franchisors, and their experience and expertise in the franchise industry.

Rachel Lilienthal Stark concentrates her practice in the representation of start-up and emerging franchisors on a variety of issues including compliance with all federal and state regulations, disclosure documents, acquisitions and financing.

Adam J. Siegelheim focuses his practice in the representation of franchisors in various matters, including the preparation of disclosure documents, state registrations, and compliance with applicable federal and state regulations. Mr. Siegelheim is a member of the International Franchise Association, the American Bar Association Forum on Franchising and the New Jersey Bar Association's Franchise Law Committee.

New Jersey Legal Update - Podcast # 73

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Fri, 14 Mar 2008 08:07:04 -0500

This week's Franchise Law podcast is an interview with the Vice President of Franchisee Development for Huntington Learning Center, Tom Spadea. The interview took place at February's 2008 International Franchise Association's Annual Convention in Orlando, Florida and discusses franchise development and recruitment strategies, the new Franchise Disclosure Document, and a discussion on how to train your employees on policy and procedure updates.

This week's Franchise Law Podcast is presented by Adam J. Siegelheim of Stark & Stark's Franchise group.

You can download the New Jersey Legal Update podcast #73 here (8.6 MB)

New Jersey Legal Update - Podcast # 72

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Fri, 25 Jan 2008 08:05:57 -0500

This week's Franchise Law podcast is an interview with the President of MFV Expositions, Tom Portesy. The interview discusses the growing rate of franchises in and outside of the United States and what this means for the future of the franchise industry. The interview took place at the 2008 Franchise Expo South, held earlier this month in Miami Beach, Florida.

This week's Franchise Law Podcast is presented by Shareholder of Stark & Stark's Franchise Law Group, Adam J. Siegelheim.

You can download the New Jersey Legal Update podcast #72 here. (3.6 MB)

New Jersey Legal Update - Podcast # 71

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Thu, 24 Jan 2008 09:55:56 -0500

This week's Franchise Law podcast is an interview with Chief Franchising Officer of Hollywood Tans, Steve Beagelman. The interview took place at the 2008 Franchise Expo South, held earlier this month in Miami Beach, Florida.

This week's Franchis Law Podcast is presented by Shareholder of Stark & Stark's Franchise Law Group, Adam J. Siegelheim.

You can download the New Jersey Legal Update Podcast # 71 here. (6.8 MB)

New Jersey Legal Update - Podcast # 70

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Fri, 04 Jan 2008 08:04:00 -0500

This week's New Jersey Legal Update podcast will discuss the necessary insurance coverage needed for franchisors in order to protect your franchise system against claims. This podcast will address good practices to follow when determining your level of insurance, as well as a discussion on industry standards and the various types of coverage available to you and your business.

This week's New Jersey Legal Update is presented by Adam J. Siegelheim, a member of Stark & Stark's Franchise Group.

You can download the New Jersey Legal Update Podcast # 70 here. (6 MB)

At Will Employment Alive and Well in the Franchise Context

jmacdonald@stark-stark.com (John E. MacDonald) — Tue, 18 Dec 2007 08:01:22 -0500

In a recent unpublished decision by the New Jersey Appellate Division, known as Ashwall and Winograd v. Prestige Management Services, Inc., et als. (Decided October 16, 2007), the Court dealt with a claim by employees of a New Jersey automobile dealership franchise who claimed religious discrimination and “promissory estoppel” against their former employer. The Plaintiffs, a manager and top-salesman, claimed discrimination based on their religious faith (Judaism) under the New Jersey Law Against Discrimination. One of them had also claimed that, since he had been given the task of turning a non-profitable dealership “around,” that he was entitled to employment for at least a reasonable period of time.

His argument was that he had been a very successful manager of another dealership, and by asking him to take on the management of a non-profitable dealership, the franchisee in effect “owed” him employment for a certain period of time. This claim had been dismissed by the trial judge prior to the trial of the case, and was never heard by a jury. While there appears to have been some factual merit to the Plaintiffs’ argument, the Appellate Division relied on traditional notions of “at-will” employment and determined that the Court had been correct in dismissing the claim for Promissory Estoppel as they did not find that there was enough evidence that the parties had intended to enter a long-term commitment. Specifically, the Court was looking for “assurances of employment” that were “clear, specific and definite.” The franchisee in this case avoided any liability on the “promissory estoppel” claim (though there was a jury verdict against it for discrimination).

