University of Texas Southwestern Medical Center v. Nassar 

Issue

Retaliation in employment claims are at a pivotal juncture.  For the first time, the Supreme Court will establish the necessary basis required for an employee to bring a retaliation claim against an employer.  A finding for the employee means that the door is open to allege retaliation as the basis for termination in a wrongful termination lawsuit; a finding for the employer means that victims of retaliation will face an extremely high burden when bringing their claims.

Background

On April 24, 2013, the United States Supreme Court heard arguments in the matter of University of Texas Southwestern Medical Center v. Nassar.  Dr. Naiel Nassar, who is Muslim and of Middle Eastern descent, was hired by the University of Texas Southwestern Medical Center (UTSW), and worked in the affiliated Parkland Hospital.  In 2004, UTSW hired a new supervising physician who allegedly began criticizing Dr. Nassar, questioning his billing and work habits, and made at least two racially motivated comments.  In order to deal with his working environment, Dr. Nassar chose to resign from the UTSW staff and exclusively become a Parkland Hospital employee.  This step would transfer Dr. Nassar from under the authority of his UTSW supervisor.  Parkland Hospital offered Dr. Nassar a permanent position on June 3, 2006, and Dr. Nassar formally resigned from the UTSW staff.  In his resignation letter, Dr. Nassar cited his former supervisor’s harassment and discrimination as the reason for his resignation.  In response to this letter of resignation, UTSW exerted pressure on Parkland Hospital, who then withdrew its offer of employment.

In 2008, Dr. Nassar sued UTSW under Title VII of the Civil Rights Act of 1964.  He alleged both constructive discharge (the UTSW working conditions were so unbearable that Dr. Nassar had no alternative but to resign) and retaliation (UTSW blocked Dr. Nassar’s employment because of his complaints of harassment).  The jury agreed with Dr. Nassar and awarded him $436,167.66 in back pay and over $3,000,000 in compensatory damages.  The Fifth Circuit Court of Appeals affirmed that there was sufficient evidence of retaliation but insufficient evidence of constructive discharge.

Question for the Court

Does the retaliation provision of Title VII of the Civil Rights Act of 1964 require a plaintiff to prove that an employer would not have taken an action but for the existence of an improper motive (the improper motive is the sole factor in the employer’s decision), or does the provision require only proof that the employer had mixed motives for taking an action (an improper motive was one of the reasons for the employment action)?

The Supreme Court has dealt with similar issues, but has not yet presented guiding framework for interpretation of federal employment statutes.  For example, the Supreme Court held in 1989 (Price Waterhouse v. Hopkins) that a plaintiff need only show that discrimination is a motivating factor in making an adverse employment decision.  Then, in 2009, the Supreme Court examined the Age Discrimination in Employment Act (Gross v. FBL Financial Services, Inc.).  There, the Court held that an age discrimination claim requires proof that age is the sole factor in the employer’s decision.

With the present case, the Court will finally resolve the question of how the retaliation provision of the Civil Rights Act and similarly worded statutes should be read.

Effect on Employers and Employees

If the Court agrees with Dr. Nassar, then employees will have fewer burdens in bringing discrimination claims against employers when alleging violation of Federal law.  Fewer cases will be dismissed on summary judgment, and more plaintiffs will have the opportunity to argue their cases on their merits.  The effect of this ruling will be a more lengthy legal process for employers and the potential for a proliferation of discrimination claims.

If the Court agrees with UTSW, then the cost, burden, and threat of litigation on employers will decrease, but the victims of retaliation will become less likely find redress for retaliatory employers’ actions.  Some commentators assert that this will undermine the purpose of the Civil Rights Act.

Whatever the Court holds, the decision promises to create a sea change in employment retaliation claims.

Today a Minnesota LLC owner asked about the requirements of filing with the Minnesota Secretary of State after electing a new board of governors:

When we formed our Minnesota LLC, we named each person who was part of the original board of governors on our LLC’s Articles of Organization. However, now we want to change some of the members of the Board of Governors. Do we need to file an amendment to our LLC Articles of Organization to since we have changed who is serving on our LLC’s Board of Governors?

In short, the answer is “no.” The first board of governors may be named in the articles of organization, but no amendment must be filed to change the board of governors later.

The answer to this question is found in the Minnesota Limited Liability Company Act, Minnesota Statutes chapter 322B. Under Minnesota Statutes section 322B.606, the “first board of governors may be named in the articles of organization.”

Minnesota Statutes section 322B.616 explains that the articles of organization may designate the original board of governors, but that designation is not permanent:

Unless fixed terms are provided for in the articles, a member control agreement, or bylaws, a governor serves for an indefinite term that expires at the next regular meeting of the members. A fixed term of a governor must not exceed five years. A governor holds office for the term for which the governor was elected and until a successor is elected and has qualified, or until the earlier death, resignation, removal, or disqualification of the governor.

Minnesota Statutes section 322B.636 explains how people are removed from the board of governors in a Minnesota LLC:

Subd. 2. Removal of governors.

A governor may be removed at any time, with or without cause, if:

1. the governor was named by the board of governors to fill a vacancy;
2. the members have not elected governors in the interval between the time of the appointment to fill a vacancy and the time of the removal; and
3. a majority of the remaining governors present affirmatively vote to remove the governor.

Subd. 3. Removal by members.

Except as provided in subdivision 4, any one or all of the governors may be removed at any time, with or without cause, by the affirmative vote of the owners of a majority of the voting power of all membership interests entitled to vote at an election of governors; provided that if a governor has been elected solely by the holders of a class or series of membership interests, as stated in the articles, any member control agreement, or bylaws, then that governor may be removed only by the affirmative vote of the holders of a majority of the voting power of all membership interests of that class or series entitled to vote at an election of that governor.

Subd. 4. Exception for limited liability companies with cumulative voting.

