March 29, 2016

Give your franchise agreement a facelift – Part 2

Changes in technology, customer needs, and the laws governing franchising require franchise agreements to evolve reactively, to accommodate such shifts as they happen, and proactively, in anticipation of what the future might bring. Regular review of your franchise agreement can help you stay on top of the waves of change, address current and potential business issues, and help protect your legal interests in the event of a dispute or termination of the agreement.

This is part two of a three part article outlining common provisions in franchise agreements that you might want to consider revamping.

Ability to Rebrand

As markets change, franchisors must consider the impact on their brand offering and their strategy to stay relevant.  If there is a business case for rebranding the system or refreshing its image and marks, the next inquiry will be whether, and to what extent, the franchisor’s existing franchise agreements give it the rights to change the current marks being used.

In Halligan v. Liberty Tax Services Inc.[1] a franchisor sought to terminate its franchisee when the franchisee refused to change its name from “U & R Tax Services” to “Liberty Tax Services” in accordance with the franchisor’s decision to rebrand the system.  The governing franchise agreement contained the following language:

“Tax Depot may choose to replace or modify certain Licensed Marks.  Franchisee agrees to adopt and use, at Franchisee’s cost, all Licensed Marks which Tax Depot designates in the Policy and Procedure Manual.  Franchisee agrees to cease use of all Licensed Marks as indicated in the Policy and Procedure Manual.” [Emphasis added.]

In Liberty Tax, the court found that the franchisee was entitled to continue using the old business name and that the franchisor did not have the right to terminate the franchisee for failing to rebrand its store.  In coming to this conclusion, the court focused on the phrase “certain Licensed Marks” in the clause cited above, noting that while it allowed the franchisor to change or modify the trademarks, no reference was made to changing the name of the franchise or business.  The lesson to be learned from Liberty Tax is thus that, in order to mandate an overall rebranding of a franchise system, the franchise agreements must expressly provide the franchisor with the right to change the primary mark and rebrand the system under a different trade name and trademark, as opposed to merely allowing the franchisor to substitute or change the trademarks (a right that is typically associated with the (limited) need to replace marks that are held to infringe upon the rights of third parties).  Finally, to complete the exercise, the franchise agreement should require the franchisee to discontinue use of any modified or substituted trademarks as directed by the franchisor.

Another issue to consider when rebranding is the risk that franchisees might bring a claim against the franchisor for any business losses they experience as a result of the rebranding.  To help reduce such risk, it may be helpful to include a provision in the franchise agreement requiring franchisees to provide a release against all claims arising from a change to the brand; bearing in mind,however, that such release could not cover the release of claims under applicable franchise laws.  More practically speaking, many franchisors try to reduce their risk of franchisee claims by making any rebranding of their system voluntary for their existing franchisees (i.e., even if their franchise agreements permit the franchisor to force the issue) and usually pay at least part of the franchisee’s cost to implement the change (i.e., by providing new signage, uniforms and other forms of trade dress free-of-charge).

Finally, franchisors looking to rebrand might also be assisted by having the flexibility to use the advertising fund monies for general marketing undertakings, which could include rebranding efforts.  In this regard, provisions surrounding use of the advertising fund by the franchisor should be reviewed carefully, particularly in light of the risks described immediately above.

Social Media and Online Marketing Policy

Franchise agreements typically prohibit the franchisee from establishing websites using the system’s trademarks and trade names.  Such prohibitions should include appropriate restrictions and guidelines on the use of social media platforms by franchisees.  For example, without a social media policy, franchisees in a system might post inconsistent marketing and messaging, or worse, publish comments that are damaging to the brand.  In particular, responses to negative online reviews by customers need to be carefully managed and either dealt with centrally by the franchisor or by the franchisee at issue in accordance with guidelines. The acts of franchisees online could also easily offend advertising laws and anti-spam legislation if left unmonitored.

Franchise agreements should contain provisions requiring the franchisee to obtain the franchisor’s prior written consent to use any of its trademarks, including online, and to follow all directives regarding marketing through social media.

[1] 2003 MBQB 174 [Liberty Tax].

Check back tomorrow for the final part of this 3-part blog post Give your franchise agreement a facelift.