Kaufman and Canoles

Kaufman & Canoles Law Blog

Intellectual Property & Franchising Law

Friday, January 10, 2014

Misuse of Social Media Photographs Can Lead to Costly Copyright Infringement

Anyone who has ever had Getty Images’ lawyer send them a letter demanding payment of retroactive fees for trivial usage of copyrighted photographs on their website will see the irony in a recent federal court decision granting a photographer $1.2 million in damages for misuse of his photographs by that company and another who took eight of his photographs from a Twitter account and subsequently published them and licensed them for use by others.  The dispute arose when freelance photographer Daniel Morel found himself on the scene of the 2010 Haiti earthquake and uploaded some photographs to his Twitter account; another Twitter user transferred the images to his account; and in its haste to provide authoritative coverage on the earthquake the Agence France-Presse news service obtained Mr. Morel’s images from the other Twitter user and published them with attribution to that individual rather than Mr. Morel as the source.  As a U.S. distributor for AFP, Getty Images also obtained access to and redistributed Mr. Morel’s photographs.  Even though they learned fairly quickly that the photographs belonged to Mr. Morel rather than the other Twitter user, AFP and Getty Images were slow to take corrective action and appear to have followed a course of action designed to fend off Mr. Morel until they had done what they wanted to do with his photographs.

The matter was actually taken to litigation by AFP in a declaratory judgment action filed against Mr. Morel, and the eventual $1.2 million judgment in his favor resulted from his counterclaims in that case.  Even though any profits gained by AFP and Getty Images from the photographs appear to have been quite low, the jury in the case awarded Mr. Morel statutory damages of $150,000 per image for willful copyright infringement, plus a much smaller amount for violations of the Digital Millennium Copyright Act, bringing the total awarded to Mr. Morel to just over $1.2 million.

The dispute between Mr. Morel and Getty Images, AFP and other users of his photographs who obtained them through Getty Images has been in the news since the 2010 Haiti earthquake.  The judge in the case ruled in Mr. Morel’s favor early in 2013 that Getty Images and AFP had infringed his rights under U.S. Copyright Law, but left it to a later jury trial to determine the amount of damages to be awarded.  The jury found AFP and Getty Images to be willful infringers, leading to the substantial amount of the damage award.  In the course of events the judge and jury rejected arguments by AFP and Getty Images that they took appropriate efforts to correct their mistakes with regard to the photographs after learning of Mr. Morel’s ownership, that he was at fault for uploading the photos to his Twitter account, and that because of Twitter’s terms of use they were free to take the photos and use them for whatever purposes they wanted.

One lesson to be learned from this case is that just because someone uploads a photograph (or anything else, for that matter) to a social media account does not mean that anyone else is free to download it and use it for commercial purposes.  Doing so risks a claim of copyright infringement and the need to eventually pay the owner for use of the photographic or other download.  While this is the basis of the business model of Getty Images and others who pursue users of copyrighted materials on their websites, the same copyright law on which they profit under that business model proved to be a two-edged sword that cut against them in this instance. – Bob Smartschan

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Thursday, January 2, 2014

Hidden Trap in Confidentiality Provisions in Settlement Agreements Entered into by Franchisors

Franchisors entering into settlement agreements must be certain that the settlement agreements give the franchisor the right to make any disclosures required by the Franchise Disclosure Document (“FDD”), without breaching any confidentiality provisions in the settlement agreement.

In a recent case, a franchisor had entered into a settlement agreement with a franchisee, which included a confidentiality clause.  The Federal Trade Commission’s Franchise Rule requires franchisors to disclose all material terms of a settlement arising from litigation involving the franchise relationship if, as a result of the settlement, the franchisor is required to pay money or other consideration, reduce any indebtedness, waive any of its rights, or take any action adverse to its interests.  Even though the franchisor was required to disclose the settlement in Item 3 of its FDD, the Court refused to dismiss a suit brought by the former franchisee asserting breach of the confidentiality provision of the settlement agreement.

Proper drafting of a settlement agreement with any current or former franchisee is critically important.  As just one example of this general principle, franchisors must ensure the settlement agreement does not contain a confidentiality provision that would restrict the franchisor’s ability to make required disclosures without breaching the settlement agreement.

