Top 5 Legal Issues on the Radar

Developments in the law that should all franchisors should watch in 2019.

By Gaylen Knack, CFE, and Karli Hussey

Franchisors looking to meet or exceed their franchise development and operational goals for 2019 must anticipate and overcome a variety of economic and market-based challenges. They also must anticipate and manage several key legal issues that otherwise could disrupt those goals for 2019 and beyond. The following is not an exhaustive list but certainly one that will impact nearly every franchisor.

Issue 1

Data Privacy Laws

The year 2018 marked the implementation of more stringent data privacy regulation in the European Union – the General Data Protection Regulation (GDPR). While franchisors with operations in Europe pursued development of GDPR compliant data privacy plans, most franchisors without such operations rightly or wrongly paid minimal attention to European data privacy regulation. That will change with the enactment of sweeping and historic data privacy legislation in California. This new legislation – the California Consumer Privacy Act (CCPA) – draws on many of the same consumer data protection principles as the European Union’s GDPR. Those principles include the right of an individual to understand what personal information is collected by a business and how it is used, the right to opt-out of having that information sold, and the right to require a business to delete all personal information of that individual. Unlike the GDPR, California’s law provides plaintiffs in litigation-friendly California easier access to the courts to remedy violations.

The law is scheduled to take effect on Jan. 1, 2020. With certain exceptions, franchisors that directly or through their franchisees collect personal information of California residents must comply with the CCPA. The California legislature quickly passed the original version of the CCPA under threat of a public ballot initiative. Despite the need for obvious corrections to the CCPA, California officials have not suggested such action. For example, will courts combine the revenue of an entire franchise system in determining whether a franchisor meets the small business exemption?

Due to the significance of the California market and the likelihood that other states will consider similar legislation, impacted franchisors will need to develop a nationwide data privacy policy that complies with the CCPA. Franchisors should review customer data collection, access and ownership policies and practices, as well as exemptions to the CCPA, to determine how this new privacy legislation will impact their franchise systems. Further, franchisors should examine their relationships with relevant third-party vendors to ensure those vendors adopt appropriate compliance measures.

Issue 2

Technology Costs

Technology is an increasingly important and expensive component of many franchise systems as franchisors seek to remain competitive and confront compliance issues such as data privacy and cybersecurity. Efforts to spread the cost of technology enhancements within the franchise system will continue to be a significant challenge in 2019. Franchisors should review their franchise agreements to ensure that technology-related provisions are broad enough to accommodate evolving technological demands during the term of the agreement. Terminology used in these provisions should be reviewed to ensure sufficient flexibility to cover hardware and software components and related equipment and enhancements, as well as internet and cloud systems, mobile applications, social media platforms, and other current or future technological innovations. Technology provisions and policies should also contemplate the allocation of any related costs, data ownership and access issues, as well as any associated rights reserved to the franchisor to avoid disputes down the road.

Issue 3

The Non-Solicitation Wave

In 2018, franchisors of several larger franchise systems faced lawsuits over the scope of non-solicitation provisions limiting franchisees from hiring/soliciting employees of other franchised or corporate-owned locations. In addition, certain state attorneys general have actively pursued removal of this type of provision. Franchisors should re-examine their own non-solicitation policies and reconsider the benefit of maintaining non-solicitation restrictions in their franchise agreements. In many cases, franchisors may find that the provision has never come into play. If so, elimination of such restrictions may be the easiest approach to avoid an unnecessary lawsuit. If non-solicitation restrictions serve a critical role in the system, they should be modified as necessary to ensure the restrictions are narrowly tailored.

Issue 4

Retooled FASB Rule

The Financial Accounting Standards Board (FASB) previously issued a new standard for revenue recognition that impacts the way in which initial franchise and certain other fee revenue is recognized. For companies operating on a calendar-year basis, this new standard became effective on January 1, 2018 for public companies and January 1, 2019 for private companies. Under the new FASB standard, franchisors can no longer recognize initial franchise and certain other fees in the year they are received. With the exception of those fees separate and distinct from the award of a franchise right (such as a separate site selection fee), franchisors must amortize the fee over the term of the agreement. In light of this new FASB standard, franchisors should discuss this issue with their accountants and determine whether the initial franchise fee and other fees should be restructured to lessen the impact of this new revenue recognition standard.

Issue 5

Joint Employer

Vicarious liability and joint employer risks remain in play in 2019 as the legal landscape seems to change almost monthly. Franchisors should continue to review operations and support policies and activities to limit the threat of vicarious and joint employer liability. Franchisor control should be limited to aspects of the franchised business necessary to protect the customer experience and deliverables associated with the brand. Franchise manuals, policies and other operational guidance should be reviewed and revised to clearly distinguish mandatory from suggested guidelines. 

Franchisors will need to overcome many obstacles to achieve their near-term objectives. Addressing these five key legal developments will help ensure that those plans are not derailed.

Gaylen Knack, CFE is Partner at Gray Plant Mooty, and Karli Hussey is an Associate based in the Minneapolis office. Both are member of Gray Plant Mooty's Franchise and Distribution Practice. Learn more about Gray Plant Mooty by clicking here.