This case highlights the potential for confusion between the franchisee who owns several locations and employees who are “specially assigned” to trouble-shoot certain kinds of jobs. To avoid this confusion, a franchisee should notify an employee clearly and in writing that their “at-will” employment relationship continues despite the new assignment and that there is no guarantee of continued employment. Such a written assurance would have most likely avoided litigation in this case and would have saved the franchisee from having to defend such a claim.

Coordinated Review Program Indefinitely Suspended

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Wed, 03 Oct 2007 08:00:36 -0500

Franchisors and their counsel are not the only ones scrambling to digest the intricacies of the revised FTC Rule. Citing the challenges in examiners having to learn a new disclosure format, the franchise coordinated review program has been suspended indefinitely. The suspension went into effect on July 31, 2007.

The coordinated review program was adopted to streamline the franchise registration process. It provided franchisors with the ability to simultaneously register their franchise offering in two or more participating states. A lead examiner would then be assigned to coordinate and oversee the registration process among the states. Prior to the suspension, 11 states participated in the program.

The future of the coordinated review program is not known. However, state administrators plan to re-evaluate the program after July 1, 2008, when the new disclosure format becomes mandatory and examiners will no longer have to review disclosures under both the new and old formats.

Do you think you have a deal? Maybe not, according to the Third Circuit.

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Mon, 27 Aug 2007 08:44:07 -0500

In a recent decision by the Court of Appeals for the Third Circuit, the court held that the express language of the franchise agreement will govern over any previously agreed upon terms and conditions.

In Travelodge Hotels, Inc. v Honeysuckle Enterprises, Inc., the franchisee had previously owned and operated an independent hotel in Branson, Missouri. During discussions with Travelodge, it indicated that it would convert to a Travelodge franchise if it could be assured that such conversion would result in a fifteen percent increase in business. Sales representatives of Travelodge provided Honeysuckle with a “Monthly Lost Business Summary Report” indicating that Travelodge was unable to fulfill 13,000 reservations in Honeysuckle’s market. The franchisee and the sales representatives from Travelodge calculated that 5,400 of those reservations would have amounted to a fifteen percent increase in the franchisee’s business.

Honeysuckle subsequently entered into a license agreement with Travelodge. Although Honeysuckle negotiated three changes from the original license agreement, the final agreement did not include any reference to the condition regarding increased sales. In contrast, the license agreement expressly disavowed any express or implied covenants or warranties that were not otherwise stated in the agreement. The license agreement also contained language that the franchisee acknowledge that no salesperson made any promise or provided information about projected sales, revenues, income, etc.

After entering into the license agreement, the franchisee failed to pay the required royalty payments. Travelodge filed suit in the United States District Court for the district of New Jersey seeking outstanding fees as well as liquidated damages. Honeysuckle filed a breach of contract counterclaim, as well as a claim that it was fraudulently induced to enter into the license agreement by Travelodge producing the “Monthly Lost Business Summary Report”, indicating that Honeysuckle would increase its business by at least fifteen percent. Honeysuckle also produced evidence that the report inaccurately reported the number of room requests. Notwithstanding, the District Court entered judgment in favor of Travelodge.

In affirming the District Court’s decision, the Court of Appeals held that if the franchisee believed that Travelodge had guaranteed the fifteen percent increase in business, it would have insisted that such term be included as one of the negotiated changes to the license agreement and would not have signed an agreement that expressly negated any such guarantee. In addition, the court held that any purported reliance by Honeysuckle on Travelodge’s statements were refuted by the multiple acknowledgments contained in the agreement that no Travelodge representative made any representations about sales and profits.

Congress Considering Legislation That Would Render Arbitration Clauses in Franchise Agreements Unenforceable

jmacdonald@stark-stark.com (John E. MacDonald) — Tue, 21 Aug 2007 08:04:34 -0500

Last month, a House bill known as H.R. 3010 and Senate Bill 1782 (both generally known as the “Arbitration Fairness Act of 2007”) started moving through the judiciary committees on their way to further action by Congress. These bills would seek, among other things, to void all arbitration agreements related to franchise disputes. A “franchise dispute” is defined in both bills to include disputes regarding franchise sales, operations, and even the franchise fee itself. These bills are an attempt by legislators to circumvent established case law that have uniformly enforced arbitration agreements in the areas of employee disputes and consumer purchases.

