Raising the Bar

Many of your favorites return in the event’s 52nd year, along with a few things you may not expect.

By Stuart Hershman

Another year has passed in the franchising world as we approach the International Franchise Association’s upcoming Legal Symposium in Washington, D.C. from May 5-7 – the 52nd installment of the event. Each year seems to usher in a new challenge for all of us to overcome. Looking back just five years ago, we saw the birth of the “joint employer” crisis in late 2013 in the NLRB General Counsel’s amicus brief in the Browning-Ferris Industries case – an issue which to this day poses an existential threat to the franchise model.

More recently, beginning in 2017 and continuing today, we have evaluated and assessed how best to respond to public outcry over so-called “no-poach” provisions appearing in franchise agreements.

No-poach provisions have created the biggest stir in franchising over the past year, flowing through multiple channels: (1) very-public Civil Investigative Demands issued by the State of Washington Attorney General’s Office beginning in February 2018 (and continuing to this day) to numerous brand-name franchisors, requesting documents and interrogatory responses relating to their use of no-poach provisions and ultimately demanding the removal and non-enforcement of such provisions in franchise agreements system-wide; (2) the introduction in March 2018 by Sens. Cory Booker and Elizabeth Warren of the pejoratively-named “End Employer Collusion Act” to outlaw no-poach provisions; (3) the issuance in July 2018 by Sens. Booker and Warren of a form letter to multiple franchisors inquiring about their use of no-poach provisions; (4) the concurrent commencement in July 2018 of an investigation by 11 state attorneys general into the no-poach-provision practices of eight well-known franchise systems; and, last but not least, (5) the proliferation of plaintiff antitrust class actions against franchisors over their use of no-poach provisions.

FTC Franchise Rule

As if the public discourse and legal wrangling over joint employer and no-poach issues have not commanded enough of our attention, the Federal Trade Commission announced on Feb. 13, 2019, that it is seeking public comment on whether to make changes to its Franchise Trade Regulation Rule as part of its systematic review of all current FTC rules and guides. Barring an extension, the current deadline for public comments is April 21, before we assemble in D.C.

Upward Trajectory

The matters I have identified above of course are not the only developments in franchising over the past year – they are simply the highest-profile matters. What we continue to see with each new challenge, however, are the vibrancy and resiliency of the franchise model and its main stewards – franchisees, franchisors, and suppliers. The franchise model’s upward trajectory since business-format franchising originated in the post-World War II era has for the most part continued unabated despite many challenges and attacks along the way, leading to what today is a remarkable number of franchised businesses employing nearly 7.6 million people directly and generating $674 billion of economic output for the U.S. economy.

Equally remarkable is the cornucopia of legal issues emerging over the decades and impacting what we do and how we practice. The franchise community faced state franchise regulation for the first time in 1971 in California and federal franchise regulation for the first time in 1979 with enactment of the FTC Rule; we witnessed the evolution of antitrust law in the late 1970s, as applied to most vertical restraints, to a “rule of reason” analysis, which strengthened the foundation of most franchise systems; we were delighted when antitrust analysis of vertical price restraints similarly relaxed in 1997 under State Oil v. Kahn (maximum resale price maintenance) and in 2007 under Leegin (minimum resale price maintenance). We have seen the growing popularity of arbitration as a dispute resolution method and related case-law developments. Out-bound franchising by U.S.-based franchise systems has exploded through master franchising, multi-unit area development, and joint ventures, joined concomitantly by the growth of international franchise disclosure regulation. Most recently, we have experienced numerous lawsuits alleging joint employer, employee/independent contractor misclassification, and antitrust violations from no-poach provisions.

On the Horizon

Just as those of us who have practiced franchise and distribution law for three-plus decades might proclaim that we have seen it all, new and unfamiliar areas emerge. The new kid on the block – blockchain – holds the promise of revolutionary change, in almost-unimaginable ways for many of us, in how contracts are formed, how business is transacted, and how people and entities deal with each other. Perhaps the current limits of our understanding of blockchain technology will be untethered by our growing ability to distribute and consume cannabis products. Who would have thought that franchising in the cannabis industry would be such a hot topic? And how does the growing presence of third-party ordering and delivery systems impact it?

Legal Journey

What else do these three topics have in common? They are just a few of the myriad subjects selected by the Task Force for this year’s Legal Symposium. But those are not the only mind trips we have in store for you. We have lined up many brilliant lawyers and businesspeople to engage you on many practical, thoughtful, and cutting-edge topics that we think will invigorate you. The Legal Symposium has always been the foremost intersection for business and legal issues affecting franchising. We look forward to you taking a magic carpet ride with us once again.

Stuart Hershman is Chair of the IFA Legal Symposium Task Force and a Partner with DLA Piper based in Chicago. He has focused his practice for more than 30 years on franchising, general dealership and distribution, and antitrust areas. Find out more about the IFA Legal Symposium here.