For further information, contact Steve Story  (757-624-3257) or Nicole Harrell  (757-624-3306).

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Wednesday, December 11, 2013

What is UCITA?

UCITA is the Uniform Computer Information Transactions Act promulgated by the National Conference of Commissioners on Uniform State Laws.  UCITA has only been adopted by two states – Virginia and Maryland.  For the most part, the UCITA provisions can be waived or varied by contract.  Although UCITA was developed to provide basic default rules for licensing, it is widely contested and debated.  Many consumer advocacy groups, as well as numerous state attorney generals, have opposed the adoption of UCITA because they argue that UCITA is biased in favor of the software industry. – Nicole J. Harrell

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Monday, December 9, 2013

Patent Reform or “Toll the Troll”

In my continuing quest to report on legal developments that may portend real change to the patent trial practice within the Eastern District of Virginia, today we tackle the “Innovation Act (H.R. 3309)” recently passed by the United States House of Representatives. That act, a mélange of politically appeasing “fixes” was aimed at making procedural changes that would curb the patent litigation abuses wrought by so-called “trolls” under the America Invents Act. Since the passage of the America Invents Act, there has been an increase in companies acquiring broad patent—particularly business method patents—and asserting them against all forms of business and not so much to enforce patent rights but rather to extract licensing fees from companies that infringe the patents.  Despite contending that the broad patents are invalid, many companies end up settling for a modest license fee rather than incur the substantial costs of litigation and, in particular, the liberal discovery now afforded under the Federal Rules of Civil Procedure.  To combat this growing issue, the House, by a 325 to 91 vote, passed the America Invents Act on December 5, 2013. According to the Washington Post, the chief provisions may be summed up as follows:

Require specificity in patent lawsuits. Right now, patent plaintiffs can file lawsuits that are vague about exactly how the defendant allegedly infringed the plaintiff’s patent. That makes it easier for trolls to sue many people without doing their homework. The bill would require lawsuits to be more specific.

Make patent ownership more transparent. Patent holders sometimes form shell companies to engage in troll-like behavior. To discourage this, the Innovation Act requires patent plaintiffs to name anyone who has a financial interest in the patent being litigated.

Make losing plaintiffs pay. The Innovation Act makes it easier for a victorious defendant to recover the costs of defending against an unsuccessful patent lawsuit. Also, if a losing plaintiff cannot pay, the bill would allow a judge to order others who had a financial stake in the plaintiff’s lawsuit to join the lawsuit and pay the defendant’s legal fees.

Delay discovery to keep costs down. A big reason patent lawsuits are so expensive is that plaintiffs often force defendants to produce millions of pages of e-mails and other internal documents to help them build their case. The Innovation Act would delay this phase of the litigation process until after the courts have addressed legal questions about the meaning of patent claims. Hopefully, that will allow more frivolous lawsuits to be resolved before defendants have racked up huge legal bills.

Protect end users. A common troll tactic is to sue end users (such as coffee shops offering their customers WiFi access) rather than technology vendors (such as the manufacturer of the WiFi equipment). These small-business defendants can often be intimidated into paying regardless of the merits of a plaintiff’s case. The Innovation Act allows technology vendors to step into the shoes of their customers and fight lawsuits against trolls on their customers’ behalf.

If the Innovations Act becomes law, there is at least one provision that may not fit neatly with the Eastern District’s Rocket Docket.  Delaying full discovery until after the claims construction hearing will favorably move up the time for consideration of Markman issues; unfortunately, it would be difficult to maintain the speed of the Court’s docket as such a process will necessarily create a bifurcated pretrial process and necessarily cause delay.  Maybe the change will light the way for Local Patent Practice Rules—something many regular practitioners in the area have endorsed. 

Although passed by the House, the Act still faces a long road before it would become law;  the Act still must survive the gauntlet of  the amendment process in the House and then, a related bill in the Senate must be passed and the two bills reconciled.  Stay tuned!  – Stephen E. Noona

Stephen E. Noona is the head of Kaufman & Canoles’ Trial Section and Co-chair of its Intellectual Property Law and Franchising Practice Group.  He has been counsel in over ninety-five (95) patent cases in the Eastern District, is Fellow in the AmericanCollege of Trial Lawyers, and regularly appears before the judges in all four Divisions of the Eastern District on patent and intellectual property matters.