The impact of this legislation is considerable. New Jersey courts, like several other states, have held that franchise agreement provisions providing for out-of-state arbitrations are enforceable. See Allen v. World Inspection Network, Int’l, Inc., 389 N.J.Super.115, 911 A.2d 484 (App. Div. 2006). Previously, the New Jersey Supreme Court held that forum-selection clauses in franchise agreements are presumptively invalid, and should not be enforced. Kubis & Perszyk Assocs. v. Sun Microsystems, 146 N.J. 176 (1996). However, New Jersey courts (as in other states) have distinguished arbitration provisions from other forum selection clauses under the rational that the Federal Arbitration Act preempts state franchise laws. This legislation would effectively negate the rational applied by the Allen court, as well as other courts throughout the country.

While not much will occur during the remainder of August due to Congress’ summer break, these bills will be moving through the respective Committees at the beginning of September.

The Franchisor Community Dodges Another Legislative Bullet

jmacdonald@stark-stark.com (John E. MacDonald) — Mon, 20 Aug 2007 13:36:51 -0500

The deceptively titled “Employee Free Choice Act of 2007” has been defeated in Congress. The Act, which would have allowed for, among other things, “card voting” by employees to establish a union (in lieu of an actual, verifiable vote) posed a significant risk to the franchisor community.

Although strong union interests quickly moved the bill through the House in the Spring, bi-partisan action has effectively defeated the Bill. Although this is good news for franchisors, the franchisor community needs to watch for any attempts to revive this defeated legislation over the next year leading up to the presidential election campaign.

Big Deal? Domino's Decision could have big impact, or not

rdeluca@stark-stark.com (Stark & Stark) — Tue, 14 Aug 2007 08:05:05 -0500

Adam J. Siegelheim, member of Stark & Stark's Franchise Group, was quoted in this month's Franchise Times' article Big Deal? Domino's decision could have big impact, or not.

You can read the full article here.

Court enters Preliminary Injunction Enjoining New Jersey Lawn Care Franchisee From Operating

asiegelheim@stark-stark.com (Adam J. Siegelheim) — Thu, 02 Aug 2007 08:01:33 -0500

NaturalLawn of America, Inc (NaturalLawn), a national franchisor of organic-based lawn care services obtained a preliminary injunction against a former New Jersey franchisee (the West Group), enjoining it from continuing to operate. NaturalLawn of America, Inc. v. West Group, LLC, 484 F.Supp.2d 392 (D.MD. 2007).

The West Group entered into three separate franchise agreements for different territories in New Jersey. At the expiration of these agreements, the West Group elected not to renew its franchise agreement, claiming that NaturalLawn’s marketing practices violated New Jersey law regarding pesticides.

Each franchise agreement contained post-termination covenants, including a two-year non-compete. Notwithstanding, upon the expiration of the franchise agreements, the West Group began operating a substantially similar business in the same territories, providing its customers with a letter indicating that it was now operating under the name “Jersey Green”.

NaturalLawn filed suit in the United States District Court in Maryland. In granting the preliminary injunction, the court described the West Group’s behavior as “inexcusable” and “as blatant and unjustified a repudiation of subsisting contractual obligations in a commercial context as had been known to or encountered by this court.” The court held that NaturalLawn was likely to succeed in proving that its trademark had been infringed, that West Group misappropriated NaturalLawn’s trade secrets, including its customer lists, and that the West Group had violated the non-compete.

In rejecting the West Group’s argument that NaturalLawn’s marketing practices violated New Jersey law, the court referred to this argument as “deeply misguided” and that the court was “not remotely convinced that New Jersey law is violated by [NaturalLawn’s] business model.” In addition to not providing the court with sufficient evidence that the marketing practices violated New Jersey law, the court also pointed out that the West Group provided no plausible explanation as to why it continued to operate the franchises for more than two years.