Arbitration – not boilerplate, and not necessarily quick, easy, or inexpensive!

If you have basic familiarity with contracts, you’ve likely heard the term “boilerplate,” which is often used to mean standard language that the contract writer uses in many of its contracts or even that you may find in contracts across the board.  Of course, just because language might be “standard,” that does not mean that it is innocuous or that you can safely ignore it!

So-called boilerplate language, it it exists, is often found near the end of the contract.  Some contracts stipulate that if a dispute arises from the contract the parties agree to submit the dispute to binding arbitration.  While this clause may be brief and, coming at the end of a contract, may appear almost like an afterthought, it is important to understand that agreeing to arbitrate has very real consequences.

Arbitration clauses are most often seen by consumers in credit card agreements and service agreements with large companies (e.g., “Any dispute in connection with this Agreement shall be subject to binding arbitration in Chicago, Illinois”), but they are also sometimes poorly understood features of contracts between small businesses who somehow heard from an uncle that arbitration was easier or cheaper than going to court.

In  November 2013, a long and expensive arbitration proceeding concerning a Gwinnett County software company came to a conclusion.  The process took three (3) years and cost $3.5 million in legal fees in addition to approximately $150,000 in arbitration costs.

The victors, Kenneth Shumard and Kenneth Shumard Jr. won the right to control the use of medical billing software that is anticipated to be highly valuable.  The Shumards also won $800,000 in attorneys’ fees.  Initially, the Shumards sought a restraining order from the Gwinnett County Superior Court preventing their other partners from making certain use of the software.  Judge Ronnie Batchelor referred the dispute to arbitration, because the partnership agreement between the Shumards and their partners required that disputes go to arbitration.

As such, the Shumards did not have the option to seek judicial process, but instead, were forced to go to arbitration.

Arbitration is conducted under its own standards and is a creature of state law.  In some ways arbitration resembles court proceedings.  For example, in the above-mentioned dispute, the arbitrator received briefs on the matter and received testimony from witnesses.  The arbitrator then required post-trial briefs and issued a written decision.

In other ways, however, arbitration is an animal unto itself.  Arbitrators are not bound the same rules as judges and their decisions are often final.  Their decisions are not subject to normal appellate court review, and only subject to attack in specific instances, such as when the arbitrator is not impartial, failed to make a final determination of the issues, or manifestly disregarded the law.  Basically, arbitration is like “private court.”

A court rarely finds that an arbitrator has committed such failings, and thus, it is best to plan on any arbitration award being the final word.  Case in point, in the above-referenced dispute, the Shumards’ partners, who were unsuccessful in arbitration, went back to Gwinnett County Superior Court Judge Batchelor seeking to have the arbitration award vacated.  Judge Batchelor denied those motions and confirmed the arbitration award.

In Georgia, Chapter 9 of Title 9 of Georgia Statutes sets out the standards for arbitration (the “Georgia Arbitration Code,” O.C.G.A. § 9-9-1 et seq.).  In Georgia, the contract controls.  If a contract that requires disputes be arbitrated is enforceable, the dispute cannot be heard by the courts and must be submitted to arbitration.  The courts do have power, however, to determine whether the contract with the arbitration clause is valid, to compel arbitration, and to validate and enforce an arbitration award.

From partnership agreements and operating agreements to construction deals and a variety of other contracts, a seemingly innocuous arbitration clause can be but a brief paragraph nestled neatly in the final pages of the contract, but nonetheless has great importance.  Before entering into a contract, seek the counsel of a contract attorney to ensure you understand the implications of every section of the agreement.

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Can You Copyright Your Label? Yes… well, no… well, partly.

A client of ours recently sought to copyright its label and wanted to know if that was possible. Understandably, the company didn’t want competitors copying its hard work in creating a unique and visually distinctive label for its product.

We first addressed the obvious, which is trademark protection for the name of the product. Ok, but the label is more than just the name, it is the artistic creation of a designer who was hired to give my client’s product a very purposeful and contemporary look.