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Friday, December 6, 2013

No Trademark for Generic Term

The Eastern District of Virginia was recently asked to review whether the Patent Trademark Office (“PTO”) and the Trademark Trial and Appeal Board (“TTAB”) properly refused to grant a trademark application based on a term’s “generic usage.”  When a party seeks review of a TTAB decision in federal district court, rather than appealing to the Federal Circuit, the parties are allowed to introduce new evidence not considered by the TTAB. 

Plaintiff, owner of an organic fertilizer company, filed a trademark application for the term “PROBIOTIC” in connection with fertilizer.  The PTO refused to register the term on two grounds, stating that (1) the term “PROBOTIC” is generic in connection with fertilizer and (2) at most, “PROBIOTIC” is merely descriptive for fertilizer and has not acquired secondary meaning.  The TTAB affirmed the PTO’s refusal to register the term PROBIOTIC as a trademark and concluded that the relevant public, when it considers PROBIOTIC in connection to fertilizer, perceives the term to be generic for fertilizer.  The Plaintiff sought review of TTAB’s decision in the Alexandria division of the Eastern District of Virginia.

“A generic name of a product can never function as a trademark” and courts will consider a variety of factors in evaluating a term’s status.  McCarthy on Trademark, § 12.1.  A generic name “merely employs the common name of a product or service or refers to the genus of which the particular product is a species.” Retail Services, Inc. v. Freebies Publishing, 364 F.3d 535, 538 (4th Cir. 2004).  Thus, according to the district court, “if the term PROBIOTIC answers the question ‘what are you,’ it is a generic term because it tells the buyer what the product is, not the source of the product.”  Id. at 10.  

Evidence relevant to the issue of genericness includes competitors’ use of the term, plaintiff’s own use of the term, dictionary definitions, media usage, testimony of persons in the trade and surveys of the relevant consumers to show the state of mind of such consumer when they consider the term.  In the end, Plaintiff’s additional evidence of genericness before the district court consisted of only the testimony of three retailers stating that they were unaware of any other producers of the organic fertilizers who also used the term “probiotic” to describe their fertilizer and soil products.  The district court did not find this evidence persuasive and ultimately determined that the term PROBIOTIC was generic in connection with fertilizers because the relevant public uses the term to refer to fertilizers generally and the term does nothing more than identify a distinctive characteristic of fertilizers. Shammas v. Rea (Ellis), No. 1:13cv1462, Memorandum Opinion (EDVA Oct. 15, 2013) 

This case provides a good overview of the standards considered by the TTAB and courts when assessing whether a term is “generic.” – Lauren Tallent Rogers

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Wednesday, November 27, 2013

Sweepstakes, Contests, Games of Chance

Increasingly, businesses are using promotions, including sweepstakes, contests and games of chance, in marketing their businesses or products.  Such promotions are highly regulated and can raise significant compliance issues.  Businesses should consider consulting counsel familiar with sweepstakes, contests and similar promotions, to ensure their sweepstakes and other promotions are fully compliant with all applicable laws.

This blog post sets forth a basic summary of the laws governing sweepstakes.

A sweepstakes is a promotional device where chance determines who wins prizes.  Conversely, in a contest, skill determines who receives prizes.  Unlike either a sweepstakes or contest, in a lottery, players must contribute something, usually a small sum of money, to receive a chance to win something of greater value.  These distinctions matter.  Different rules  apply to each type of promotion.  To avoid transforming a perceived sweepstakes into a contest, credit unions should not include elements of skill in a sweepstakes.  Likewise, sponsors cannot require sweepstakes participants to pay anything to participate, or else they may inadvertently hold an illegal lottery instead of a sweepstakes.  (Most states have criminal statutes classifying lotteries as illegal gambling).

Federal law regulates sweepstakes by imposing disclosure requirements on sweepstakes’ entry materials sent by mail.  To meet federal sweepstakes rules, entry materials must state in a readily noticeable, readable, and understandable manner:

  • that no purchase is necessary (on the mailing, on the entry form, and in the rules);
  • all terms and conditions of the sweepstakes;
  • the mailing sponsor’s contact information;
  • the estimated odds of winning;
  • the quantity, nature, and estimated value of each prize; and
  • the schedule of any payments made over time.

