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Collateral Issues in Franchising: Beyond Registration and Disclosure

Collateral Issues in Franchising: Beyond Registration and Disclosure

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Collateral Issues in Franchising: Beyond Registration and Disclosure

846 pagine
9 ore
Jan 7, 2015


In addition to counseling their clients on disclosure, registration and other basic franchising concepts, franchise attorneys must handle a wide variety of collateral, but essential, areas of law on a daily basis. These can range from Internet communications to advertising programs to supply chain issues.

In this book, each chapter addresses a particular category of concerns and offers insightful analysis of important aspects of the franchisor-franchisee relationship. Topics include social media, search-engine optimization and other Internet concerns; franchise sales relationships; third-party financing; the franchisor's corporate and business structure and intellectual property; real-estate issues such as zoning, permits, building code compliance, signs, environmental issues and due diligence, and real estate financing; regulation of advertising and telemarketing; and supply chain management and logistics; among others.
Jan 7, 2015

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Collateral Issues in Franchising - Kenneth R. Costello




Cover design by Tony Nuccio/ABA Publishing.

The materials contained herein represent the opinions of the authors and/or the editors, and should not be construed to be the views or opinions of the law firms or companies with whom such persons are in partnership with, associated with, or employed by, nor of the American Bar Association or the Forum on Franchise Law unless adopted pursuant to the bylaws of the Association.

Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book is intended for educational and informational purposes only.

© 2014 American Bar Association. All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. For permission contact the ABA Copyrights & Contracts Department,, or complete the online form at

Library of Congress Cataloging-in-Publication Data

Collateral issues in franchising: beyond registration and disclosure / Kenneth R. Costello, editor.

pages cm

Includes bibliographical references and index.

e-ISBN: 978-1-62722-444-4

1. Franchises (Retail trade)--Law and legislation--United States. I. Costello, Kenneth R., editor. II. American Bar Association. Forum on Franchising issuing body.

KF2023.C65 2014



Discounts are available for books ordered in bulk. Special consideration is given to state bars, CLE programs, and other bar-related organizations. Inquire at Book Publishing, ABA Publishing, American Bar Association, 321 N. Clark Street, Chicago, Illinois 60654-7598.





