Franchise Agreements, Part 1

According to the International Franchise Association, more than 700,000 Ohio jobs are directly or indirectly related to franchised businesses.  When our clients consider whether to launch or expand a franchise, our attorneys carefully review these and other provisions in franchise agreements:

1. Does the franchise agreement necessitate revisions to your operating agreement? For example, it may require your limited liability company to have a certain number of officers or restrict the type of name.
2. What initial fees are required? What recurring royalty fees will have to be paid?
3. Typically, the agreement will require that the franchisee carry a minimum level of liability insurance. Does your LLC carry this amount of coverage? 
4. Franchise agreements frequently include noncompete clauses to discourage franchisees from operating a similar business nearby. For example, the contract might prevent a coffee franchisee from operating another coffeehouse within the same city during the term of the agreement and for 2 years thereafter. Are these time and geographic restrictions reasonable? 
5. Which employees are bound by confidentiality or nondisclosure agreements? 
6. When can the agreement be terminated? And if the agreement is breached, what are the required damages? 

Although this list is not exhaustive, it may give you an idea of some important questions to consider before finalizing a franchise agreement.

Lawsuit Abuse Reduction Act Proceeds Through Congress

Legislation designed to help small businesses by reducing frivolous lawsuits in federal courts is making its way through the U.S. House of Representatives.

H.R. 2655, the Lawsuit Abuse Reduction Act of 2013 amends Rule 11 of the Federal Rules of Civil Procedure to strengthen sanctions against parties and lawyers who file unmerited lawsuits. Specifically, the bill:

• Reinstates sanctions for the violation of Rule 11;
• Requires judges to impose monetary sanctions against lawyers who file frivolous lawsuits, including the attorney's fees and costs incurred by the victim of the frivolous lawsuit; and 
• Prevents parties and their attorneys from withdrawing frivolous claims after a motion for sanctions has been served.

Bill sponsors hope that the increased sanctions would discourage frivolous suits and claims, allowing business owners to use resources to expand their business rather than defending lawsuits in federal court. Moore & Van Allen’s Litigation Blog has a detailed explanation of the changes to Rule 11, which could affect all attorneys and parties in federal court.

The bill was recently passed by the House Judiciary Committee and is now pending before the full House. A companion bill, S. 1288, is under consideration by the Senate Judiciary Committee.

Choice of Law Provisions in Non-Compete Agreements.

A recent federal case in Ohio emphasizes the importance of examining choice of law provisions in your non-compete agreements.  

From the Ohio Employer's Law Blog:

Choice of law is one of the most important, and, often, most ignored decisions you can making in drafting a non-competition agreement. Lifestyle Improvement Centers, LLC v. East Bay Health, LLC (S.D. Ohio 10/7/13), illustrates how the choice of which state’s law will govern the contact can govern the enforceability of the restrictive covenant. 

Forfeiture of Mineral Leases

When a landowner performs a title search on his property, he or she may discover that someone else has leased the oil or gas rights on the property, even though the landowner has never received royalties or even seen any drilling equipment. Under Ohio law, an owner or lessor cannot lease the property if another person or company holds an existing mineral lease, even if the conditions in that lease have not been fulfilled. Ohio Revised Code § 5301.332 provides the statutory procedure for forfeiting a mineral lease if the lessee has not kept specific covenants in the lease.

First, after the lease is discovered, further research must be done to determine the current lessee. Particularly in the case of old leases, the original lessee may have transferred the lease to another person or company.

Once the current lessee is identified, Ohio law requires that the lessor notify the lessee in writing that the lease has been forfeited, describing the specific ways that the lease has been violated. This requires careful examination of the lease document. For example, a lease may state that it remains in effect as long as oil or gas is produced from the land; or as long as lessor is paid royalties.

After thirty days of providing notice, the lessor can file an affidavit of forfeiture with the county recorder’s office reciting, among other things, the failures to abide by the lease. In response to this notice of forfeiture, the current lessee may release the lease or respond with an affidavit detailing why the lease may still be in effect. If there is no response within sixty days, the lease can be canceled by the county recorder.

This process is similar to the procedure under the Ohio Dormant Mineral Act, discussed in a previous blog post, which allows a property owner to claim another individual’s abandoned rights to the minerals located beneath the landowner’s property.

Cloud Computing for Attorneys and Businesses

Like many businesses, our law practice is gradually becoming paperless. Services like Dropbox or iCloud which use “cloud computing” – saving files on remote servers rather than on local machines – can greatly improve both communication and collaboration while reducing the cost of supplies and waste.