So, can we copyright the label?

This seemingly simple question brings to bear a number of interesting issues. As a threshhold matter, Copyright protects original expression. The United States Supreme Court has held that with regard to copyright, originality means only that the work was independently created by the author and possesses at least some minimal degree of creativity. See Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340, 346 (US 1991). The requisite level of creativity is typically extremely low; even a slight amount will suffice. See FMC Corp v. Control Solutions, Inc. 369 F.Supp.2d 539, 561 (E.D. Pa. 2005). Classic copyright material (like prose or photographs) typically meets the minimum threshold of creativity with ease. But that is not to say that the threshold is so low as not to exist at all.   Indeed short phrases, basic shapes, and lists of ingredients do not present the sufficient amount of creativity for copyright protection.

Labels, however, are typically a combination of pictures, text, short phrases, and shapes. So are they copyrightable because of the pictures and process, or not, because of the short phrases and basic shapes?

There are a number of cases that indicate that labels are subject to copyright protection. See Kitchens of Sara Lee, Inc. v. Nifty Foods Corp., 266 F.2d 541 (2d Cir. 1959). Based on case law, it appears that consumer product labels containing more than a mechanical list of ingredients manifest the amount of creativity necessary to enjoy copyright protection. See FMC Corp. 369 F.Supp.2d at 572 (citing Sebastian Int’l, Inc. v. Consumer Contact (PTY) Ltd., 664 F.Supp. 909, 913 (D.N.J.1987), rev’d on other grounds,847 F.2d 1093 (3d Cir.1988); Drop Dead Co. v. S.C. Johnson & Son, 326 F.2d 87, 92–93 (9th Cir.1963), cert. denied,377 U.S. 907, 84 S.Ct. 1167, 12 L.Ed.2d 177 (1964) (copyright on aerosol wax product label held valid); Kitchens of Sara Lee, Inc. v. Nifty Foods Corp., 266 F.2d 541, 545 (2d Cir.1959) (defendant’s use of identical pictures on cake labels infringed plaintiff’s copyrights on the labels).

For example, in one case, a label on a bottle of shampoo was found copyrightable for a small bit of text describing the product:

“Hair stays wet-looking for as long as you like. Brushes out to full-bodied dry look … WET is not oily, won’t flake and keeps hair wet-looking for hours, allowing you to sculpture, contour, wave or curl. It stays looking wet until it’s brushed out. When brushed, hair looks and feels thicker, extra full. Try brushing partly, leaving some parts wet for a different look.” See Sebastian, 664 F.Supp. at 913.

The court held that “[n]o one can seriously dispute that if plaintiff were to discover that a competitor’s package utilized the exact language as above with the exception of the product’s name, plaintiff would be entitled to protection.” Id.

The court in Sebastian instructed that the language on a label is entitled to copyright protection when it is “more than simply a list of ingredients, directions, or a catchy phrase.” See Sebastian, 664 F.Supp. at 913.

Even shorter phrases can be sufficiently original to garner copyright protection, even for commercial works, such as labels. See Abli Inc. v. Standard Brands Paint Co., 323 F.Supp. 1400 (C.D. Cal. 1970) (label was copyrightable when it contained phrases such as “Cut to desired length … Will not run … Simply slide top bead into rod as illustrated”). Indeed, the length of a sentence is not dispositive of whether it is subject to copyright protection. See Rockford Map Publishers, Inc. v. Directory Service Co. of Colorado, Inc., 768 F.2d 145, 148 (7th Cir. 1985).

In addition to text, drawings or photographs typically are protectable.

Now when you register a copyright, you have to select whether it is a work of visual art, literary work, etc. As a whole, a label certainly seems like a visual work. Indeed, often it is registered as such. Federal courts have held that the form of registration of a work has no effect on the scope of copyright. See S.C. Johnson & Son, Inc. v. Turtle Wax, Inc. 1989 WL 134802 (N.D. Ill. 1989) (finding that a work registered as a nondramatic literary work rather than a work of visual arts does not negate copyright protection in visual elements of the work). Nonetheless, you will sometimes find pushback from the Copyright Office based on the nature of the work you claim.