By Deb Coldwell


By Kenneth R. Costello


By Keith Klein and Matthew Fojut

I. Introduction

II. Available Forms of Internet Marketing

III. Developing an Online Presence

A. Obtaining Domain Names

B. Gripe Sites—

IV. Establishing and Managing Web Sites and Social Media Pages

A. Laws Applicable to Social Media Web Sites and Content

B. The Children’s Online Privacy Protection Act

C. Reporting Child Pornography

D. Franchise Sales and Disclosures Still Apply

V. Marketing a Brand Online and Driving Traffic

A. Search Engine Marketing and Search Engine Optimization

B. Astroturfing and Endorsements

C. CAN-SPAM Act and TCP Act

D. The Rising Popularity of QR Codes

VI. Terms of Use, Privacy Policy, and ADA Compliance

A. Terms of Use

B. Privacy Policy

C. ADA Compliance

VII. Litigation Issues with the Internet and Social Media

A. Managing Franchisor-provided E-mail Accounts

B. Subpoenas for Information on Social Media Web Pages

VIII. Internet and Social Media Policies: Integrating the Internet and Social Media into the Franchise Relationship

IX. Preparing for Web 3.0


By Marisa D. Faunce and Christina M. Noyes

I. Confidentiality and Nondisclosure Agreements

II. Preliminary or Training Agreements

III. Term Sheets, Letters of Intent, and Memoranda of Understanding

IV. Rights of First Refusal and First Offer Agreements

V. Lead Referral Agreements

VI. Lead Generation Agreements

VII. Franchise Broker Agreements

A. Authority

B. Territory and Market Limitations

C. Compliance with Franchise Disclosure Laws

D. Responsibility for Sales Materials

E. Franchisee Qualification and Approval

F. Best Efforts or Limited Competitive Representation?

G. Compensation

H. Intellectual Property Issues

I. Indemnification

J. Termination and Expiration of the Agreement

K. State Registration Requirements for Brokers

VIII. Area Representation Agreements

A. Grant of Rights

B. Exclusivity

C. Fees and Compensation

D. Recruitment

E. Development Quotas

F. Operation of Outlets by the Area Representative

G. Operations Manual Disclosure of Responsibilities

H. Registration and Disclosure Issues

I. Advantages of Area Representation Arrangements

J. Disadvantages of Area Representation Agreements

IX. Master Franchise Agreements

X. Internet Sales and Advertising Issues

A. Franchisor Web Sites

B. Federal Advertising Law Issues

C. California

D. Puffing

E. Use of Testimonials

F. Federal Enforcement

G. State Advertising Approval Requirements

H. State Evaluation of Webinars and Scripts

I. State Regulatory Review of the Internet and Exemptions

XI. Conclusion


By Jeffrey A. Brimer

I. What Are Unique Venues and Why Are They Unique?

II. What Makes Unique Venues Desirable?

A. Extends the Brand to Places Customers Want It to Be

B. What Are the Unique Realities of These Venues?

III. Application to Unique Venues

A. Do Disclosure and Registration Requirements Apply?

B. How Do the Disclosure Requirements Differ for Unique Venues?

C. Item That Definitely Changes—Item 7

D. Items That May Change

IV. Exemptions and Exclusions

A. Fractional Franchising

B. Large Investment Franchise

C. Sophisticated Franchisee Exemption

D. Other Exemptions and Exclusions Applicable to Unique Venues

V. Considerations for Hotels

A. Complex Ownership Structures

B. Owner/Operator Split

C. Transfers of Ownership

D. Flag Changes

E. Other Channels of Distribution in the Hotel

F. Master Agreements with Hotel Chains or One-offs with Hotel Franchisees

G. Mentality of Hotel Owner (Usually the Franchisor in a Relationship) Stepping into the Role of a Franchisee

VI. Considerations for Casinos

A. General Concerns

B. Gaming Commission Authority

VII. Considerations for Tribal Locations

A. Sovereign Status

B. Tribal Corporations

C. Sovereign Immunity

D. Tribal Courts and Jurisdiction

E. Other Laws to Consider

F. Gaming Regulations

VIII. Considerations for Universities

IX. Considerations for Sports Facilities

X. Considerations for Airports

XI. Considerations for Supermarkets

A. Banner Changes

B. Dual Channel Distribution

C. Cross-marketing Opportunities

XII. Considerations for Shopping Center Food Courts

XIII. Considerations for Office Buildings

XIV. Considerations for Military Bases and Government Facilities

A. Relevance of Government Contracting to Franchisors

XV. Conclusion


By Kenneth A. Freed

I. Introduction

II. Franchisor-Financing Transactions

A. General

B. Transaction Structure and Security

C. Franchise-Specific Due Diligence

D. Franchise-Specific Representations

E. Legal Opinions

F. Franchise-Specific Covenants

III. Franchisee-Financing Transactions

A. Lender Issues/Concerns

B. Franchisor Issues/Concerns

C. Franchisee/Borrower Concerns

D. Resolving Conflicting Concerns in a Mutually Beneficial Manner

E. Issues Specific to SBA-Guaranteed Financing

IV. Conclusion


By David Gurnick

I. Structural Considerations for Start-up and Seasoned Franchisors

II. Collateral Issues for the Start-up Franchisor

A. Credibility

B. Raising Capital

C. Flexibility for Different Kinds of Developments

D. Choice of Entity or Structure to Facilitate Legal Compliance and Logical Operation

E. Choice of Entity to Facilitate Limited Personal Liability

F. Additional Steps to Limit Personal Liability

G. Where to Organize and Locate

H. Managing Trademarks and Other Intellectual Property

I. Selecting Service Providers

J. Responding to Unanticipated Opportunities

III. Considerations of Seasoned Franchisors

A. Seasoned Franchisors Face Similar Issues in a Different Way

B. Targeting Markets for Growth

C. Product and Service Research and Development

D. Streamlining Operations

E. Addressing Opportunities to Sell or Merge the Business

F. Resolving Disputes

G. Manner in Which Collateral Decision-making Occurs

IV. Collateral Agreements

V. Conclusion


By Mark D. Shapiro

I. Franchisor Control of Site

II. Lease Provisions

A. Use Clause

B. Notice and Opportunity to Cure

C. Lease Assignment

D. Third-Party Beneficiary

E. No Amendment

F. Rider Supersedes

G. Access to Protect System

H. Refranchising

I. Approval of Use and Marks

J. Remodel Rights

K. Right to Receive Reports

L. No Assignment or Subletting

M. Radius Restrictions

N. Exclusivity Rights

III. Collateral Assignment of Lease

IV. Enforcing Terms

V. Franchise Agreement Terms

A. Grant of License and Site Selection

B. Relocation

C. Direct Control

D. Advantages

E. Disadvantages

VI. Management Agreements

VII. Operation Manual Considerations

A. Site Selection

B. Lease Negotiations

C. Permits and Approvals, Zoning, and Code Compliance

D. Signage and Trade Dress, Specifications, and Drawings

E. Environmental and Facility Due Diligence

F. Remodeling Obligations and Rights

G. Financing Rights

VIII. Franchisee Financing of Real Property

A. Interplay Among Franchisor, Franchisee, Landlord, and Lender

B. Leasehold Mortgages

C. Estoppel Certificates and SNDAs

IX. Bankruptcy and Termination Considerations

A. Assumption/Rejection and Assignment

B. Cure Issues

C. Lease and Franchise Agreement Cross-Defaults

D. Lease and Franchise Agreement Impact on Eviction

X. Exposure for Control

A. Vicarious Liability

B. ADA Compliance

C. Environmental Liability

D. Bad Site Selection


By Gary R. Batenhorst

I. Introduction

II. Required Advertising Expenditures

III. National and Regional Marketing Funds

IV. Marketing Cooperatives

V. Drafting Marketing Provisions for Franchise Agreements

VI. Marketing Cooperative Provisions in Franchise Agreements

VII. Cooperative Advertising and the Definition of a Franchise

VIII. National Advertising and Vicarious Liability Issues

IX. Marketing Payments from Suppliers

X. Compliance with Consumer Advertising Laws

XI. Comparative Advertising

XII. Advertising to Children

XIII. E-mail Marketing

XIV. Telemarketing

XV. Use of Terms Free and New

XVI. Environmental Claims

XVII. Claims Substantiation

XVIII. Contest Guidelines

XIX. Organization of Marketing Funds

