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Franchising Legal Update - Fall 2007

By Stephen E. Story and Nicole J. Harrell

New FTC Rule

The new mandatory Federal Trade Commission Rule ("FTC Rule") for franchisors takes effect on July 1, 2008. This new FTC Rule substantially changes the disclosures required in every franchisor's disclosure document, and franchisors must comply with the new rule to obtain registration renewal in Virginia (and all other registration states) after July 1, 2008. (The new FTC Rule format may be used, at the option of any franchisor, after July 1, 2007.) Please contact Steve Story or Nicole Harrell for more information about the new FTC Rule and renewal registration filings.


Franchise Mentors

Steve Story and Nicole Harrell of Kaufman & Canoles joined with Joanna Brumsey of Wall, Einhorn & Chernitzer, Steve Maxey of Maxey Consulting Group, Art Webb of BCF Advertising and Kevin Wilson of Envest Ventures to create Franchise Mentors, a free session of multi-disciplinary advice for prospective franchisors. The first session was successfully held with Cal'z Pizza on July 26, 2007. To apply, click here to access the online application.


Amendments to Virginia Retail Franchising Act and New Implementing Rules

The Virginia General Assembly recently amended the Virginia Retail Franchising Act to allow a franchisor to sell franchises within the state with less than stellar financial statements, by having franchise fees deferred or placed in escrow until the franchisee opens for business or the franchisor's financial situation improves. The new law also allowed the State Corporation Commission ("SCC") to create certain exemptions from registration. The new registration exemptions include those for a "seasoned franchisor," one who meets certain net worth requirements and has had at least 25 franchisees conducting the same franchised business being offered or granted for the entire five year period immediately preceding the offer or grant. The new regulations also exempt from registration (a) the sale or transfer of a franchise by a franchisee who is not an affiliate of the franchisor; (b) the offer or grant of an additional franchise to an existing franchisee of the franchisor, if the franchise being sold is substantially the same as one the franchisee has operated for at least two years, and it was properly registered or exempt the first time it was sold; and (c) offers or grants of a franchise to certain financial institutions or broker-dealers. The SCC also considered an exemption for purchase of a franchise by a "sophisticated franchisee," requiring an initial investment of more than $1,000,000, but did not include that exemption in the final regulations. The new law and regulations took effect July 1, 2007. For more information about the changes to the Virginia Retail Franchising Act, or the implementing regulations, please contact Steve Story or Nicole Harrell.


Tips for Franchisors - Regular Report Cards for Franchisees

Franchisors should consider giving their franchisees a periodic (such as yearly) report card on compliance with system standards. Satisfactory grades on these report cards can be used to qualify for obtaining any additional franchises or for renewal of an existing franchise. Also, the report card can be a valuable tool in promoting ongoing compliance with system standards.


Franchise Relations Issues

Kaufman & Canoles routinely counsels franchisees on issues relating to difficulties in their franchise relationships, including developing exit strategies and negotiating exit agreements for franchisees. For further information, please contact Steve Story.


Tip for Franchisees - Compliance with New Credit Card Law

Franchisees who take credit cards need to be aware of the Fair and Accurate Credit Transactions Act of 2003 or FACTA, which became fully effective December of 2006. The most significant provision in FACTA prohibits any party that accepts payment by credit or debit card from including more than the last five digits of the card number on any electronically printed receipt provided to the cardholder. Lawsuits have been filed against major restaurant chains and retailers such as In-N-Out Burger, El Pollo Loco, California Pizza Kitchen, IKEA and Costco seeking nationwide class certification, actual and punitive damages and attorneys' fees.   These restrictions do not apply to receipts that are handwritten or prepared by manually imprinting the credit or debit card number on the receipt. For further information about FACTA, please contact Steve Story.


New Franchise Registrations

Kaufman & Canoles recently successfully registered franchise offering circulars in Virginia for the following franchisor:

  • Jobin International, LLC, the franchisor of Jobin Realty® franchises, with 22 locations in Northern Virginia

Recent Openings

We would like to congratulate our franchise clients on the recent openings of the following locations:
  • Bo-Tide Victory, Inc. - Bojangles'® Famous Chicken ‘n Biscuits, 3927 Victory Boulevard, Portsmouth, Virginia
  • Bo-Tide Bennett's Creek of Suffolk, Inc. - Bojangles'® Famous Chicken 'n Biscuits, 3605 Bridge Road, Suffolk, Virginia - Opening December 2007
  • McKenzie Cole LLC - Entrée Vous, 940 Cedar Road, Chesapeake, Virginia
  • Pills & Powder LLC - GNC, 5000 South Croatan Highway, Nags Head, North Carolina

Recent Area Development Agreements Negotiated
  • Barnette Holdings, LLC - Jazmo'z Bourbon Street Cafe

News

On October 28, 2007, Steve Story was quoted in the Wall Street Journal article "Four Danger Signals When Franchising." Click here to view the article.

Steve Story and Nicole Harrell were selected to edit, and recently completed editing, the Virginia section of the Franchise Deskbook, a standard legal franchising reference publication of the American Bar Association Forum on Franchising.

Steve Story, Chairman of our Franchising Practice Group, was recently named to Best Lawyers in America, Franchising (2007 edition) and to Virginia Super Lawyers, Franchising (2007 edition).

Nicole Harrell has been selected as a candidate for the International Franchise Association's prestigious Certified Franchise Executive (C.F.E.) training program.

Steve Story attended the October 2007 American Bar Association Forum on Franchising in Phoenix, the leading convention for franchise lawyers. He was the only lawyer from Hampton Roads to attend the three-day seminar, with updates on all aspects of franchise law.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.