Where the rubber really meets the road is in compilation, meaning, the compilation of multiple elements. As with my very first example, what is the result when you combine copyrightable elements like pictures and prose with non-copyrightable elements like lists of ingredients, brand names, titles, or short phrases?

Many have and many will continue to argue that the work is registrable as a whole work in the arrangement and selection of the components. Indeed, the Copyright Act itself provides that a work as a whole can be copyrightable due to the originality expressed in the overall selection, organization, and arrangement of the work, and the United States Supreme Court has agreed. See Feist at 360; see also 17 U.S.C. § 103. Yes, originality can be displayed in taking commonplace materials and making them into a new combination and arrangement. See Drop Dead Co. v. S.C. Johnson & Son, Inc., 326 F.2d 87 (9th Cir. 1963) (finding arrangement of color, layout, design and wording on bottle of PLEDGE furniture polish is copyrightable as a whole, including laudatory and instructional text); see also X-IT Products, LLC v. Walter Kiddie Portable Equipment, Inc., 155 F.Supp.2d 577, 609-611 (E.D. Va. 2001) (finding that although short phrases and bullet points on packaging were not protectable, label as a whole was protected under copyright, which necessarily includes the arrangement of the individual elements). Even very simple arrangements can be sufficiently original to be entitled to copyright protection. See S.C. Johnson & Son, Inc. v. Turtle Wax, Inc. (finding that a label with red stripes on a yellow background with a ribbon and the company name is sufficiently original for copyright protection).

Now hold on to your hat…

Despite this line of case law, it is the well-articulated policy of the Copyright Office to deny registration of the arrangement of elements on the basis of physical or directional layout in a given space. See Darden v. Peters, 402 F. Supp. 2d 638 (E.D.N.C. 2005). Not only does this apply to labels, it applies to websites, too!! To perhaps put it another (and more awesome) way, on a phone call with an examiner from the Copyright Office wherein I recited the above mentioned case law, the examiner told me, “Well the court can say that, but that’s not how we see it.

So where to go from here?

Are labels copyrightable?

Yes.

Can you successfully register a label for copyright?

Um, maybe not.

Can you successful register just those creative elements of a label, like a picture, drawing, or prose?

YES. The way you do this is to submit the entire work, but claim only the creative elements, essentially disclaiming the rest.

There you have it – the more creative the elements of your label, the better your shot of gaining copyright protection from the Copyright Office.

Intellectual property issues like copyright and trademark can be tricky. If you or your business have a question about an intellectual property issue, contact a trademark attorney, copyright attorney, or intellectual property attorney at Briskin, Cross & Sanford.

The Hobby Lobby Decision: What does it really say?

Besides the United States’ unexpected, and truly awesome, performance in the World Cup, the topic that has attracted the most attention and commentary this week is the already infamous US Supreme Court Hobby Lobby decision.

Unfortunately, much of the information being disseminated does not accurately report what actually happened in the case or what the Supreme Court actually decided.

So what does the Hobby Lobby decision really say?

Let me break it down for you.

The laws at play:

The Religious Freedom Restoration Act of 1993 (the “RFRA”) prohibits the government from substantially burdening an individual’s exercise of religion, even if the burden arises from a general rule (as opposed to a rule specifically targeting religion or the exercise of religious beliefs). As of 2000, when it was amended by the Religious Land Use and Institutionalized Persons Act of 2000, the RFRA also includes “any exercise of religion, whether or not compelled by, or central to, a system of religious belief.”

The lawsuit:

The owners of three (3) closely held, for-profit corporations sued the federal Department of Health and Human Services (among other agencies).