In a limited liability company having cumulative voting, unless the entire board of governors is removed simultaneously, a governor is not removed from the board of governors if there are cast against removal of the governor the votes of a proportion of the voting power sufficient to elect the governor at an election of the entire board of governors under cumulative voting.

Subd. 5. Election of replacements.

New governors may be elected at a meeting at which governors are removed. If the limited liability company allows cumulative voting and a member notifies the presiding manager at any time before the election of new governors of intent to cumulate the votes of the member, the presiding manager shall announce before the election that cumulative voting is in effect, and members shall cumulate their votes as provided in section 322B.63, subdivision 1, clause (2).

Thus, governors may be named in the Articles of Organization, but the statute contemplates that the board will change over time and subsequent filings for new persons serving on a board of governors is not required by the Minnesota Limited Liability Company Act.

Many are overwhelmed by options when faced with estate planning.  “Should I create a trust?”  “Do I need to try to avoid probate?”  “What are the tax consequences?”  Individuals are left with the feeling that there is no place to start.  When that situation occurs, some simply never start planning.

Deciding What Type of Will Is Needed

While every situation is unique, there is one question that I ask when considering the complexity of a testamentary document: Is the estate worth over $1,000,000?  If the answer is no, then a simple will is likely sufficient.  Minnesota currently does not tax estates smaller than one million dollars, and there are exclusions up to five million dollars for qualifying small business property and homestead farmland.

Type of Will Needed For Estates Worth Less Than $1,000,000

If an estate is below one million dollars, then the concerns over tax planning are lifted, and one can focus on what really matters: planning for those that you care about.  Most people in this category can address their concerns and reach their planning goals effectively through a simple will.  Not only does a well written simple will direct the transfer of personal property and real estate, but the testator (the individual creating the will) can select a personal representative to manage affairs after the testator’s death.

What Should a Will Include?

The most important aspect of any will is the designation of guardians for minor children.  A simple will can name individuals or couples to care for minor children.  It can also designate alternate guardians, should the primary guardians be unwilling or unable to take on that responsibility.  No matter what the size of the estate, every individual should have a plan in place for the care of his or her children.  Even if the value of the estate is modest, or even nonexistent, a simple will can ensure the proper care of minor children.

How a Simple Will Can Protect Your Children’s Assets

Not only can a simple will ensure the best care for a testator’s children, but it can also manage assets on behalf of the children in accordance with the testator’s wishes.  When considering the transfer of property, individuals with young children are often best served by creating a testamentary trust in their wills.  This testamentary trust can be designed to ensure proper management of the assets and shield the children’s inheritance from most creditors.  A testamentary trust does not require the transfer of title to the name of the trust while the testator is alive, and it can be easily written into a simple will.

Conclusion

While it is true that there are a wealth of options when planning one’s affairs, that does not mean that estate planning is reserved for large estates.  For many, a simple will is an effective tool to make sure that your personal and financial affairs are in order.  If you have any questions, feel free to contact Mark Dooley, an experienced estate planning attorney, today.

The Federal Trade Commission, the nation’s consumer protection agency, has prepared this booklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest.

I. The Benefits and Responsibilities of Franchise Ownership

II. Advance Work: Before You Select a Franchise System

III. Selecting a Franchise

IV. Finding the Right Opportunity

V. Investigating Before You Invest

VI. Before You Sign the Franchise Agreement

I. The Benefits and Responsibilities of Franchise Ownership

A franchise enables you, the investor or franchisee, to operate a business. You pay a franchise fee and you get a format or system developed by the company (franchisor), the right to use the franchisor’s name for a limited time, and assistance. For example, the franchisor may provide you with help in finding a location for your outlet; initial training and an operating manual; and advice on management, marketing, or personnel. The franchisor may provide support through periodic newsletters, a toll-free telephone number, a website, or scheduled workshops or seminars.

Buying a franchise may reduce your investment risk by enabling you to associate with an established company. But the franchise fee can be substantial. You also will have other costs: for example, you may be required to give up significant control over your business while you take on contractual obligations with the franchisor.

Typically, franchise systems have several components.

Costs

In exchange for the right to use the franchisor’s name and assistance, you will pay some or all of the following fees.

Initial Franchise Fee and Other Expenses

Your initial franchise fee, which will range from several thousand dollars to several hundred thousand dollars, may be non-refundable. You may incur significant costs to rent, build, and equip an outlet and to buy initial inventory. You also may have to pay for operating licenses and insurance, and a “grand opening” fee to the franchisor to promote your new outlet.

Continuing Royalty Payments

You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. Often, you must pay royalties even if your outlet isn’t earning significant income. As a rule, you have to pay royalties for the right to use the franchisor’s name. Even if the franchisor doesn’t provide the services they promised, you still may have to pay royalties for the duration of your franchise agreement. Indeed, even if you voluntarily terminate your franchisee agreement early, you may owe royalties for the remainder of your agreement.

Advertising Fees

You also may have to pay into an advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your particular outlet.

Controls

To ensure uniformity, franchisors usually control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own business judgment. Here are a few examples.

Site Approval

Many franchisors pre-approve sites for outlets, which, in turn, may increase the likelihood that your outlet will attract customers. At the same time, the franchisor may not approve the site you’ve selected.

Design or Appearance Standards

Franchisors may impose design or appearance standards to ensure a uniform look among the various outlets. Some franchisors require periodic renovations or seasonal design changes; complying with these standards may increase your costs.

 Restrictions on Goods and Services You Sell

Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. If you own an automobile transmission repair franchise, you may not be able to perform other types of automotive work, like brake or electrical system repairs.

Restrictions on Method of Operation

Franchisors may require that you operate in a particular way: they may dictate hours; pre-approve signs, employee uniforms, and advertisements; or demand that you use certain accounting or bookkeeping procedures. In some cases, the franchisor may require that you sell goods or services at specific prices, restricting your ability to offer discounts, or that you buy supplies only from an approved supplier even if you can buy similar goods elsewhere for less.