XX. Marketing-Related Agreements

XXI. Operations/Marketing Manuals

XXII. Approved Media

XXIII. Gift Certificates and Gift Cards

XXIV. Contests and Sweepstakes

XXV. Compliance with Other Legal Requirements

XXVI. Approval of Marketing Materials

XXVII. Internet Marketing Rules


By Joyce Mazero, Suzanne Trigg, and Emma Ricaurte Harker

I. The Franchise System Supply Chain: A Competitive Advantage

II. The Basics: Components of a Franchise System Supply Chain and Key Parties

III. Supply Options: Approved Suppliers, Sole-Source Suppliers

A. Franchisees’ Selection of Suppliers Using Product Specifications

B. Approved Suppliers

C. Franchisor as Supplier or Captive Suppliers

D. Choosing the Best Supply Chain for a Franchise System

IV. An Additional Option: Purchasing Cooperatives

A. Controlling the Purchasing Cooperative

B. Forming a New Purchasing Cooperative

C. Distinct Legal Considerations in Establishing Purchasing Cooperatives

D. Ongoing Role of a Franchisor in a Purchasing Cooperative

E. Relationship of Purchasing Cooperative with Franchisor

V. Managing Rebates and Rebate Disputes

A. Disputes

B. Managing Rebates

VI. Disclosures Related to the Franchise System Supply Chain

A. Disclosures Regarding Approved Suppliers

B. Product Specifications

C. Purchasing Cooperatives

D. Disclosing Rebates and Other Supplier-Provided Benefits

E. Contracts to Disclose

F. Other Disclosure Requirements Involving Suppliers

VII. Practical Guidance: Legal Framework and Agreements in Supply Chains

A. Agreements with Product Suppliers

B. Third-Party Logistics and Transportation: Legal Framework

C. Third-Party Logistics Agreements

VIII. Across Borders: International Supply Chain Concerns

A. Distribution

B. Terms of Sale/Order Acceptance Sales Obligation

C. Cultural Norms and Preferences

D. Local Customs and Religious Laws

E. Disputes and Governing Law

F. U.S. Laws of International Application

G. Local Laws

IX. Restaurant and Food-service Franchise Systems: Special Supply Chain Issues


By Craig Tractenberg

I. Introduction

II. Assignments of Franchise Agreements

A. What Constitutes a Franchisee Assignment or Transfer

B. Contractual Provisions Addressing the Transfer Process

C. Contract Silent as to Transfer

D. State Statutes Affect the Transfer Process

E. Special Issues in Bankruptcy Affecting Transfers

F. Forms for Assignment and Termination of Franchise Agreement

G. Post-Termination Remedies and Obligations

H. Limitations on Termination and Nonrenewal

I. Consequences of Nonrenewal

J. Enforceability of Post-term Noncompetition Agreements upon Nonrenewal

K. Conclusion


Consent to Assignment of Franchise Agreement

Termination of Franchise Agreement, Sublease and General Release


By Robert L. Zisk and Jeffrey L. Karlin

I. Introduction

A. Underreporting and Nonpayment of Royalties and Advertising Fees

B. Interlocking Defenses: Vicarious Liability Claims, Insurance Coverage Requirements, and Indemnity Clauses

II. Addressing Unlawful Conduct

III. Unapproved Products

IV. Quality Assurance Programs

V. Implementing System/Operational Changes




Kenneth R. Costello is a partner in the Los Angeles office of Bryan Cave, LLP, an international law firm named by U.S. News & World Report as Tier 1 nationally in franchising, with 1,000 lawyers and 26 offices globally. He is certified as a specialist in franchise and distribution law by the California State Bar Board of Legal Specialization and focuses his practice on a broad range of U.S. and international franchise, intellectual property licensing, and e-commerce issues, and is a frequent author and speaker on these topics.

Among many other publications, he co-authored Franchising Law: Practice and Forms, a leading three-volume treatise, he has been an author and speaker at twelve ABA Annual Forums on Franchising and Annual International Franchise Association Legal Symposia, and a contributing author of chapters in several American Bar Association (ABA) publications (including this publication), as well as the Franchise Desk Book, The FTC Franchise Rule, and the ABA’s law school Casebook and accompanying Teacher’s Manual.

He has served on the International Franchise Association’s Supplier Forum Advisory Board, Legal/Legislative Committee, and Membership Committee, as an articles editor for the ABA Franchise Law Journal, and on the Advisory Board of Leader’s Franchising Business & Law Alert.

Mr. Costello was named Los Angeles Franchise Law Lawyer of the Year by U.S. News/Best Lawyers for 2013, and has been recognized by Chambers U.S.A., Chambers Global as a superb transactional attorney with tremendous business sense, by International Who’s Who of Franchise Lawyers as one of the Most Highly Regarded franchise lawyers globally, by Best Lawyers in America, and in Law & Politics magazine as a Southern California Super Lawyer.

He has testified on franchise trade regulation issues before the Federal Trade Commission and has been consulted on franchising issues by the Wall Street Journal, New York Times, Los Angeles Times, CBS News, Forbes, and Entrepreneur Magazine, among other media. For additional information, see



Keith Klein is a partner in Bryan Cave LLP’s franchise and distribution practice group. He is certified in franchise and distribution law by the California State Bar and he also has been recognized by Best Lawyers in America© for his work in franchising. Keith has authored a number of franchise publications including, most recently, a chapter addressing the California Franchise Relations Act. He is regularly interviewed by franchise publications on social media and Internet issues, and he has participated in local, national, and international panels on these issues. Keith has been recognized as a rising star by Benchmark for his litigation work after leading teams of lawyers handling nationwide dockets of complex litigation and other high profile trials and arbitrations. Keith heads Bryan Cave’s Start Up and Emerging Growth program in its Los Angeles office and serves as outside general counsel to multi-channel marketing companies.

Matthew Fojut is general counsel for Just Fabulous, Inc. Before Just Fabulous, Mr. Fojut was General Counsel & Senior Vice-President, Business Affairs of Slingshot Labs, News Corporation’s Web 2.0 incubator; was Vice-President, Business& Legal Affairs of FOX Interactive Media (MySpace); and an associate in the Venture Capital/Emerging Growth Transactions Department of the international law firm O’Melveny & Myers.


Marisa D. Faunce is a partner with the law firm of Plave Koch PLC in Reston, Virginia. Marisa is an Order of the Coif graduate of the Marshall-Wythe School of Law at the College of William and Mary, and she received her undergraduate degree from the University of Virginia. Marisa has been recognized as a Franchise Times Legal Eagle by Best Lawyers in America© and by the International Who’s Who of Franchise Attorneys. Marisa counsels franchisors, licensors, and manufacturers on transactional, regulatory, and intellectual property issues involved in their franchise and distribution programs. Marisa has extensive experience in structuring and revamping franchise programs; drafting franchise, license, and area development agreements; and counseling franchisors with regard to regulatory (FDD) compliance issues. Marisa counsels franchisors with regard to corporate transactions, contract negotiations, master franchise programs, captive market development and all aspects of the franchise relationship, including operational compliance, system standards, default and termination strategies, and franchise workouts. She regularly trains franchisor executives with respect to franchise sales, relationship, and regulatory compliance issues. In addition to assisting franchisors with franchising issues, Marisa is an experienced trademark attorney with a specialized focus in branding, licensing and trademark prosecution at the U.S. Patent and Trademark Office.