The lawsuits claimed that the requirement under the Patent Protection and Affordable Care Act of 2010 (the “ACA”) that a corporation must provide employees access to contraceptives designed to prevent the development of an already fertilized egg violates the sincerely held religious belief of the owners (not of the corporation) that life begins at conception. Thus, the owners argued, this portion of the ACA violates their rights under the RFRA and the Free Exercise Clause.

Points to know:

  • The Decision Only Applies to Contraceptives that Prevent an Already Fertilized Egg from Further Development.

The ACA generally requires non-exempt employers to provide twenty (20) separate types of contraceptives approved by the federal Food and Drug Administration. Only four (4) of the twenty (20) contraceptives are designed to prevent an egg that has already been fertilized from attaching to the uterus wall and developing further (i.e., the “morning after pill” and IUDs).

The three (3) lawsuits only objected to those four (4) contraceptives designed to prevent a previously fertilized egg from further development.

The Hobby Lobby decision does not affect the remaining sixteen (16) contraceptives designed to prevent the fertilization of an egg. The Supreme Court’s decision thus does not prevent Hobby Lobby employees from access to those forms of contraceptives, nor does it release Hobby Lobby (and other qualifying corporations) from the responsibility to provide insurance coverage for those remaining sixteen (16) contraceptives.

  •  The Decision Only Applies to For-Profit, Closely Held Corporations.

The Hobby Lobby decision does not exempt all employers from the contraceptive requirements of the ACA; rather, it only applies to closely held corporations. Generally, a “closely held corporation” is one owned by a small number of individuals. The Internal Revenue Service defines “closely held corporation” as a corporation where (i) five (5) or fewer people own more than fifty percent (50%) of the company’s outstanding stock at any time during the last half of the tax year, and (ii) the company is not a personal service corporation. Thus, the employees of publicly traded companies (like Coca-Cola) are not affected by the Hobby Lobby decision.

The Future of Hobby Lobby

The Supreme Court’s majority opinion in Hobby Lobby clearly limits the scope of its decision to closely held, for-profit corporations. Justice Ginsberg’s dissent, however, hints at a potential broader application of the Hobby Lobby decision by identifying other cases from courts across the nation where “commercial enterprises [have sought] exemptions from generally applicable laws on the basis of their religious beliefs.”

Justice Ginsberg questions whether this particular decision will also apply to other religious-based objections to the ACA’s requirements, such as blood transfusions, antidepressants, medications derived from pigs (such as anesthesia, intravenous fluids, or pills coated with gelatin), and vaccinations.

Of course, it is impossible to predict exactly how the Hobby Lobby decision will be applied by state legislatures and courts, or whether publicly traded companies will challenge the ACA under the same arguments as the three (3) closely held corporations. A savvy business owner, however, will remain cognizant of any new developments stemming from the Hobby Lobby decision or other objections to the ACA.

If you are ever in any doubt about how a state or federal law or recent court decision may impact your business, speak to a business attorney at Briskin, Cross & Sanford.  Our business is to know.

Water, Water, Everywhere – Or Is it Firearms? What Georgia businesses need to know about the Safe Carry Protection Act

Samuel Taylor Coleridge wrote the line “Water, water everywhere/and all the boards did shrink…” in his epic poem “The Rime of the Ancient Mariner,” but is “firearms, firearms, everywhere/and all the businesses did shirk” now more applicable for Georgia businesses?

The Georgia Safe Carry Protection Act (a.k.a., the “Guns Everywhere” law) goes into effect today, July 1, 2014. These new laws substantially expand the rights of licensed gun owners to carry their guns into myriad locations previously barred to those carrying firearms. Some of the new gun-friendly places may surprise you, as they include bars, public housing, government buildings without screening checkpoints, and churches (with the permission of the church’s governing body).

Most importantly for private businesses, the Safe Carry Protection Act reinforces the rights of both licensed and unlicensed gun owners to carry guns in their private (non-company owned) cars and trucks. Practically, both the Act and the 2010 Business Security and Employee Privacy Act not only allow employees to bring firearms onto a private employer’s parking lot but also bar employers from prohibiting concealed guns on their property.