Restrictions on Sales Area

A franchisor may limit your business to a specific territory.While territorial restrictions may ensure that you will not compete with other franchisees for the same customers, they also could hurt your ability to open additional outlets or to move to a more profitable location. In addition, a franchisor may limit your ability to have your own website, which could restrict your ability to have online customers. Moreover, the franchisor itself may have the right to offer goods or services in your sales area through its own website or through catalogs or telemarketing campaigns.

Terminations and renewal

You can lose the right to your franchise if you breach the franchise contract. Franchise contracts are for a limited time; your right to renew is not guaranteed.

Franchise Terminations

A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment.

Renewals

Franchise agreements may run for as long as 20 years. At the end of the contract, the franchisor may decline to renew. Renewals are not automatic, and they may not have the original terms and conditions. Indeed, the franchisor may raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. Any of these changes may result in more competition from company-owned outlets or other franchisees.

II. Advance Work: Before You Select a Franchise System

Before you invest in a particular franchise system, think about how much money you have to invest, your abilities, and your goals. Be brutally honest.

Your Investment

• How much money do you have to invest?
• How much money can you afford to lose?
• Are you purchasing the franchise alone or with partners?
• Do you need financing? Where’s it coming from?
• What’s your credit rating? Credit score?
• Do you have savings or additional income to live on while you start your business?

Your Abilities

• Does the franchise require technical experience or special training or education (for example, auto repair, home and office decorating, or tax preparation)?
• What special skill set can you bring to a business, and, specifically, to this business?
• What experience do you have as a business owner or manager?

Your Goals

Write down your reasons for buying a particular franchise:

• Do you need a specific annual income?
• Are you interested in pursuing a particular field?
• Are you interested in retail sales or performing a service?
• How many hours can you work? How many are you willing to work?
• Do you intend to operate the business yourself or hire a manager?
• Will franchise ownership be your primary source of income or a supplement to your current income?
• Do you get bored easily? Are you in this for the long-term?
• Would you like to own several outlets?

III. Selecting a Franchise

Purchasing a franchise is like any other investment: it comes with risk. When you think about a particular franchise, think about the demand for the products or services it offers, competitors that offer similar products or services, the franchisor’s background, and the level of support you will receive.

Demand

Is there a demand for the franchisor’s products or services in your community? Is it seasonal or ever- green? Could you be dealing with a fad? Does the product or service generate repeat business?

Competition

What’s the level of competition—nationally, regionally, and locally? How many franchised and company-owned outlets are in your area? Does the franchise sell products or services that are easily available online or through a catalog? How many competing companies sell similar products or services? Are they well-established or widely recognized by name in your community? Do they offer a similar product at a similar price?

Your Ability to Operate the Business

Sometimes, franchise systems fail. What will happen to your business if the franchisor closes up shop? Will you need the franchisor’s ongoing training, advertising, or other help to succeed? Will you have access to the same suppliers? Could you conduct the business alone if you have to cut costs or lay anyone off?

Before you invest in a particular franchise system, think about how much money you have to invest, your abilities, and your goals. Be brutally honest.

 Name Recognition

Buying a franchise gives you the right to associate with the company’s name or brand. The more widely recognized the name, the more likely it is to draw in customers.

Consider:

• name and brand recognition for the company and its product or service
• whether the company has a registered trademark
• how long the franchisor has been in business
• whether the company’s reputation is for quality products or services
• whether consumers have filed complaints against the franchise with the Better Business Bureau or a local consumer protection agency

Training and Support Services

What training and continuing support does the franchisor provide? Does the franchisor’s training measure up to the training for workers in the particular industry? Can you compete with others who have more formal training? What backgrounds do the current franchise owners have? Is your education, experience, or training similar?

Franchisor’s Experience

Many franchisors operate well-established companies with years of experience both in selling goods or services and managing a franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful entrepreneur can successfully manage a franchise system. Find out:

• how long the franchisor has managed a franchise system
• whether the franchisor has enough expertise to make you feel comfortable. If the franchisor has little experience managing a chain of franchises, take any promises about guidance, training, and other support with the proverbial grain of salt.

Growth

A growing franchise system increases the franchisor’s name and brand recognition and may enable you to attract customers. But growth alone doesn’t ensure successful franchisees. Indeed, a company that grows too quickly may not be able to support its franchisees with the support services it promises them. Investigate the franchisor’s financial assets and resources; are they sufficient to support the franchisees?

IV. Finding the Right Opportunity

There are many, many ways to find franchise opportunities. Some franchisors have websites with information about their franchises. Franchise expositions are another good source of information, as are franchise brokers—companies or people that specialize in matching individuals with franchise companies. It’s always a good idea to visit franchised outlets in your area and talk to the owners about their experience with particular franchisors.

Shopping at a Franchise Exposition

Attending a franchise exposition allows you to see and compare a variety of franchise possibilities under one roof. Before you attend, research the kind of franchise that may best suit your budget, experience, and goals. When you attend, visit several franchise exhibitors who deal with the type of industry that appeals to you. Ask questions.

• How long has the franchisor been in business?
• How many franchised outlets exist? Where are they?
• What is the initial franchise fee? What additional start-up costs can you expect? Are there continuing royalty payments? How much? What do other franchisees pay?
• What management, technical, and other support does the franchisor offer?
• What controls does the franchisor impose?

Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise in greater detail. These meetings can be another source of information and another opportunity to raise questions. Be prepared to walk away from any franchise opportunity—and promotion—that doesn’t fit your needs.