Christina M. Noyes is a partner with Gust Rosenfeld, PLC, in Phoenix, Arizona. She has been in private practice since 1996 and was a certified public accountant for three years with Deloitte and Touche, LP before starting her legal career. Christina focuses her transactional practice on franchise and corporate law, as well as handles trademark registrations and renewals. She represents franchisees and franchisors and has been listed in the Franchise Law category of The Best Lawyers in America© since 2009. Christina has written articles and has presented materials on franchising, business opportunity issues, and intellectual property issues for the American Bar Association Forum on Franchising, the International Franchise Association and various Arizona business groups. Christina was also the author of the Arizona Chapter of Covenants Against Competition in Franchise Agreements (M. Grey and N. McNew, coeditors). Christina is a graduate of Miami University (B.A., Accounting, cum laude, 1990) and Arizona State University College of Law (J.D., cum laude, 1996, managing editor, Arizona State University Law Journal). She is admitted to practice in Arizona.


Jeffrey A. Brimer is a counsel in the Denver, Colorado office of Faegre Baker Daniels LLP. Previously, he was of counsel in the Denver office of Snell & Wilmer LLP, and Vice President, General Counsel and Secretary of Medicine Shoppe International, Inc., a St. Louis, Missouri-based subsidiary of Cardinal Health, Inc. Jeffrey is a graduate of the University of Missouri-St. Louis (B.S., Political Science, summa cum laude, 1976) and the University of Missouri-Columbia School of Law (J.D., 1979), where he was a Member of the Missouri Law Review. He is a member of the American Bar Association (Sections on Business and International Law and Practice, and the Forum on Franchising), the Colorado and Missouri Bars, and the International Bar Association. He holds a Certified Franchise Executive designation from the International Franchise Association. Jeffrey was the editor of the Franchise Law Compliance Manual (Second Edition), published by the American Bar Association Forum on Franchising in 2011. He served as a member of the Governing Committee of the Forum on Franchising from 2000 to 2005, was the Chair of the Long-Range Planning Committee of the Forum on Franchising, and served on the ABA Section Officers Committee – CLE Task Force. He was programs officer of the Forum from August 2002 until May 2004 and was co-chair of the ABA Annual Forum on Franchising, held in Scottsdale, Arizona in October 2002. He was a member of the Steering Committee of the Corporate Counsel Division of the Forum on Franchising from 1994 through 2000 and served as the Director of the Division from 1998 through 2000. He is a member of the International Franchise Association Legal-Legislative Committee. Jeffrey has written and spoken on a variety of franchise issues at the ABA Annual Forum on Franchising, the International Franchise Association Legal Symposium and Annual Meetings, the Bar Association of Metropolitan St. Louis, the Kansas City Bar Association, the Colorado Bar Association, the Denver Franchise Business Network, and the International Bar Association. Jeffrey has been named to The International Who’s Who of Franchise Lawyers, Franchise Times Legal Eagles, Chambers USA and Chamber’s Global: America’s Leading Lawyers for Franchising, Best Lawyers in America©, and Super Lawyers®.


Kenneth A. Freed is the founder of Freed Law Offices based in Newport Beach, California. He has over thirty years’ experience focusing on franchise and distribution law; business mergers and acquisitions; real estate acquisition; leasing, finance and development; corporate and commercial finance; and general corporate, LLC, and partnership issues. He also performs litigation oversight and management and acts as an arbitrator, mediator, and expert witness in franchise- and business-related disputes. Following law school, Kenneth joined the San Francisco firm of Feldman, Waldman & Kline, where he rose to become a shareholder in the firm. From 1995 to 2005, Kenneth was the chief legal and administrative officer for a multi-unit franchisee restaurant operating company, where he structured and managed major acquisition, financing, and development transactions to help grow the company in only eight years from start-up to over 300 locations in 16 states, with $350 million in annualized sales and over 7,500 employees. Kenneth also managed and coordinated the restructuring and sale of the restaurant operating company, and the refinancing of the debt and restructuring of the leases of the real estate holding company affiliates that continue to own the real estate underlying 133 of the restaurants. Kenneth continues to manage all aspects of the business of the real estate holding company affiliates as president of the companies, in addition to practicing law. Kenneth has an AV rating from Martindale-Hubbell. He previously served as chair of the Franchise Law Committee of the Business Law Section of the State Bar of California, where he was instrumental in initiating changes to California’s franchise investment laws. In addition, he is a member of the American Bar Association Forum Committee on Franchising. He is a former member of the International Franchise Association’s Legal/Legislative Committee and served on the Advisory Board of the Council of Franchise Suppliers. He has been a featured speaker at both the International Franchise Association Legal Symposium and the American Bar Association Forum on Franchising. Kenneth received a B.A. in Economics, magna cum laude, from Boston University, and a J.D. from the University of Chicago Law School.


David Gurnick practices law with the Lewitt Hackman firm in Los Angeles, California. David represents manufacturers, franchisors, cooperatives, distributors, dealers, and franchisees in wide-ranging industries in preparation of agreements, franchise law compliance, antitrust and competition matters, government investigations, trademarks, copyrights, trade secrets, e-commerce, and related litigation. David is certified as a specialist in franchising and distribution law by the State Bar of California Board of Legal Specialization. David has written numerous books and articles on franchise and distribution law subjects. He authored Distribution Law of the United States (Juris Publishing 2011). He was a contributing co-author for International Franchising, a text on law and strategies for international franchising programs. David is also author of Franchising Depositions (Juris Publishing 2003). David has served as an adjunct professor of law teaching franchising. He has been a panelist at the American Bar Association Forum on Franchising, International Franchise Association Legal Symposium and California Continuing Education of the Bar. Previously, David was on the editorial board of the American Bar Association Franchise Law Journal. David is 2012–2013 President of the San Fernando Valley Bar Association and served as president in 1993–1994. He previously chaired its Business Law and Litigation Sections. He previously served as a trustee of the University of West Los Angeles College of Law and as president of the Valley Community Legal Foundation. He is a 2012–2013 trustee of the Los Angeles County Bar Association and also served two terms as trustee in the 1990s. David is admitted to practice in the U.S. Supreme Court, U.S. Courts of Appeals for the Federal Circuit and Ninth Circuit, and U.S. District Court for the Central District of California. David is a member of the Bars in California and the District of Columbia. David earned his Bachelor’s degree in 1981 from the University of California, Los Angeles (UCLA), where he graduated summa cum laude and Phi Beta Kappa. At UCLA, David was a member of the Student Council and University Policies Commission and chaired the Judicial Review Committee. David received his law degree in 1984 from the University California, Berkeley. During law school, David served as Judicial Extern to the U.S. Ninth Circuit Court of Appeals.