Georgia law also limits the ability of private employers to search locked, privately owned vehicles owned by both employees and their invited guests.

So what is an employer to do?

  1. First, business owners with should determine whether or not their businesses are subject to the new Safe Carry Protection Act and/or the Business Security and Employee Privacy Act, as these laws do not apply to all types of businesses.
  2. Next, companies subject to one or both of these laws then should reevaluate any firearm policies to make sure they comply with Georgia law.
  3. Finally, business owners should contact their commercial insurance representative to ensure that the current policy covers any potential liability created by the Safe Carry Protection Act or the Business Security and Employee Privacy Act.

If, as a business owner, you are ever unsure how a new (or existing) state or federal law, or perhaps a new court decision you may have read or heard about in the news, applies to your business, that would be a great time to pick up the phone and talk to a business attorney at Briskin Cross and Sanford.

The End of the “Pomegranate Blueberry Flavored Blend of 5 Juices”

Imagine this…

You are sitting poolside, enjoying a bottle of Minute Maid’s “Pomegranate Blueberry Flavored Blend of 5 Juices” when you happen to look at the ingredients.

It slowly dawns on you the the self-described “Pomegranate Blueberry Flavored Blend of 5 Juices” only in fact contains about 0.3% pomegranate juice and 0.2% blueberry juice.

You are outraged!

How can Minute Maid and its owner, Coca-Cola, get away with such misleading labels?

The good news is that they no longer can, thanks to POM Wonderful, LLC and a unanimous U.S. Supreme Court.

It begins (as it always does) with a lawsuit. POM Wonderful sued Coca-Cola, alleging that Coke’s label for its “Pomegranate Blueberry” juice deceives buyers into believing that the juice primarily contains both pomegranate and blueberry, thus violating Section 43(a) of the Lanham Act (which addresses situations where one company’s false advertising is causing harm to another competing business).

Coke’s response to the lawsuit was simple: its “Pomegranate Blueberry Flavored Blend of 5 Juices” label complied with the Food, Drug and Cosmetic Act (the “FDCA”) regulations, which trump the Lanham Act. Thus, Coke argued, if its label complies with the FDCA, it cannot be liable under the Lanham Act.

In a rare, and, dare we say, juicy unanimous decision, the U.S. Supreme Court sided with POM Wonderful (interestingly, it has been reported that Justice Kennedy stated during oral arguments that he was also misled by Minute Maid’s “Pomegranate Blueberry” label).

Now, a company harmed by a competitor’s false or misleading marketing of a food or beverage product can file a lawsuit under the Lanham Act, even if the marketing labels are regulated by the Food and Drug Administration and comply with the Food, Drug and Cosmetic Act.

The U.S. Supreme Court’s recent decision will have companies in the food and beverage industry scrambling to review, and possibly revise, their labels and marketing materials. Of course, this decision has farther reaching implications than just for Minute Maid and its competitors since the Supreme Court’s decision could conceivably apply to other businesses regulated by federal laws… like alcoholic beverages, transportation, even pharmaceuticals.

If you are concerned that your product label does not properly describe your product, or perhaps a competitor’s label falsely describes your competitor’s product and puts you and other honest businesses at a disadvantage, consult a trademark attorney at Briskin Cross and Sanford… before, not after, someone squeezes your juciebox for you.

A Primer on Business Opportunities (“Biz Ops”), Part II: disclosure and filing requirements

In the first part of this blog series on business opportunities, I explored the definition of “business opportunity” (or “Biz Op”) to determine what type of enterprises may fall under federal and state law and thereby trigger compliance issues.

After conducting this initial inquiry to determine whether or not a seller’s offering qualifies as a business opportunity, the seller can then determine what is required, both federally and in each state the Biz Op is sold. Of course if a seller is not marketing a Biz Op, there are no special business opportunity requirements with which it must comply (keep in mind, however, that even if a seller is not selling a “business opportunity,” it must still comply with other state and federal laws concerning fraud and unfair or deceptive business practices or the sale of securities) .