Using a Franchise Broker

Franchise brokers—who also refer to themselves as “business coaches,”“advisors,”“referral sources,” or “sales consultants”—help people who want to buy a franchise. They often advertise on the Internet and in business magazines that they will help you select among various franchise options.Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources.A broker also may help you complete applications and the paperwork to consummate the sale. Remember that franchise brokers often work for franchisors, and get paid only if a sale is completed.

Limited Opportunities

Some franchise brokers may claim to be able to match you with “the perfect opportunity” because they represent a wide range of business sellers. That may be true—or not. In some instances, franchise brokers represent only a few franchisors, and, as a result, their suggestions may be limited.

Selection Standards

Some franchise brokers may claim that they will suggest only those franchises that meet certain standards. You may think this means that your financial risk is limited because the broker is weeding out the poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. If you rely on a broker, be skeptical: you may be directed to a franchise that is failing or that doesn’t have a track record.

Upselling

Some brokers earn a flat fee regardless of the price of the franchise they sell; others earn a commission pegged to the price of the franchise the broker sells. The more costly the franchise, the bigger the broker’s commission. Some brokers may steer you toward a more costly franchise to beef up their own commission.

Unauthorized or Misleading Earnings Representations

To convince you to buy a particular franchise, a broker may make certain representations about income. Earnings claims may not be true, and sometimes, can be misleading even if literally true. For example, the figures may be based on earnings in an area where demand for the business’ goods or services is high. Or the earnings claimed may be based on outdated industry data. In some instances, earnings claims may be gross sales figures: when you factor in likely expenses, actual earnings can be far less. Because earnings representations may be misleading, many franchisors prohibit their sales representatives from making them.

Before using a franchise broker, ask yourself:

• whether you need the services of a franchise broker. Can you get enough information shopping online or reading trade magazines?
• whether the broker is paid by the franchisor. Are there any fees you must pay the broker? If so, how much you are willing to pay?
• whether the broker’s commission depends on the price of the franchise. If it does, consider the fact that the broker may be leading you toward a higher-priced franchise. Ask about alternatives in the same field that may cost less.
• how many franchisors the broker represents. If it’s a small group, the potential match-ups may be limited.
• how the broker selects franchisors to represent. Are the selection criteria in writing? Ask to see them. How many franchisors has the broker turned down in the recent past?
• about potential earnings claims. Verify whether the franchisor has authorized the claims. Ask the franchisor for the written documentation that lays out the basis for the claims. Think about consulting an accountant to determine whether the claims are reasonable and if they are applicable to where and how you intend to operate your business.

You should receive the names and contact information for other buyers of the franchise— current and former franchisees. Talk to them, rather than relying on information from the broker alone.

Speak to them about their experience within the franchisor.

V. Investigating Before You Invest

The All-Important Disclosure Document

Before you invest in any franchise system, get a copy of the franchisor’s disclosure document. Under the Franchise Rule, which is enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for—and get—a copy of the disclosure document once the franchisor has received your application and agreed to consider it. Indeed, you may want to get a copy of the franchisor’s disclosure document before incurring any expenses to investigate the franchise offering.

The franchisor may give you a copy of its disclosure document on paper, via email, through a web page, or on a disc. The cover of the disclosure document should have information about its availability in other formats. Make sure you have a copy of the document in a format that is convenient for you, and keep a copy for reference.

Read the entire disclosure document. Don’t be shy about asking for explanations, clarifications, and answers to your questions before you invest. Among the key sections in a complete disclosure document are:

Franchisor’s Background

This section tells how long the franchisor has been in business, likely competition, and any special laws that pertain to the industry, like any license or permit requirements. This will help you understand the costs and risks you are likely to take on if you purchase and operate the franchise.

Read the entire disclosure document. Don’t be shy about asking for explanations, clarifications, and answers to your questions before you invest.

 Business Background

This section identifies the executives of the franchise system and describes their experience. Pay attention to their general business backgrounds, their experience in managing a franchise system, and how long they’ve been with the company.

Litigation History

This section discusses prior litigation—whether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also says whether the franchisor or any of its executives have been held liable for—or settled civil actions involving—the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with its performance.

This section also should say whether the franchisor has sued any of its franchisees during the last year, a disclosure that may indicate common types of problems in the franchise system. For example, a franchisor may sue franchisees for failing to pay royalties, which could indicate that franchisees are unsuccessful, and therefore, unable or unwilling to make their royalty payments.

Bankruptcy

This section discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy, information that can help you assess the franchisor’s financial stability and whether the company is capable of delivering the support services it promises.

Initial and Ongoing Costs

This section describes the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases, or rentals. It also explains ongoing costs, like royalties and advertising fees. In addition, ask about:

• continuing royalty payments
• advertising payments, both to local and national advertising funds
• grand opening or other initial business promotions
• business or operating licenses
• product or service supply costs
• real estate and leasehold improvements
• discretionary equipment, such as a computer system or a security system
• training
• legal fees
• financial and accounting advice
• insurance
• the costs of compliance with local ordinances, such as zoning, waste removal, and fire and other safety codes
• health insurance
• employee salaries and benefits

Starting your business may take several months. Estimate your operating expenses for the first year and your personal living expenses for up to two years. Compare your estimates with what other franchisees have paid and with competing franchise systems. You may be able to get a better deal with another franchisor.An accountant can help you evaluate this information.

Restrictions

This section tells whether the franchisor limits:

• suppliers from whom you may purchase goods
• the goods or services you may offer for sale
• your customers
• where you can sell goods or services
• your use of the Internet to sell goods or services to customers in and out of your territory and the right of the franchisor (or other franchisees) to use the Internet to solicit customers or to sell in your territory

These kinds of restrictions may limit your ability to exercise your own business judgment in operating your outlet. That said, if the franchisor does not limit the territory where each franchisee can sell, the franchisor and other franchisees may compete with you for the same customers, either by establishing their own outlets, or by selling to customers in your area through the Internet, catalogs, telemarketing, and the like.