Mark D. Shapiro is a founding partner of the law firm Hyland Levin in Marlton, New Jersey. He concentrates his practice in the areas of real estate and franchise law. Mark’s franchise practice includes counseling regional and national franchisors on franchise structuring, operational, relationship, real estate, and regulatory issues. He regularly represents buyers and sellers of business assets in a variety of distribution-related industries. His real estate practice focuses on development, leasing, and loan transactions. He also represents property owners in tax appeal matters. Mark has participated as a program presenter on franchise law for the American Bar Association’s Forum on Franchising, the New Jersey Institute of Continuing Legal Education, the International Franchise Association and the Pennsylvania Bar Institute. He has also presented on real estate law for the Pennsylvania Bar Institute and Lorman Education Services. The State of New Jersey Department of Banking and Insurance/Real Estate Commission has approved Mark as an instructor for continuing education credits. He moderates and teaches continuing education credit programs to commercial real estate brokers. He served as chair (2009–2011) and secretary (1997–1999) of the New Jersey State Bar Association’s Franchise Law Committee and has been a member of the American Bar Association’s Forum Committee on Franchise Law since 1996. Honored by New Jersey Monthly Magazine as a New Jersey Rising Star and listed as a Super Lawyer in the area of real estate, Mark was also recognized by Chambers USA: America’s Leading Lawyers for Business as Leaders in Their Field in the area of real estate. He has an AV Peer Review Rating from Martindale-Hubbell Law Directory. In addition, he was twice selected as a 40 under 40 New Jersey lawyer by the New Jersey Law Journal. Mark is a graduate of Emory University (B.A. 1990) and the George Washington University Law School (J.D. 1993).


Gary R. Batenhorst is a partner in the Omaha, Nebraska office of Cline Williams Wright Johnson & Oldfather, LLP. As a member of the firm’s Franchising and Distribution Practice Group, he concentrates his practice on transactional and compliance matters, representing primarily franchisors, product manufacturers, and multi-unit franchisees. He also represents start-up franchisors in the establishment of franchise systems. Gary was Vice President, Secretary and General Counsel for Godfather’s Pizza, Inc. from 1988–2001. He taught Franchising as an adjunct professor at Creighton University School of Law for fourteen years, where he currently teaches business planning. Gary received his B.S./B.A. from Creighton University (magna cum laude 1973) and his J.D. from New York University School of Law (1976). Gary has been recognized by Best Lawyers in America©, Who’s Who of International Franchise Lawyers and Super Lawyers®. He has written on franchise topics in state and national publications and has presented programs on franchise topics for national and state continuing education programs and seminars for individuals interested in establishing franchised businesses.


Joyce Mazero is a partner in the Franchising & Distribution, Food & Beverage and Retail Industries and Consumer Products practice groups. She has substantial business experience as lead project partner assisting clients in developing strategy, structuring, negotiating, implementing, and resolving disputes for product-and service-based domestic and international license, franchise, distribution, and shared services systems. This includes organizational and governance matters for purchasing groups, cooperatives, manufacturers, suppliers, joint ventures, and sales representative systems as well as the full gauntlet of relationship, competition, and enforcement issues associated with such systems. Among her various honors and awards, Joyce was named by Chambers USA and Chambers Global as one of the nation’s leading franchise attorneys and received the prestigious national Band 1 recognition annually from 2008–2013. She currently serves on the boards of trustees of the National Restaurant Association Educational Foundation and the International Franchise Association Educational Foundation, previously having been the 2006 recipient of the International Franchise Association’s Bonny LeVine Award for leadership in franchising. She is the founding member and chair emeritus of the DFW Chapter of Women Corporate Directors (2008–present). She was awarded the Women’s Foodservice Forum Leadership Award in 2010 and served as a board member of the Women’s Foodservice Forum (2004–2009). She also serves on the Susan G. Komen for the Cure Advocacy Alliance Board and the Board of Governors for the College of Merchandising, Hospitality and Tourism for the University of North Texas.

Suzanne Trigg focuses her legal practice on product distribution and other supply chain issues. She has represented franchisors, restaurant systems, consumer product manufacturers and distributors, medical device manufacturers, and other companies conducting supply chain initiatives. Suzanne’s experience includes representing and establishing purchasing cooperatives and similar buying groups, structuring agreements with vendors and logistics providers, and addressing issues specific to restaurant and food-service companies, including food safety issues. Suzanne frequently drafts and negotiates franchise, license, product distribution and logistics agreements and counsels clients on regulatory compliance issues. Suzanne also draws upon her background in public policy to represent the interests of businesses contracting with or under inspection by government agencies. Before practicing law, Suzanne served as legislative director for a member of the Texas House of Representatives. Suzanne is a member of the ABA Forum on Franchising, has authored several articles on franchise issues, and has given presentations at conferences held by the International Franchise Association.

Emma Ricaurte Harker is an associate at Kastner Huggins Reddien Gravelle LLP. Emma focuses her practice on representing companies in commercial transactions, including supply and distribution arrangements, intellectual property licensing and technology-based transactions. She has represented clients in drafting franchise and development agreements, license agreements, service agreements and other distribution-related agreements and preparing domestic and international franchise disclosure documents.