Additionally, the mailing cannot: state that an individual has won a prize unless he has actually won the prize; contain a statement inconsistent with the contest rules; require the sweepstakes entry to include an order or payment; or state that individuals not purchasing products may be disqualified from future sweepstakes.  If a mailing violates these rules, the Postal Service may seize it.  The mailing’s recipient may also sue the sponsor to recover $500 or the amount of their damages from the mailing.  For serious violations, a sponsor may be fined $10,000 for each mailing. 

Equally as important as these federal disclosure requirements, most states also separately regulate sweepstakes.  These state laws also apply to sweepstakes that do not use the mail, such as increasingly common promotions using the internet.  Under many states’ laws, promoters must make disclosures equivalent to or greater than those required under federal law.  The patchwork of state sweepstakes laws imposes varying additional requirements on sponsors of multi-state promotions.

Some states require sweepstakes promoters to register the promotion, in advance, with a state agency.  These states often exempt from their registration rules sweepstakes with small prizes; however, Rhode Island’s law covers sweepstakes with total prizes as low as $500.  In addition to requiring registration, sweepstakes require sweepstakes promoters to post a bond or pay a fee before holding a sweepstakes.  In many states, sponsors must also maintain a list of sweepstakes winners and make that list available to participants.  Also, some state statutes mandate that a promoter award every prize unless the sweepstakes’ rules expressly state that unclaimed prizes will not be awarded.  Finally, in many states, individuals may be held criminally liable for particularly egregious sweepstakes law violations.

The wide range of federal and state sweepstakes laws which even a small-scale promotion may trigger compels credit unions to tread carefully in their promotions.  Before holding a sweepstakes, sponsors should consider seeking legal advice to ensure compliance with applicable laws and consider at least the issues in the following checklist:

Sweepstakes Checklist:

  1. Be sure no purchase is necessary – do not require participants to pay a fee to enter the sweepstakes.  Do not require participants to purchase a product to enter the sweepstakes.  Allow an alternate, free entry method.
  2. Be aware of, and comply with, the most restrictive state law applicable to a multi-state sweepstakes.  If required, register your sweepstakes with the applicable state agency.  If required, pay any fee or post any bond that an applicable state agency might require.  Consider restricting eligibility to less than all states, if that strategy is consistent with your business purpose.
  3. Be clear and precise with sweepstakes rules.  Problems with sweepstakes frequently arise from ambiguities in the sweepstakes rules.  Any ambiguities will be construed against the sweepstakes promoter and in favor of the participant.  Have multiple readers (including counsel) review the rules for clarity and precision.
  4. Avoid turning a sweepstakes into a contest.  Chance—not the participant’s skill—should determine whether a participant wins a prize.
  5. Award all sweepstakes prizes.  If you do not plan to award all prizes, the rules of the sweepstakes should state that “unclaimed prizes will not be awarded.”
  6. Do not make any misleading or deceptive statements about the sweepstakes, its rules, conditions, or prizes.
  7. Prepare, keep and retain records of the sweepstakes rules and sweepstakes award protocol, and disseminate a winners’ list.
  8. Consider retaining legal counsel to review the sweepstakes rules.

 For further information regarding this topic, please contact Stephen E. Story at 757/624-3257 or sestory@kaufcan.com. – stephen E. story

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Friday, November 22, 2013

How Important is Testing and Quality Control When Purchasing a Software System?

 

Healthcare.gov.  Need I say more?  Or, for those of you nostalgic for your law school days, res ipsa loquitur

Actually, most business purchasers of software and related hardware systems will not be able to draw any direct lessons from the Obamacare website rollout fiasco.  It is just too unique, complicated and fraught with too many problems, technical and otherwise.  However, it should serve as a reminder to anyone planning to replace or acquire any important business software system – and an Internet website is essentially a software system — that there is a right way and a wrong way to do these things.  So let me just offer some guidance we have shared with our clients before, in the following Software Acquisition Checklist:

Replacement of a business software system can constitute a major investment of both dollars and management time and entails the risk of disruption of ongoing processes facilitated by the software it if is not done well and on schedule.  For these reasons advance planning is a “must” for any significant software upgrade.  The following checklist is a summary of some of the more important advance planning points that should guide any software acquisition.