Terminations

This section spells out the conditions under which the franchisor may end your franchise and your obligations to the franchisor after termination. It also defines the conditions under which you can renew, sell, or assign your franchise to others.

Training

This section explains the franchisor’s training and assistance program. Check for information about:

• who is eligible for training
• whether new employees are eligible for training and, if so, at what cost. Who pays?
• how long the training sessions take. How much time is spent on technical training, business management training, and marketing?
• who conducts the training and their qualifications
• whether the company offers ongoing training and at what cost
• support staff available for trouble-shooting: Are they assigned to your area and how many franchisees they are responsible for?
• whether on-site individual assistance is available and at what cost

The training you need will depend on your business experience and your knowledge of the franchisor’s goods and services. If you have doubts about whether the training offered is sufficient to give you the tools you need to handle day-to-day business operations, consider another franchise opportunity.

Advertising

This section has information on advertising costs. Franchisees often are required to contribute a percentage of their income to an advertising fund. Find out:

• what part of the advertising fund is devoted to administrative costs
• what other expenses are paid from the advertising fund
• whether franchisees have any control over how the advertising dollars are spent
• what advertising promotions the company has already engaged in and what’s on the drawing board
• what percentage of the fund is spent on national advertising
• what percentage of the fund is spent on advertising in your area
• what percentage is devoted to selling more franchises
• whether all franchisees contribute equally to the advertising fund
• whether you need the franchisor’s consent to develop and buy your own advertising
• whether there are rebates or advertising contribution discounts if you do your own advertising
• whether the franchisor gets any commissions or rebates when it places advertisements, and who benefits from those—you or the franchisor

Current and Former Franchisees

This section has very important information about current and former franchisees. Many franchisees in your area may mean more competition for customers. The number of terminated, cancelled, or non-renewed franchises may indicate problems.

Some companies may repurchase failed outlets and list them as company-owned outlets.

Look for contact information for current franchisees and franchisees who have left the system within the last year; talking to them may be the most reliable way for you to verify the franchisor’s claims. Visit or phone as many of the current and former franchisees as possible to chat about their experiences, and the volume and type of business they’re doing. Note that some of them may have signed confidentiality agreements that prevent them from speaking with you. If that’s the case, try contacting others on the list.

If you buy an existing outlet that was reacquired by the franchisor, the franchisor must tell you who owned and operated the outlet for the last five years. Several owners in a short time may indicate that the location isn’t profitable or that the franchisor hasn’t supported that outlet as promised. Consider contacting several previous owners to learn more about their experience operating the particular outlet. You will want to learn:

• how long the franchisee operated the franchise
• where the franchise was located
• whether they were able to open the outlet in a reasonable time
• their total investment, including any hidden or unexpected costs
• how long it took them to cover operating costs and earn a reasonable income
• whether they were satisfied with the cost, delivery, and quality of the goods or services they sold
• their backgrounds before becoming a franchisee
• If you have doubts about whether the training offered is sufficient to give you the tools you need to handle day-to-day business operations, consider another franchise opportunity.
•  whether the franchisor’s training was adequate
• whether the franchisor provided ongoing help
• their satisfaction with the franchisor’s advertising program
• whether the franchisor fulfilled its contractual obligations
• whether the franchisee would invest in another outlet
• whether the franchisee would recommend the investment

Some franchisors may give you a separate reference list of franchisees to contact. To ensure that you get the full picture, you may want to contact at least some references listed in the disclosure document that are not on the separate list.

Associations of Franchisees Operating Similar Outlets

There’s no question that the disclosure document is critical reading for potential franchisees. Associations of franchisees who are operating similar outlets are another important source of information. Whether or not these associations are sponsored or endorsed by the franchisor, they can provide information about the state of the relationship between the franchisor and its franchisees. You may want to ask a franchisee association about:

• its membership
• its history
• its goals
• its relationship with the franchisor
• any benefits in buying from one franchisor versus a competitor
• any problems franchisees are facing in the operation of their outlets

Earnings Information

You may want to know how much money you can make if you invest in a particular franchise system. Be careful. Earnings information can be misleading. Insist on written substantiation for any information you may receive that suggests your potential income or sales.

Franchisors are not required to disclose information about potential income or sales, but if they do, the law requires that they have a reasonable basis for their claims and that they make the substantiation for their claims available to you. When you review any earnings claims, consider:

Sample Size

Say a franchisor claims that franchisees in its system earned $50,000 last year. The claim may be deceptive if it doesn’t represent the typical earnings of franchisees. The disclosure document should tell the sample size and the number and percentage of franchisees who reported earnings at the level claimed.

Average Incomes

A franchisor may claim that the franchisees in its system earn an average income of, say, $75,000 a year. Average figures tell very little about how individual franchisees perform. An average figure may make the overall franchise system look more successful than it is because just a few very successful franchisees can inflate the average.

 Gross Sales

5 Some franchisors provide figures for the gross sales revenues of their franchisees. These figures don’t really tell about the franchisees’actual costs or profits. An outlet with a high gross sales revenue on paper may be losing money because of high overhead, rent, and other expenses.

Net Profits

Franchisors often do not have data on net profits oftheir franchisees. If you get net profit information, ask whether it includes information about company- owned outlets; they often have lower costs because they can buy equipment, inventory, and other items in larger quantities, or they may own, rather than lease, their property.

Geographic Relevance

Earnings may vary with geography. If it’s reported that a franchisee earned a particular income, ask about the franchisee’s location. The disclosure document should note geographic or other differences among the group of franchisees whose earnings are reported and your likely location.

Franchisees’ Backgrounds

Keep in mind that franchisees have different skill sets and educational backgrounds. The success of some franchisees doesn’t guarantee success for all.