Craig Tractenberg focuses his practice on complex litigation, international arbitration, and counseling requiring expertise with franchise and distribution, insolvency, licensing, and intellectual property issues. He is a partner at the law firm of Nixon Peabody LLP and serves as its Franchise and Distribution Team Leader. Craig was named New York Franchise Law Lawyer of the Year by U.S. News/Best Lawyers for 2012 and has been recognized for exceptional standing in the legal community in Chambers USA: America’s Leading Lawyers for Business, "SuperLawyers," the International Who’s Who of Franchise Lawyers and Best Lawyers in America©. Craig has been recognized for the past ten years as a Legal Eagle by Franchise Times and he was inducted into the inaugural Legal Eagles Hall of Fame in 2013. Craig is a regular contributor to American Bar Association, International Franchise Association and American Lawyer Media publications and is active in the franchise law committees of the Pennsylvania and New York State Bar Associations. He is a graduate of LaSalle College and Temple University School of Law, where he teaches as an adjunct professor of franchise law.


Robert L. Zisk is a principal at Gray Plant Mooty, in its Washington, D.C. office, and concentrates his practice on franchise and distribution and commercial litigation. He is co-chair of the Franchise & Distribution practice group. Bob has extensive experience as a franchise litigator and counselor. For over twenty-five years, he has represented national franchisors in litigation with franchisees over issues of financial fraud, system standards, class actions, encroachment, trademark and trade dress infringement, and covenants not to compete. He specializes in addressing franchisee underreporting of sales, tax fraud, and related financial issues, both in and out of court. He is a frequent speaker on franchise law topics, and has presented programs at the American Bar Association’s Forum on Franchising, the International Franchise Association’s Legal Symposium and Annual Convention, and the National Restaurant Association’s Internal Auditors’ Group.

Jeffrey L. Karlin is a principal with Gray Plant Mooty’s Washington, D.C. office and is a member of the firm’s Franchise & Distribution and Business & General Litigation practice groups. Before entering private practice, he served for nine years as a trial attorney for the Torts Branch, Civil Division, U. S. Department of Justice. Jeffrey has litigated a wide variety of commercial cases for franchisor clients involving issues of financial fraud, underreporting of sales, wrongful discharge, conversion, encroachment, and market withdrawal. He has also defended a number of tort and product liability actions involving hot beverage spills, premises liability, wrongful death, invasion of privacy, and defamation. Jeffrey is licensed to practice in both the District of Columbia and California and is admitted to practice in the United States District Court for the District of Columbia. He is a member of the American Bar Association and actively participates in the American Bar Association’s Forum on Franchising.


By Deb Coldwell

This book developed from a need to assist franchise lawyers in a very practical way because franchise attorneys counsel their clients on more than disclosure, registration, and other basic franchising concepts. It is designed, therefore, to fill in the gaps and create a guide to collateral, but important, areas of law that franchise lawyers face on a daily basis. It is also intended to complement the many other excellent publications the Forum on Franchising sponsors. As you will see from the breadth and depth of the subjects covered here—from Internet communications to advertising programs to supply chain issues—this book should soon become a must-have resource for all who practice franchise law.

I would like to thank many Forum members associated with this publication. First and foremost, I want to recognize and thank Ken Costello, the editor of the book. Ken has worked hard to make sure this addition to the Forum’s franchise library is well-written and thoughtful. I also commend the current Publications Officer, Karen Satterlee, for guiding the book to its final publication. I also thank Rob Henley, the liaison to the Publications Committee, who assisted in getting the book past the finish line. I would be remiss if I did not also applaud the efforts of the chapter authors—Gary Batenhorst, Jeff Brimer, Marisa Faunce, Ken Freed, Matt Fojut, David Gurnick, Emma Ricaurte Harker, Jeff Karlin, Keith Klein, Joyce Mazero, Christina Noyes, Mark Shapiro, Craig Tractenberg, Suzie Trigg, and Robert Zisk.

On behalf of the Forum, I extend my gratitude to Ken, Karen, and Rob and the chapter authors who worked on this book. Without the efforts of these members, this superb publication would not have reached fruition. Thank you for giving so unselfishly of your time and talents. This publication will aid franchise practitioners with the collateral issues they face every day. It will also assist a new generation of franchise lawyers by providing yet another valuable resource for the study and discussion of the legal aspects of franchising.

Deborah S. Coldwell

Chair, Forum on Franchising



By Kenneth R. Costello

Franchisors and counsel must grapple countless practical and legal issues beyond core franchise registration, disclosure, and relationship statutes and rules. This monograph presents a compilation of detailed articles by experienced practitioners offering important insights into these collateral issues. By using the word collateral, we by no means suggest that these issues are subordinate or less important. In fact, they affect most or all franchisors and are often given inadequate attention. These issues can result in substantial exposure if overlooked or misunderstood. Each of the chapters addresses a particular category of concerns and offers insightful analysis of important aspects of the franchisor-franchisee relationship.

Chapter 1 explores the implications and challenges presented by the rise of the Internet, which has transformed the landscape and dynamics of franchising. As a new and rapidly changing medium for communication on a global scale, social commerce is something that must be understood by franchisors and counsel. Moreover, they must develop a proactive approach to cultivating an online presence, secure domain name registrations, combat cybersquatting, stake out a presence on social media Web sites, and defend the franchisor’s turf from interlopers, gripe sites, and the like. Keith Klein deploys his experience in start–up and emerging-growth companies, collaborating with Matt Fojut, who has been general counsel for several Internet-based companies including MySpace, to explore the implications of the Digital Millennium Copyright Act, the Communications Decency Act and Children’s Online Privacy Protection Act, and the way in which online branding works in the real world. They also cover key topics such as Web site terms of use and privacy policies, social media Web pages, search engine optimization and marketing, and potential exposure under the recent Federal Trade Commission’s Guidelines Concerning the Use of Endorsements and Testimonials in Advertising

In Chapter 2, Marisa Faunce and Christina Noyes cover issues related to the franchise sales process. They address confidentiality and nondisclosure agreements, the use of letters of intent, rights of first refusal, and first offer agreements. They also examine the different types of lead referral sources and the key provisions of lead referral agreements, lead generation agreements, franchise broker agreements, area representative and development agent agreements, and master franchise agreements. They offer keen insight into these franchise sales relationships, discussing the advantages and disadvantages, and registration and disclosure implications of these relationships.