1.         If your internal IT resources/personnel are not sufficient, engage a software consultant to help guide you in the acquisition.  The right consultant can be invaluable to help ensure both that the software system you are buying is what you  need, and that it is installed, integrated and implemented properly.

2.         Determine what you need the software system to do and how well you need it to do it (speed, accuracy, guaranteed uptime, etc.) and from this develop specific requirements based on functionality and performance.  These should be the basis for the “specifications” the software vendor will agree to meet.

3.         Assess the environment in which the software system will have to perform, including interfaces to existing equipment and other software and databases you use, and any new equipment needed to optimize performance of the new software.  These things will end up being your responsibility rather than the software vendor’s, unless you hire the vendor to take care of certain of them.  So identifying environmental issues in advance will enable you to work with the software vendor to make everything work together properly.

4.         Identify your specific security and control requirements in order to assure that the software you are buying will meet them, or can be readily modified or augmented to meet them.

5.         Focus on scheduling as early as possible in the process, in order to be sure the software system vendor can meet your timing requirements.  It is important to keep scheduling realistic to avoid surprises.  There will always be hiccups and delays in any but the simplest software replacement.  Realistic scheduling will help moderate their impact. 

6.         Determine early on what types and stages of testing you will put the new system through before accepting it, and work out with the new software vendor the schedule and procedures for testing and acceptance. 

7.         Plan for essential training by identifying what will be required and which of your personnel will be trained as operators of the software or to provide internal training to other users of the software.

8.         Be sure to focus on the ongoing maintenance commitment of the software system, to be sure it provides what you need.  Solid maintenance terms will include such things as guaranteed uptime for the system and response time for handling of software problems.

9.         Spread your payment for the software and services provided by the vendor over the life of the project (delivery, installation, testing and acceptance), both to keep the vendor motivated to perform and to be sure you have leverage throughout the process to keep the project on schedule.  If possible a significant portion of the software vendor’s license and other fees should be deferred until and linked to successful testing and final acceptance of the installed system.

10.       You will want legal input and guidance not only for contracts and other documentation of your business deal with the software vendor, but also to help assure that the rights you get in the software are sufficient for your purposes and to help spot any lurking intellectual property issues or concerns with the vendor’s rights in the software.

In context of the ongoing healthcare.gov debacle, I want to emphasize and expand a bit on the sixth numbered item in the above list, relating to testing.  In any major software acquisition – and this includes websites – the best way to be sure you get what you pay for is to work up and follow a rigorous testing regime that ends with a final test in which actual intended users of the new system put it through its paces to confirm that it not only works on a technical level, but also where “the rubber meets the road,” when the person who needs to use the system to do what it is intended to do tries to make it perform as advertised.  We all know now that quality control and testing appear to have been given short shrift in the government’s acquisition of the healthcare.gov website.  Would that they had paid more attention to the common sense advice in the checklist above?  – Robert E. Smartschan

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Friday, November 15, 2013

Works Made for Hire

Did you recently discover that you do not own something you thought you did, like your software, website or logo?  The basic rule is that if your employee creates something for you as the employer, that is within the scope of his or her employment, then you as the employer own that work.  If, however, you contract with an independent third party, then that third party owns the work unless you have agreed otherwise in writing.  When engaging a third party to write code, design a website, or create copy, a logo or other materials, the terms of your engagement should be in writing and clearly state that the works are being created specifically for you and are considered “works made for hire.”  In addition, the third party should specifically assign and transfer to you all rights, title and interest in and to the work that is being created.  Without this written agreement and specific language, you don’t own the work that you otherwise paid for. – Nicole J. Harrell

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Friday, November 8, 2013

More Limitations on Patent Litigation

As this blog has noted in the past, there is a move afoot to limit the abuses of expensive patent litigation.  From the Federal Rules of Civil Procedure (Amendments effective this December) and various District Court Local Rules that limit discovery to proactive judges that currently use Rule 16 Pretrial Conferences to shape the course of discovery, efforts are being made to reduce the expense and burden of these lawsuits.  Now, the Senate can be named among those bodies championing this cause.  According to his website, Senator John Cornyn of Texas has proposed a bill to amend Title 35  to provide:

Pleading Requirements

Initial complaints have to provide more detail, including specific information about the plaintiff’s claims, including listing the patents, asserted claims, accused devices, and other issues regarding the ownership of the patents and persons interested in their enforcement.  The provision would also direct the Supreme Court to review and amend Form 18 of the FRCPs to conform with the new section.  These changes are aimed at codifying recent legal rulings that require, in spirit, more than mere notice pleadings sanctioned for the ordinary garden variety cases under Rule 8 of the Federal Rules of Civil Procedure. 

Joinder

Section 299 would be amended to permit defendants to join most persons with an interest in the asserted patents.  This change seeks to combat the strategy of selling litigation interests in patents to groups that seek to litigate the patents without joining the patentees or the companies that hld substantial interests in the patents. 

Discovery Limitations

Discovery in patent infringement cases on issues other than claim construction would be delayed until the claim construction ruling.  The court would have discretion to permit discovery necessary to resolve motions filed before the Claims Construction, Markman ruling.

The bill would also define “core” discovery (which excludes computer code or electronic communications unless the court finds it should be included) and provide that for any discovery beyond core discovery costs are automatically shifted to the requesting party, including attorneys fees, and the requesting party must either pay for the discovery when requested, or post a bond to cover the expenses.  Courts can still determine that discovery should not be had, even if the costs are paid/posted.

Aimed at curbing the abuses of electronic discovery, this section is in line with the views of many progressive judges that believe that discovery in these cases can take on an abusive live of its own that serves very little purpose in and greatly increases the costs of the litigation. 

Costs and Expenses

The bill would make costs more likely in abusive cases.  Courts “shall” award reasonable costs and expenses, including attorneys fees, to the prevailing party unless: (1) the loser’s position and conduct was “objectively reasonable and substantially justified”; or (2) “exceptional circumstances” would make such an award unjust.  In determining whether one of the exceptions applies the court shall not consider as evidence any settlement licenses.  If the losing party cannot pay the expenses, the court may make the costs and expenses recoverable against any interested party. 

The bill has been assigned to committee; sadly, as worthy as these changes may seem, the website, assigns only a “7% chance of [the bill] getting past committee…and a 3% chance of [the bill] being enacted [into law].” – Stephen E. Noona

Stephen E. Noona is the head of Kaufman & Canoles’ Trial Section and Co-chair of its Intellectual Property Law and Franchising Practice Group.  He has been counsel in over ninety (90) patent cases in the Eastern District, is Fellow in the American College of Trial Lawyers and has appeared before the judges in all four Divisions of the Eastern District on patent and intellectual property matters.

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Tuesday, October 29, 2013

Prospective Franchisee Due Diligence – Part 5

This post, and the posts that preceded it (Parts 1-4) outline the due diligence that we recommend for prospective franchisees.  For the prior blog posts on this topic, click  Part 1, Part 2,  Part 3 and part 4.

Before you narrow down your search to a single potential franchise investment, you should investigate similar, alternative franchises.  For example, if you’ve decided to invest in a pizza franchise, don’t lock into a single franchise, particularly solely because you like the food or the experience.  A great product or experience, by itself, does not equate to a great franchise.  Check out franchise.org or Bond’s Franchise Guide  to see if there are other, similar franchises.  Compare unit economics (such as number of stores in operation, initial franchise fee and royalty percentages).

Unless you are a skilled financial type, hire an accountant to generate a pro forma to estimate potential sales and likely expenses so that you will know if you can expect a reasonable return on your investment over the life of the franchise.

Read a good book on franchising – I recommend Franchising for Dummies – by Dave Thomas and Michael Seid. 

Only after you have completed all of the due diligence steps discussed in Parts 1 through 5, and remain convinced the franchise investment is appropriate, should you hire qualified franchise counsel.  We strongly recommend you hire franchise counsel who is a member of both the American Bar Association Forum on Franchising and the International Franchise Association’s Supplier Forum.

For further information regarding this topic, please contact Stephen E. Story at 757/624-3257 or sestory@kaufcan.com. – Stephen E. Story

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