Reliance on Earnings Claims

Franchisors may ask you to sign a statement— sometimes presented as a written interview or questionnaire—that asks whether you received any earnings or financial performance representations during the course of buying a franchise. If you heard or got any earnings representations, report it fully during an interview or on a questionnaire or other statement. If you don’t, you may be waiving any right to contest the earnings representations that were made to you and that you used to make your decision to buy.

Financial History

The disclosure document gives important information about the company’s financial status, including audited financial statements. You can find explanatory information about the franchisor’s financial status in notes to the financial statements. Investing in a financially unstable franchisor is a significant risk; the company may go out of business or into bankruptcy after you have invested your money.

It’s a good idea to hire a lawyer or an accountant to review the franchisor’s financial statements, audit report, and notes. They can help you understand whether the franchisor:

• has steady growth
• has a growth plan
• makes most of its income from the sale of franchises or from continuing royalties
• devotes sufficient funds to support its franchise system

VI. Before You Sign the Franchise Agreement

The company’s disclosures may change between the time you receive the disclosure document and the time you sign the franchise agreement. For example, the company may have updated its disclosures; it is required to do that at least annually after its fiscal

year ends. You have the right to ask for a copy of any updated information before you sign the franchise agreement. An updated disclosure document may indicate the filing of new suits by or against the franchisor, changes in the franchisor’s management team, new financial data, and more current financial performance data, among other information.

Additional Sources of Information

Accountants and Lawyers

In addition to reading the company’s disclosure document—including any updates—and speaking with current and former franchisees, consider talking to an accountant and a lawyer. An accountant can help you understand the company’s financial statements, develop a business plan, assess any earnings projections and the assumptions they’re based on, and help you pick a franchise system that is best suited to your investment resources and your goals.

A lawyer can help you understand your obligations under the franchise contract. These contracts usually are long and complex. A contract problem that arises after you have signed the contract may be very expensive to fix—if it can be fixed at all. Choose a lawyer who is experienced in franchise matters, but rely on your own lawyer or accountant for a recommendation, rather than the franchisor’s recommendation.

Banks and Other Financial Institutions

These organizations can offer an unbiased view of the franchise opportunity you are considering. They should be able to get a Dun and Bradstreet report or similar financial profile of the franchisor.

Better Business Bureau

Check with the local Better Business Bureau (BBB) in the city where the franchisor has its headquarters. Ask whether there are complaints on file about the company’s products, services, or personnel.

Government

Several states regulate the sale of franchises. Check with the state office that regulates franchising—it may be the Office of the Attorney General—for more information about your rights as a franchise owner in your state.

The Federal Trade Commission (FTC) enforces the Franchise Rule. The FTC publishes a number of business guides—for example, Getting Business Credit , Dot Com Disclosures, Business Guide to the Mail and Telephone Order Merchandise Rule, and Complying with the Telemarketing Sales Rule that may be helpful to your business.

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

• Original article

The Benefits of Calling All Workers “Independent Contractors”

Obviously, Minnesota employers would like to categorize everyone as independent contractors so

1. employers don’t have to pay unemployment if they fire the person,
2. employers don’t have to pay worker’s compensation if the person is injured, and
3. employers don’t have to pay half of the Social Security / FICA tax for each paycheck.

There are many other benefits for employers categorizing workers as “independent contractors.” In short, independent contractors in Minnesota do not benefit from the Minnesota laws protecting employee rights.

Employee vs. Independent Contractor Test in Minnesota

Minnesota state law does not let employers simply choose whether a worker is an employee or independent contractor.

The test for determining whether a worker is an employee or independent contractor is simple to apply when the answer is obvious.  But if a worker seems somewhat like an employee and somewhat like an independent contractor, the test can be more challenging.

The Simple Five-Factor Test for Employee vs. Independent Contractor

In short, the employee vs. independent contractor test in Minnesota weighs a number of factors. When a question arises about whether a particular relationship is that of employer-employee or that of two entities contracting independently, a five-factor test has developed through case law that generally allows an employer or employee to make some judgments concerning the appropriate characterization. This test involves analyzing the following five factors.

1. The right to control the means and manner of performance
2. The mode of payment
3. The furnishing of tools and materials
4. Control over the premises where the work was done
5. The right of discharge

Source: Guhlke v. Roberts Truck Lines, 128 N.W.2d 324 (1964).

Attempting to apply this test can reveal how challenging it is in a real world environment. If you are not sure, ask an attorney to analyze the situation for you. Failure to properly characterize a worker can result in serious legal consequences for you and your business.

Other Employee vs. Independent Contractor Resources for Minnesota

Here are two of the best resources in Minnesota on the topic. Here is the state’s explanation of how to determine whether a person is an employee or independent contractor: Minnesota Department of Labor and Industry: Determining independent contractor or employee status.

Here is a more comprehensive explanation of how to determine whether a person is an employee or independent contractor: Bench and Bar of Minnesota: Independent Contractor or Employee?

IRS Test for Employee vs. Independent Contractor

The IRS has its own test to determine whether someone is an employee or independent contractor. Learn more here: IRS Test for Employee vs. Independent Contractor.

Minnesota Antitrust Act Definitions

Before we get into what the Minnesota Antitrust Act covers, here are a few important definitions.

Commodity

“Commodity” means any goods, merchandise, wares, produce, chose in action, land, article of commerce, or any other tangible or intangible property, real, personal, or mixed, for use, consumption, enjoyment, or resale.

Service

“Service” means any kind of activity performed in whole or in part for financial gain.

Contract, combination, or conspiracy

“Contract, combination, or conspiracy” means any agreement, arrangement, collusion, or understanding. “Contract” includes a purchase, a contract to purchase, a sale, a contract to sell, a lease, a contract to lease, a license, or a contract to license. “Combination” includes a trust, common selling or purchasing agent, pool, or holding company.

Person

“Person” means any individual, corporation, firm, partnership, incorporated and unincorporated association, or any other legal or commercial entity.