Chapter 3 discusses unique, or nontraditional, franchise venues, such as hotels, casinos, tribal locations, universities, sports facilities, airports, supermarkets, and shopping center food courts, among others. Author Jeff Brimer discusses how territorial rights may differ from those granted to traditional venues, and associated contractual, regulatory, and disclosure implications when franchising unique venues. He also explains how to deal with the complex franchisee ownership structures common to franchising these types of sites, and addresses specific nonfranchise legal concerns that may apply to nontraditional venues, such as sovereign immunity and related dispute resolution issues associated with franchising on tribal properties. Jeff also delves into the esoteric issues and implications of franchising on military bases and PX Exchanges, and provides detailed information regarding Non-Appropriated Funds (NAFs), Non-Appropriated Funds Instrumentalities (NAFIs), Federal Acquisition Regulations, Defense Federal Acquisition Regulations, and related governmental procurement policies.

No book on collateral issues and franchising would be complete without addressing third-party financing, including real estate sale-leaseback financing; equipment loans and capital leases; senior, subordinated, and mezzanine debt; securitizations; construction loans; and unsecured lines of credit. In Chapter 4, Ken Freed deftly focuses on issues involved in various franchisor and franchisee financing transactions; explains how to reconcile the conflicting interests of the lender, the franchisor, and the franchisee; and examines the different approaches employed by franchisors in franchise financing deals, from simple consents and comfort letters to detailed intercreditor agreements allowing a lender to take a security interest in franchise agreements.

In Chapter 5, David Gurnick discusses issues related to a franchisor’s corporate and business structure and intellectual property, from the perspective of start-up as well as seasoned franchisors. He considers the pros and cons of using multiple business entities to develop company-owned operations and franchised operations, and to own the copyrights, trademarks, and other intellectual properties licensed to franchisees. These structural considerations can have an impact on the franchisor’s credibility with prospective franchisees, the ability of each to raise capital through third-party lenders, and the protection of the franchise system’s intellectual property against unanticipated risks.

As the saying goes, the three most important ingredients in a successful franchise operation are location, location, and location. In Chapter 6, Mark Shapiro examines franchise real estate issues, including the essential provisions that should be contained in every franchisee’s lease. Control over the real property is a critical component of a strong franchise program and the nuances are often misunderstood or overlooked by franchisors, both new and experienced. The author examines not only the lease provisions, but also the corresponding franchise agreement and operations manual provisions that need to be crafted carefully to minimize surprises and conflicts during the franchise relationship. The issues include zoning, permits, building code compliance, signs, environmental issues and due diligence, real estate financing, and bankruptcy and termination considerations.

Consumer advertising by franchisors and franchisees is essential to the success of any franchise system. In Chapter 7, Gary Batenhorst examines the legal issues facing franchisors in establishing and administering its advertising programs. He addresses the thorny issues relating to the receipt of payments from approved vendors; advertising-specific laws relating to comparative advertising, advertising to children, unsolicited e-mail marketing, telemarketing, the specific marketing terms such as the word free and claims of environmental green; and sweepstakes and contest promotions, gift certificates, and gift cards. The author also explores matters such as governance of national and regional marketing funds and marketing cooperatives, and dealing with consumer advertising laws that have an impact on marketing programs. He also discusses important provisions in franchise agreements and operations manuals relating to marketing, and reviews case law dealing with the franchisor’s disclosure and other legal obligations relating to development and execution of marketing strategies.

Franchise systems require careful supply chain management to obtain competitive advantages and consistent, high-quality products. Chapter 8 examines the logistics of negotiating the acquisition of raw materials from manufacturers and vendors through storing and moving these goods and services from the manufacturer to the end user or to distribution centers and warehouses. In this chapter, Joyce Mazero, Suzanne Trigg, and Emma Ricaurte Harker examine third-party and fourth-party logistic providers, and the practical, business, regulatory, and disclosure issues associated with designated, approved, and captive suppliers, as well as the advantages and disadvantages of establishing purchasing cooperatives. They discuss the franchisor’s ongoing role and relationship, and how to manage rebates and a franchise disclosure document obligations with respect to franchise system supply chain matters. This chapter also offers practical guidance concerning the legal framework and relevant agreements and key contract provisions of master supply agreements among the franchisor, manufacturers, and producers supplying proprietary and other core items to the franchise system, and the unit supply agreements between a manufacturer or producer and the franchisee at the unit level. As franchisors pursue international expansion, there are also issues in working with international supply chain partners. The authors examine international standards and contractual concerns, including risk of loss provisions such as Free On Board (FOB) or ExWorks (EXW), and how to deal with regional and local cultural differences, customs, religious laws, and other factors that can affect the quality, integrity, uniformity, and consistency of a franchisor’s product offerings.

Chapter 9 of this monograph examines assignment, termination, and renewal of franchise relationships, including the franchisee’s ability to exit the system, or to pass the business on to family members upon retirement or upon death or disability. Inadequate controls can jeopardize the franchisor’s brand and the equally important interests of the remaining franchisees who want to preserve a strong and vibrant franchise system. Craig Tractenberg discusses key considerations in drafting franchise agreement assignment provisions, including defining legal limitations, requiring a seller to pay outstanding debts to trade creditors, explaining transfer fees, and training the successor franchisee, as well as ensuring that successor transferees meet current standards for approval. He also explores legal issues surrounding requirements for the franchisee to execute a release before a proposed transfer, provisions ensuring that the price paid by the buyer is not excessive, franchisor rights of first approval, and the effect of state relationship laws on the transfer process. Under what circumstances can a franchisor be liable for tortious interference when a transfer fails to occur? What are appropriate post-termination rights and remedies? How do state relationship statutes impact franchise agreement provisions? The author also examines statutory good cause and notice and cure opportunity requirements, anti-discrimination statutes, limitations on conditions to renewal, and available statutory damages and common law remedies that may apply.