If a seller is in fact marketing a Biz Op, it must comply with the following regulations.

Federal law requires the business opportunity seller to provide prospective purchasers with a one page form disclosure document disclosing the seller’s name, address, and phone number; whether the seller had been the subject of a civil or criminal action; whether the seller offers a cancellation or refund policy; whether the seller makes any earnings claims (earnings claims can be express {“you’ll make a million dollars”} or implied {purchasers of this business opportunity drive Ferraris]); and the name and phone number of ten (10) other purchasers closest in distance to the prospective purchaser. If the seller has litigation history or makes earning claims it will have to attach these to the disclosure documents as additional pages.

All things considered, this disclosure document is much simpler and more streamlined than it once was. Prior to March 2012, the business opportunity rules were contained along with the franchise rules under one code section, 16 CFR § 436. This rule required extensive disclosures, as is still the case with regard to franchises.  The Federal Trade Commission (“FTC”), which promulgates business opportunity and franchise regulations, ultimately determined that while franchises involved complex contractual licensing relationships and substantial investment costs, business opportunities often involved simple contracts and significantly lower investments. As such, the extensive disclosure requirements of the franchise rule imposed unnecessary compliance costs on both business opportunity sellers and buyers.

Therefore, the FTC decided to split the franchise rule into two separate code sections, one governing franchises and the other governing Biz Ops. The first business opportunity rule was set out in new code section 16 CFR § 437 as an “interim rule.” The interim rule was identical to the previous franchise rule, requiring the same detailed disclosures. Finally, however, in March 2012, the new and much-simplified business opportunity rule went into effect. As stated, the new rule requires the seller to disclose a one-page form disclosure document to prospective purchasers. This disclosure must be given to each prospective purchaser 7 days before the purchaser gives the seller any consideration or enters into a contract. This must be given to every prospective purchaser in every state, whether or not the state has its own law on point, and cannot be combined with other information that may confuse or obscure the disclosures required by federal law.

In addition to the federal disclosure requirement, many state laws not only require disclosure to the prospective purchaser, but also require registration with the state. Typically this means that the seller sends a copy of the state-specific disclosure and any required attachments (typically a copy of the contract the seller uses with purchasers; financial statements of the seller) along with a required payment (typically a couple hundred dollars) to the state’s regulating department (often the secretary of state, the attorney general, or the securities commission). If a state requires the seller to register the disclosure document with the state, it is critical the seller does so before soliciting sales in that state.

Each year the seller is required to file a renewal and pay the renewal fee. Throughout the course of a year, a seller is required to file an amendment if any material changes in the required information occur.

A number of state laws, however, were created to mirror the former federal business opportunity law, which required much more extensive disclosures. Despite the fact that the federal rule has since changed and become more simplistic, many such states have retained the more extensive disclosure requirements and have not amended their disclosure requirements. As such, these state disclosures may require the seller to disclose additional information such as the name and address of each of the seller’s salespersons, the business and education background of the seller’s principals and officers, as well as their personal litigation and bankruptcy histories; the terms and conditions of the offer and any training provided; statistical figures regarding the amount of business opportunities sold, failed, terminated, refunded, and still operating; audited financial statements; proof that the seller has obtained a bond; certain disclaimers or mandatory refund periods required by state law, or even copies of advertisements used by the seller. The disclosure document often also requires the seller to attach a copy of the proposed contract, which also must include certain content required by state law.

States have varying requirements for the timing of disclosure documents to prospective purchasers. A number of states require that the seller give disclosure documents to prospective purchasers no less than 48 hours prior to the time the purchaser signs a contract or gives any consideration (typically, the whole or a part of the purchase price). Some states, however, require disclosures be made 10 business days prior. It is critical that the seller have a clear guide to follow when marketing to prospective purchasers to ensure it does not run afoul of state-specific disclosure requirements.