Trade or commerce

“Trade or commerce” means any economic activity of any type whatsoever involving any commodity or service whatsoever.

The Minnesota Antitrust Act provides that “[a] contract, combination, or conspiracy between two or more persons in unreasonable restraint of trade or commerce is unlawful.”

Prohibited Acts Under the Minnesota Antitrust Act

Under the Minnesota Antitrust Act, the following are illegal:

(1) A contract, combination, or conspiracy between two or more persons in competition:

(a) for the purpose or with the effect of affecting, fixing, controlling or maintaining the market price, rate, or fee of any commodity or service;

(b) affecting, fixing, controlling, maintaining, limiting, or discontinuing the production, manufacture, mining, sale or supply of any commodity, or the sale or supply of any service, for the purpose or with the effect of affecting, fixing, controlling, or maintaining the market price, rate, or fee of the commodity or service; or

(c) allocating or dividing customers or markets, functional or geographical, for any commodity or service.

(2) A contract, combination, or conspiracy between two or more persons whereby, in the letting of any public contract, (a) the price quotation of any bid is fixed or controlled, (b) one or more persons refrains from the submission of a bid, or (c) competition is in any other manner restrained.

(3) A contract, combination, or conspiracy between two or more persons refusing to deal with another person, except a refusal to deal by associations, trading boards, or exchanges when predicated upon a failure to comply with rules of membership.

With certain limitations, the following acts are also unlawful under the Minnesota Antitrust Act:

(1) Requiring any United States person to be excluded from a business transaction on the basis of that person’s sex, race, color, religion, ancestry or national origin or on the basis that the person conducts or has conducted business with persons of a particular race, sex, color, religion, ancestry or national origin, or on the basis that the person has done business in a particular country.

(2) Giving, as part of any business transaction, any statement, certification or other document to the effect that the giver of the statement, certification or other document has complied with a policy imposed by any person, nation, or international organization requiring exclusion from any business transaction, or discrimination against, any United States person on the basis of race, sex, color, religion, ancestry or national origin or on the basis that the person conducts or has conducted business with persons of a particular race, sex, color, religion, ancestry or national origin, or on the basis that the person has done business in a particular country.

(3) Granting, accepting or processing any letter of credit or other document which evidences the transfer of funds or credit, or entering into any contract for the exchange of goods or services, where the letter of credit, contract, or other document contains any provision which requires any person to discriminate against or to certify that the person has not dealt with any other United States person on the basis of race, sex, color, religion, ancestry or national origin, or on the basis that the person conducts or has conducted business with persons of a particular race, sex, color, religion, ancestry or national origin, or on the basis that the person has done business in a particular country.

(4) As part of any business transaction, complying, or agreeing to comply, or certifying or giving other assurance of compliance or agreement to comply, with a policy imposed by another party requiring discrimination against, or refusal to deal with, any United States person, group of United States persons, or list of United States persons, on the basis of race, sex, color, religion, ancestry or national origin or on the basis that the person, group of persons or list of persons conducts or has conducted business with persons of a particular race, sex, color, religion, ancestry or national origin, or on the basis that the person has done business in a particular country.

Penalties Under the Minnesota Antitrust Act

Civil Penalties - Under the Minnesota Antitrust Act, the court may impose civil penalties:

Any person who is found to have violated sections 325D.49 to 325D.66, shall be subject to a civil penalty of not more than $50,000. Any person who fails to comply with a final judgment or decree rendered by a court of this state issued for a violation of sections 325D.49 to 325D.66, shall be subject to a civil penalty of not more than $100,000.

Criminal Penalties - Under the Minnesota Antitrust Act, the court may impose criminal penalties:

Any person who is found to have willfully committed any of the acts enumerated in section 325D.53 shall be guilty of a felony and subject to a fine of not more than $50,000 or imprisonment in the state penitentiary for not more than seven years, or both.

Right to Triple Damages Plus Attorney’s Fees

Under the Minnesota Antitrust Act, anyone  injured by a violation of the Minnesota Antitrust Act, shall recover three times the actual damages sustained, together with costs and disbursements, including reasonable attorneys’ fees. In addition, Minnesota courts are authorized to grant temporary, interlocutory, or permanent injunctive relief as necessary to prevent and restrain violations of the Minnesota Antitrust Act.

Federal Antitrust Law

Antitrust issues in Minnesota should also be analyzed under federal antitrust law in addition to the Minnesota Antitrust Act. A number of federal statutes have developed over the years to prohibit or restrain monopolistic and unfair business practices. Federal antitrust laws include

• The Interstate Commerce Act of 1887
• Sherman Antitrust Act of 1890 (“The Sherman Act”)
• The Clayton Antitrust Act
• The Federal Trade Commission Act of 1914
• The Robinson-Patman Act of 1936
• The Celler-Kefauver Act of 1959

Learn More about the Minnesota Antitrust Act

The full text of the Minnesota Antitrust Act is provided in Minnesota Statutes sections 325D.01 to 325D.07. If you are facing an antitrust issue, you should consult with an experienced Minnesota antitrust lawyer.

What Type of Things May be Copyrighted?

Creative works can be copyrighted. The expression of ideas can be copyrighted.

A copyrighted work may, however, contain both protected and unprotected portions. The unprotected portion or portions are not entitled to copyright protection and may be copied by others. Unprotected matter may include: portions of work not original to the author; work that is in the public domain; an idea, concept, actual event, principle, or method expressed or described in a work, common computer programming techniques or other functional aspects of a computer program; and others.

The Expression of Ideas, and Not the Ideas Themselves, May be Copyrighted

While the expression of ideas can be copyrighted, ideas themselves cannot be copyrighted. Ideas are unprotected matter. The expression of the idea is protected matter.