Completing our examination of collateral issues in franchising, Chapter 10 by Robert Zisk and Jeff Karlin explores various ongoing challenges faced by franchisors. The authors discuss enforcement of royalty, advertising and other payment obligations of franchisees, practical considerations in detecting under-reporting, and dealing with nonpayment of fees by franchisees that experienced financial difficulties. They also examine methods by which franchisors shield themselves from exposure to tort liability arising out of the operation of franchise locations, including insurance coverage requirements, vicarious liability claims, and indemnity clauses in franchise and related agreements. They address quality assurance programs and control over a franchisee’s use and sale of unapproved products, and legal and practical concerns involved in implementing system-wide changes to address changes in consumer preferences and demographics, to take advantage of technological advancements, and to rejuvenate a franchisor’s brand, including a discussion of the relevant case law.

I also want to acknowledge and thank Robert P. Henley, my liaison on the ABA Publications Committee, whose great support and assistance throughout the long process of bringing this work to fruition has been much appreciated.



By Keith Klein and Matthew Fojut


The marketing of products and services started with the shingle outside a proprietor’s store and expanded dramatically over the past century. Franchising proved a significant contributor to that expansion, making it possible for branded products and services—originally only available in a limited geographic region—to be recognized and available to everyone everywhere.

The rise of the Internet has further transformed the scope of marketing, creating new mediums for communication on an immediate and global scale. This transformation has created new opportunities for businesses and, of course, new issues for lawyers. For franchising, with its history of relegating global marketing to the franchisor and local marketing to independently owned franchisees, this new, easily accessible, and pervasive medium has proven problematic.

Imagine, for example, that a New York City franchisee offers a discount to the first fifty customers who respond to a Twitter post. With thirty franchised locations in Manhattan, consumers may be unable to determine which locations are extending the offer. This may result in confused consumers responding to tweets at nonparticipating locations and, equally troubling, frustrated franchisees embroiled in disputes with neighboring franchisees after being forced to honor another’s social media promotions. Requiring franchisees to identify the participating locations on social media posts sounds like an easy solution, but it may not be feasible on sites such as Twitter, where precious few characters (limit of 140) are permitted.

As counsel to businesses that seek to embrace the Internet, practitioners are expected to understand Internet marketing, identify potential legal pitfalls, establish a legal framework to pursue Internet-based endeavors safely and effectively, and respond to issues as they arise. This chapter seeks to familiarize counsel with the dynamics of online marketing, both to consumers and prospective franchisees, on general communications, and offer some practical and legal solutions for franchise systems. Additional information concerning the structure and operation of national marketing funds, and local advertising and cooperative advertising can be found in Chapter 7 of this publication. Because Internet marketing continues to develop, practitioners are encouraged to stay current on legal developments and confirm the state of the law before providing counsel on material issues.²


The prevailing forms of communication on the Internet are generally categorized into three formats. The original format, known as Web 1.0, consists of one-way broadcasting in which only the business (or Web site owner) publishes information and no meaningful way exists for the user to respond in the same medium.³This is most closely analogous to television and radio advertising. Web 1.0 enables a Web site publisher to control its messages carefully, vetting content before publication and modifying content at its discretion. Because of this extensive control over content, Web 1.0 communication has been widely embraced and now, barely fifteen years since its introduction, it is deemed an almost mandatory component of marketing in the modern-day business environment.

The second form of communication, known as Web 2.0, encompasses previously unavailable forms of mass communication, whereby a conversation between the author of the content and others is broadcast worldwide in microseconds in a medium that enables others to comment or participate equally as immediately.⁴ At present, the most widely recognized Web 2.0 format is social commerce, a broad term that refers to user-generated advertorial content on e-commerce sites that allow consumers to advise one another about and help each other locate goods and services for purchase.⁵ This includes all Web sites containing customer ratings and reviews, shopping tools, forums and communities, social media applications, and social advertising. With the recent exponential growth of these Web sites, Web 2.0 is a major focus of online marketers today, but many businesses have not embraced Web 2.0 as fully and quickly as they embraced Web 1.0. Some of those who have entered the world of Web 2.0 have experienced great success, while others have experienced potentially devastating consequences, thus many businesses have simply remained on the sideline waiting for the practical and legal landscape to become more clearly defined.

Even as Web 2.0 continues to evolve and gain traction, technological developments have brought the Internet to the cusp of the third form of communication, Web 3.0. This term, reportedly coined by New York Times writer John Markoff, refers to an intelligent web that converts the Internet into a personalized catalog with the machines doing the thinking instead of an aggregation of billions of documents that can be vetted through Boolean and other rudimentary electronic searches.⁶ As of the date of publication, Web 3.0 has not developed in a manner that permits a meaningful discussion about its impact on franchising or its legal ramifications, but it will no doubt present further unique complexities for franchise systems.


The first steps in establishing a presence in the traditional marketplace are staking out real estate and developing a brand. The Internet marketplace is no different, though practically speaking, these first steps are easier and cheaper to accomplish. As the Internet business environment continues to grow, however, the relative ease and low barrier to entry have created congestion and given rise to issues not experienced in the traditional marketplace.

The first critical issue unique to the online environment is the particular scarcity of Internet real estate–domain names. Under trademark law, a fast casual dining brand and a day spa brand could co-exist in the marketplace with the same trade name without issue. On the Internet, however, room exists for only one business to have the name associated with [brand].com, which therefore generates significant demand for that particular online real estate. One relatively high-profile and early example of this problem was a dispute over the domain name between an adult entertainment provider (which had registered the name first) and Hasbro, a well-known board game manufacturer.⁷ Further complicating things is the fact that other businesses, whether for legitimate or nefarious purposes, may seek to obtain a domain name that is, for example, one typographical error away from being an identical domain name. As a widely discussed case in point, Zero Micro Software obtained a registration for (with a zero in place of the second o), leading Microsoft to send a cease and desist letter, which ultimately led to Zero Micro Software’s discontinued use of the domain name.⁸

Clearly, the apparently limitless resources of the Internet quickly narrow under the demands for unique domains, and the same issue has quickly developed in the realm of social media sub-domains, which will be addressed later in the chapter.

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