Whether information is stored on a cloud or in a file cabinet, attorneys are required by professional conduct rules to make reasonable efforts to prevent the unauthorized disclosure of client information. Some states have already issued specific ethics opinions regarding cloud computing for lawyers.

While these legal ethics rules and opinions might not specifically apply to other professions, the general principle of keeping information confidential is relevant to both attorneys and business owners.

To maximize the potential of Dropbox or similar services while maintaining the privacy of your information, consider implementing these recommendations from a variety of legal blogs:

• Protect your information before sharing it with the cloud. (via Flat Fee IP)
• “Lawyers should take the additional step of encrypting, or pre-encrypting, client data before we give it to Dropbox or any other cloud-based storage solution.
• Use a two-step authentication when logging in. (via Attorney at Work)
• “Two-factor authentication increases login security because it requires you to use something more than just your login credentials (your account name and password).”
• Share files with caution. (via Small Firm Innovation)
• “In order to avoid sharing other client information with [your client], you should create a separate folder that contains only the documents you want to share with them.”
• Unshare files with clients or co-counsel when the case is resolved. (via Lawyerist)
• “Dropbox makes it very easy to share files with co-counsel. It’s also easy to forget to kick out your co-counsel when the case is over."

Supreme Court Strengthens Property Rights

Although today's start of the Supreme Court's new term brings prediction after prediction about the important cases on the docket, it can be difficult to forecast the impact of the Court's decisions.  For property owners, for example, the June 25 decision in Koontz vs. St. Johns River Water Management District could have just as far-reaching an effect as the more high-profile cases involving the Voting Rights Act or Defense of Marriage Act.

This case began in 1994, when Coy Koontz, a Florida landowner, applied for a permit to develop a portion of his property. Because his land was designated as wetlands under Florida law, Koontz was required to enhance wetlands elsewhere as part of his application. He proposed to develop 3.7 acres and give his remaining 11 acres to the district for conservation.   

The permitting agency, the St. Johns River Water Management District, refused to approve Koontz’s construction unless he met one of two conditions: 1) reduce the size of his development to 1 acre and reserve the remaining 14 acres for conservation; or 2) continue with his existing proposal and pay for conservation improvements on district-owned wetlands elsewhere. 

When Koontz sued, the courts were forced to interpret the case based on previous Supreme Court decisions which allowed government to condition land permits only if there was a “nexus” and “rough proportionality” between its demand and the effect of the land use. In Koontz, the Supreme Court ruled that these requirements still applied, even though Koontz’s permit was denied (not approved with conditions) and even though his land was not taken (and only financial demands were made). “We hold that the government’s demand for property from a land-use permit applicant must satisfy the requirements of Nollan and Dolan even when the government denies the permit and even when its demand is for money.” (Koontz at 22). 

This broad reading of the Constitution’s Fifth Amendment Takings Clause, which seemingly requires government to show a connection between its land requirements and its financial demands, promises to strengthen the rights of property owners and developers while placing additional burdens on local governments. Potentially, every governmental financial demand may be constitutionally challenged by property developers, and much litigation is likely to result as future courts grapple with the ramifications of the Koontz decision.

Legislature Examines Debt Settlement Regulations

Ohioans seeking to settle their credit card debt could be affected by a pending bill in the Ohio Legislature. House Bill 173, currently pending before the House Financial Institutions, Housing and Urban Development Committee would change existing regulations governing debt settlement companies.

Debt settlement companies are third parties who intervene between a debtor and creditor, offering to settle creditor debts for a small percentage of the amount owed. In a typical case, the debtor stops paying the creditor and instead makes regular payments to the debt settlement company, who then attempts to negotiate a settlement on behalf of the debtor.

Currently, these companies are regulated under a 2004 statute known as the Debt Adjuster’s Act (Ohio Revised Code § 4710.01 et. seq.), which, among other provisions, limits fees charged by debt settlement companies to the greater of 8.5% of the debtor’s monthly payments or $30. Additionally, the Federal Trade Commission finalized rules in 2010 prohibiting companies from charging fees before debts are settled.

House Bill 173 would create separate regulations for debt settlement companies. Under the bill, these companies would be exempted from the requirements and fee caps of ORC 4710.02 and – as in the 2010 FTC rules – prohibited from charging up-front fees to debtors. Fees would no longer be capped, but companies would be subject to additional regulations, including registering with the Department of Commerce and disclosing a variety of information to debtors.

The Columbus Dispatch recently published an article summarizing opposing views on the bill, and the Ohio Legislative Service Commission has a full analysis of the legislation.