For example, an author might write about a couple meeting, falling in love, and facing disapproval from others based on the couple having different religious beliefs. This author’s creative expression of the storyline and characters is protected matter. However, this author does not have an exclusive right to the idea, concept, or principle of this storyline.

The more detailed portions of a fictional work are more likely to be protected matter than the more general portions. A recount of factual events will receive less copyright protection than fictional stories. The means of expression of facts and events, for example in a non-fiction book, are protected by copyright. However, another author is permitted to recount, in another way, the same facts and events.

Merging Protected and Unprotected Matter

However, when protected matter and unprotected matter both exist in a work, there is a possibility that the merger doctrine will apply. The merger doctrine allows an author to copy protected matter to the extent necessary if there is only one, or a few, ways of describing or depicting the unprotected matter. Otherwise it would be difficult or impossible to express the unprotected matter.

For example, a golden retriever is golden, furry, has four legs, two eyes, a long snout with nose and mouth, ears that are positioned in a certain way, and a tail with a certain amount of curl. It would be nearly impossible to depict a golden retriever without these characteristics. Therefore, similarities among depictions of golden retriever drawings or statues, under the merger doctrine, cannot be the basis for finding infringement on the copyright. The expressive protected matter merges with the unprotected matter. Otherwise copyright law would prohibit any drawings or statues of golden retrievers.

Purchasing decisions are often made based on the the reputations associated with the name or logo (the brand) of a product. If a customer likes a product they may remember its brand and seek it out. On the other hand, if  a customer doesn’t like a product, they  may refrain from purchasing it again.

This shows that trademarks can really help, or hurt, a business. A business with a reputation of providing quality products will want to mark all its products with its name and logo so that quality and other marketing efforts can be recognized by the consumer.

Infringing on the Trademark of Another May Damage Your Own Business

Whether intentional or unintentional, trademark infringement may have devastating consequences. You may be forced to stop using a trademark after putting a great amount of time, money and effort into it.

Even if you are innocently infringing, you will be forced to stop future infringements. Additionally, there may be great cost in legal fees, etc. in establishing that your use of the mark was innocent and without knowledge of someone else’s trademark.

A successful plaintiff in a trademark infringement case may recover the defendant infringer’s profits resulting from the infringement.

The plaintiff may also recover any actual damages, if the plaintiff is able to prove that the damages were caused by the defendant’s use of the infringing mark, and that consumers were actually confused or deceived by the use. These actual damages may include profits lost, injury to goodwill or business reputation, expenses incurred by the plaintiff in attempting to prevent customers from being deceived by the defendant, and the cost the plaintiff incurs for any corrective advertising to correct confusion or harm to goodwill.

Conduct a Trademark Search Before Choosing Your Mark

This all said, conducting trademark searches is very important before establishing the mark of your business on your products or services. Contact Thompson Hall Santi Cerny & Dooley today to discuss conducting a trademark search on your good or service.

1. Minnesota Business Owners Owe Fiduciary Duties
2. Breach of Fiduciary Duties in Minnesota
3. Dealing with a Breach of Fiduciary Duties

Breach of Fiduciary Duties in Minnesota

Unfortunately, many business owners in Minnesota and across the nation breach their fiduciary duties. Although business owners may not know that the law imposes fiduciary duties on them, they generally know that what they are doing is not fair or expected by the other business owner. Often they justify their illegal actions with excuses like

• “many other business owners do this”
• “the other business owner did something wrong first”
• “nobody will care; it’s not a big deal”
• “I will repay the business later”
• “no one will ever know”

Whatever the excuse, breach of fiduciary duty is it illegal in Minnesota and the consequences can be severe.

Consequences for Breach of Fiduciary Duties

Consequences for breach of fiduciary duties have included court orders requiring

• repayment to the other business owners to fully compensate them for damages
• payment of attorneys fees for the other parties
• payment of court costs of the lawsuit
• payment of sanctions, fines, or punitive damages
• losing control of the business by placing another business owner in control of the business
• restricting future business operations
• denying a bankruptcy discharge of these financial obligations
• criminal prosecution (when a criminal law has been violated)

Read the next article in this series: How Minnesota business owners can deal with a breach of fiduciary duties

1. Minnesota Business Owners Owe Fiduciary Duties
2. Breach of Fiduciary Duties in Minnesota
3. Dealing with a Breach of Fiduciary Duties

Dealing with a Breach of Fiduciary Duties

One of the most challenging and sensitive times, when dealing with a business owner who has breached fiduciary duties, is when you have learned about the business owner’s conduct. You often don’t know all the details, but you know enough to realize there is a problem. Do you confront the business owner? Do you talk to other business owners first? You talk to employees to ascertain what they know?

The most effective approach depends on many factors including the percentage of ownership you have in the business, the percentage of ownership of the malfeasant business owner, the type of misconduct, whether the financial consequences of the misconduct are significant, the temperaments of the parties involved, and how much you are willing to spend to protect your interest in the business.

As a business attorney who has been brought in by business owners at many stages, I can tell you that your interests are far better served by bringing in an attorney early. If the problem is small, the attorney can advise you regarding how to efficiently and inexpensively result of the problem. If the problem is large, and another business owner has caused substantial harm to you or the business, and attorney can help you identify and preserve evidence needed to win in court.

The e-mail account and computer used by a business owner can be a treasure trove of evidence to prove your case. As you know, computer data changes on a daily basis, so the quicker that you would involve an experienced business litigation attorney, the quicker you can ascertain your legal options and the related cost of those legal options.

Dealing with a breach of fiduciary duties general involves an assessment of the evidence, approaching the person who breached their fiduciary duties, and attempting a resolution without legal action. In serious cases, or when resolution cannot be attained through negotiations, decisive legal action may be necessary to protect and restore the value of the business.

Learn more about fiduciary duties of Minnesota business owners or breach of fiduciary duties in Minnesota.