The Franchise Law Blog – Fourth Edition

Burger King – Too clever by half

Burger King recently produced an advertisement with an employee holding a Whopper explaining that 15 seconds isn’t enough time to describe how brilliant the burger is and so the employee turns to the camera and says, “ok Google, what is the Whopper Burger”.  The statement triggers, and presumably was intended to trigger, Android devices close to the television which then searches the definition of Whopper in Wikipedia.

Unfortunately for Burger King, Wikipedia has a policy of allowing anyone to edit its contents so, unsurprisingly, within hours the definition had been changed so that, for instance, it was suggested that the burger contains cyanide!

Further, it appears that Google had not been consulted about the advertisement and apparently Android devices have stopped responding to the advertisement, so it may well be that Google has developed software to counter this type of advertising, but full marks to Burger King for its brilliant use of technology although almost inevitably someone is likely to be a step ahead.


Sainsburys – Local

Sainsburys is considering expanding its convenience store chain by offering franchises to independent retailers as it struggles to find suitable new sites.

Tesco currently hopes to take over cash ‘n’ carry business Bookers, which controls the Premier, Budgens and Londis franchise businesses.

Mike Coupe, Sainsbury’s chief executive, said it was becoming increasingly tough to find suitable sites. Sainsbury’s is currently testing a franchise arrangement on eight Euro Garages petrol forecourts.  Coupe said it could be a lower-cost alternative to leasing or buying company owned stores.  “When we look at how we grow our business, then a franchising model has some attractions to it if we can maintain control of the brand,” he said.


McDonald’s US Challenges

In our previous blog we referred to McDonald’s European issues but now in the US a trade union is accusing the company of charging its franchisees too high rent, alleging that the “sky-high” rent makes it harder to pay workers a fair wage.

The Service Employees International Union, which represents 2 million American workers, is asking the attorney generals of Illinois and California to investigate how McDonald’s calculates franchisee rents.  According to Bloomberg, “U.S franchisees paid the world’s biggest fast-food chain more than $3 billion in rents last year, a rate of return on McDonald’s real-estate investments that’s as much as triple the industry average.” It is suggested that rent accounts for about 10.7% of sales revenue and it is further alleged that McDonald’s rate of return on its real estate holdings ranges from 10.5% to 19.3% which is double or triple the industry average of 5.9%.

It is no secret that McDonald’s franchises are profitable for McDonald’s which is why it has been selling off its company-owned stores in recent years, moving toward having franchises make up a full 90 per cent plus of its total locations.


Unjustified Threats

The Intellectual Property (Unjustified Threats) Act received Royal Assent on 27 April 2017.

The Act curtails a legal remedy available to a party threatened with patent or trademark infringement litigation, who can argue that a letter constituted an “unjustified threat”.

The Act introduces a new provision preventing threats actions from being brought against advisers provided they act on instructions and identify their client in communications. The Act also introduces so called “safe harbour” provisions that enable the owner of IP rights to communicate with an infringer for a “permitted purpose” which includes:-

(a)   Giving notice that a registered trade mark exists;

(b)   Discovering whether, or by whom, a registered trade mark has been infringed by a specified act; and

(c)   Giving notice that a person has a right under a registered trade mark;

The Court is also given a wide discretion to treat any other purpose as a permitted purpose if it “considers it in the interests of justice to do so”.  We expect this provision to be debated in case law in the coming years.

Formal secondary legislation is required before the measure can be implemented as law but this is expected later this year.


Domino’s breach of the Australian Franchising Code

On 1 January 2015, the Australian Franchising Code of Conduct was updated to introduce court-imposed civil penalties for non compliance with certain provisions of the Code, including those provisions requiring franchisors to provide franchisees with copies of marketing fund statements and reports.

Infringement notices can be issued in respect of alleged breaches of these provisions.  The current amount for each infringement notice for an alleged breach of the Franchising Code is fixed at $9,000 for a body corporate.

Domino’s Pizza Enterprises Ltd (Domino’s) is the first company to pay penalties for alleged non compliance with Australia’s Franchising Code of Conduct.

Following the issue of two infringement notices, Domino’s has paid penalties totalling $18,000 Australian Dollars. Infringement Notices were issued because Domino’s had failed to comply with the requirement in the Franchising Code of Conduct to provide franchisees with both an annual marketing fund financial statement and an auditor’s report within the time limits prescribed under the Code.

If franchisees are required to contribute to a marketing fund, the Code requires a franchisor to prepare an annual financial statement to franchisees, disclosing the fund’s receipts and expenses, and to give a copy of the financial statement to franchisees by no later than four months after the end of the financial year.

The Code also requires the fund to be audited (unless 75 per cent of franchisees agree the franchisor does not have to comply with this requirement) and for the auditor’s report to be provided to franchisees within 30 days of the report being prepared.


Franchise Disputes

 Many disputes between a franchisor and a franchisee relate to relatively small sums of money and this does create challenges in attempting to resolve those issues through the courts.

The relevant rules (CPR44.3) enables a court to reduce or disallow legal costs awarded to the winning party that are disproportionate in amount even if they were reasonably or necessarily incurred. Relevant factors include the sums in issue, the complexity of the litigation and any additional work generated by the party against whom the cost order is to be made.

In BNM v MGN Ltd [2016] EWHC B13, the senior costs judge had to consider a case involving an injunction application against MGN restraining them from using or publishing confidential information. The claim was settled and MGN undertook not to disclose confidential information, agreed to pay damages of £20,000 and agreed to pay the claimant’s costs.  In fact the claimant’s costs were approximately £242,000 which included an uplift for both the solicitors and barristers based on their success and an after the event legal insurance premium of just under £60,000. The judge held that the costs were disproportionate and reduced the costs by about 50%.

The case emphasises the dangers in bringing claims for relatively modest sums. A realistic assessment of the loss suffered by the claimant has to be made at an early stage in proceedings.

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