Some states also require the seller to secure a bond, against which aggrieved purchasers can recover. Not all sellers must secure a bond, but only those that make certain representations, such as a guaranty that the purchaser will derive income from the business opportunity that exceeds the price paid, or a representation by the seller that it buy back from purchaser any unsold products.

Based on the foregoing it is not difficult to see why a Biz Op seller may seek to negotiate a balance between the representations it makes in courting prospective purchasers and the corresponding compliance required under state law. This nuanced dance is explored in greater detail in Part III of this blog series, which explores business opportunities as a growth strategy.

 

 

 

The importance of timing in the sale of your franchise: when to say “No” to a prospective franchisee

Your franchise is up and running and generating a buzz.  You are getting inquiries from across the US, some of which are clearly qualified buyers itching to get into this new franchise opportunity.

It’s difficult to turn away a prospective buyer, but sometimes that’s exactly what you need to do, at least temporarily.

Say, you get an inquiry from a prospective franchisee in New York. You are aware that New York is one of the states that requires franchise registration–in fact, you have already begun the process of registration with the state. Is now a good time to enter preliminary conversations with the prospective buyer? What if you fully disclose to the buyer the fact that you are still waiting on approval from the State of New York and cannot consummate any deal until such time as you are approved, are you in the clear now?

The answer, as you may have suspected, is no.

The previous summary is based on Reed v. Oakley, 661 N.Y.S. 2d 757 (1996). In Reed, a franchisor began negotiating with a prospective buyer after the franchisor had registered with the state of New York, but before receiving approval. The franchisor informed the buyer it was not able to close the deal until it was approved by New York, and the initial agreement of the parties even specified that the buyer was to receive disclosure documents and have the required time to review them before any deal would close.

When the relationship between buyer and franchisor later soured, the buyer cried foul, claiming that the franchisor violated New York’s Franchise Sales Act by soliciting and negotiating the sale of a franchise prior to receiving approval to sell franchises in the state of New York. The court agreed with the buyer, finding that New York’s Franchise Sales clearly prohibits solicitation or negotiation of a franchise sale prior to registration approval. The fact that franchisor appears to have acted in good faith and did in fact give the buyer all the relevant disclosures plus time to review them prior to closing the deal appeared to have no influence on the court’s decision.

The real rub in this case for the franchisor is the loss it sustained. Typically, the remedy for violation of the New York Franchise Sales Act is the amount of damages the buyer can prove were sustained by the franchisor’s violation of the law. If, however, the franchisor has “willfully” violated New York’s Franchise Sales Act, then the franchisee may rescind the contract, get all his money back, plus 6% interest, plus attorneys fees, and court costs.

Ouch!

Sometimes the word “willfull” is associated with conduct you would think of as knowingly wrong, but in Reed v. Oakley, the court determined that the word “willful” means simply “voluntary and intentional, as opposed to inadvertent.” The franchisor had, in fact, voluntarily and intentionally negotiated with Reed, and in so doing it “willfully” violated New York law, subjecting it to all of the penalties.

In the world of franchise and business opportunity sales, it is almost unavoidable that a few buyers will feel that the business they have bought does not quite meet their expectations. If this happens to you, you want to be sure that you have fully complied with all state disclosure laws.

Compliance can be challenging, given the fact that there are both federal and state requirements, state franchise laws vary from state to state, and franchise requirements can be rather complex. Sometimes franchisors are tempted to do it all themselves, but like an attempted home haircut that winds up back in the barber’s chair, a do-it-yourself approach all too often results in franchisee complaints, state action, wasted money, and worst of all, wasted time. A franchise attorney can help you avoid the disclosure pitfalls, protect your intellectual property, and bolster your contracts and agreements, freeing you up to focus on the job you should be doing, growing your business.

Before you begin soliciting franchisees or advertising in a state, make sure you are informed of the law. Develop a registration roll-out game plan, follow it, and avoid the pitfalls.  A franchise attorney at Briskin, Cross and Sanford can help you do this.