Additional Franchisor Liability From Franchisee Employees

Over the past several years franchisees have been claiming that they have employee based claims against the franchisor. This has been especially prevalent in the janitorial and other service based franchises. Now we are getting cases where employees of franchisees are making claims that they are employees of the franchisor in certain cases.

 

Generally franchisors have been able to say that they are a separate entity from the franchisee and therefore cannot be liable to employees of the franchisee. But recently in New York, employees of Domino's Pizza franchisees were able to amend their complaint against the franchisee employers to also include Domino's, the franchisor, for violations of the Fair Labor Standards Act and the New York Labor Law. This case is Cano v. DPNY, Inc.

 

While this case is still pending and the franchisor may not be held liable in the end, it is concerning that the court did not dismiss the amended complaint, as expected. Some of the reasons the court gave for not dismissing the amended complaint are based on the following actions by Domino's:

 

1) Domino's promulgated compensation policies and implemented them through the Domino's PULSE system which included tracked hours, wages and payroll records. These were submitted to the franchisor for review.

 

2) Domino's created management and operation policies and practices that were implemented at the restaurants by providing materials for use in training store managers and employees, provided posters and directions for employee's tasks and monitored that performance through required computer hardware and software.

 

3) Domino's developed and implemented hiring policies.

 

This is just one more reason for a franchisor to have their franchise attorney review their policies, including their operations manuals, to ensure that they are limiting their exposure to liability.

Multi-Unit Development Arrangements

There are three types of agreements used when a franchisor desires to expand through multi-unit as opposed to single unit development: Master Franchise Agreement, Area Representative Agreement and Area Developer Agreement. Before exploring some of the basic elements of each arrangement, it is important to note that there may be franchise registration requirements associated with entering into any of these agreements and it is important to speak with a qualified attorney who can help you understand the impact of each type of arrangement.

Master Franchise

This type of multi-unit development is most often seen with international expansion. In this type of arrangement, the franchisor will delegate nearly all pre-sale and post-sale obligations to the master franchisee who essentially acts as a sub-franchisor. However, while most of the franchisor’s obligations are delegated, most franchisors will retain the right to ultimately approve or reject sub-franchisee candidates and specify the format for the FDD and the Franchise Agreement. The reason for this is that in the event the Master Franchise Agreement is terminated, a franchisor needs to agree with the obligations and requirements imposed on both the sub-franchisee and the franchisor.

If you are a franchisor seeking to expand through a Master Franchise Agreement, or a franchisee looking to purchase a Master Franchise Agreement, there are some key provisions that need to be addressed in the agreement. Among the provisions to be aware of:

·         Is the master franchisee required to sign the sub-franchise agreements;

·         Is there a strict development schedule;

·         Is the master franchisee allowed to develop his/her own franchise units;

·         How are the currency issues handled;

·         How are taxation matters handled;

·         Is there a translation requirement;

·         What is the term;

·         Are there country-specific franchise laws that must be followed;

·         At the expiration of the term of the Master Franchise Agreement, what happens to the then-current sub-franchisees, their territories and their agreements;

·         What is the royalty and other fee splitting arrangement (if any); and

·         What is the territory and is it exclusive.

Area Representative

In this type of arrangement, the franchisor typically delegates only certain pre-sale and post-sale obligations. The typical area representative relationship is one where the area rep helps to advertise and promote the franchise opportunity in a specific market, engages potential franchise candidates and helps provide operational support and guidance to the any franchisee resulting from the area rep’s efforts.

Key provisions to be aware of in this type of arrangement include:

·         What is the territory and is it exclusive;

·         What specific post-sale obligations and services are to be performed by the area rep on the franchisor’s behalf;

·         If there are current franchisees in the territory, will the area rep perform the services and obligations to them or only to new franchisees;

·         What is the term;

·         What is the compensation/fee arrangement; and

·         Does the franchisor have the right to open and operate company-owned units in the territory without compensation to the area rep.

Area Developer 

This type of multi unit development arrangement is most closely aligned with single unit franchising and is a common form of development. Here, the third-party developer agrees and commits to develop and operate a specified number of units in a designated territory. This arrangement is most commonly used in a domestic market where there is a low or non-existent franchisor presence.

Key provisions to be aware of in this type of arrangement include:

·         What is the term and time frame for developing the units;

·         What is the territory and is it exclusive;

·         Are additional franchise units outside the development schedule allowed;

·         What is the price per franchise unit developed; and

·         What happens to existing franchise units of the area developer if the Area Development Agreement is terminated.

With each type of multi-unit arrangement there are several additional factors to consider. It is important to have a clear idea of why you are seeking either to expand through multi-unit development or to purchase a multi-unit development agreement, and to discuss these ideas and plans with qualified professionals. 

The Accidental Franchisor

Recently I heard a conversation between attorneys regarding a business transaction they were in the middle of setting up for a client. The client wanted to do a series of LLCs or joint ventures with various partners. The client would contribute the business concept and name and the other “partners” would contribute money and time to operate the businesses. What these attorneys did not understand is that they were setting up a franchise system for their client.

 

Very often a business will be structured without realizing that the structure is a franchise. A franchise exists if the definition of a franchise is met, not if the franchisor knew they were selling a franchise. In this case, the client’s business transaction has all three definitional elements of a franchise: 1) Use of a trademark (the use of the client’s business name); 2) A marketing plan, substantial support, or community of interest between the franchisor and franchisee (the contribution of the business concept by the client); and 3) Payment of a fee (the financial contribution by the partners).

 

Because the client’s business transaction is a franchise, the client is required to comply with federal and state laws regarding the sale of a franchise, prior to entering into the business. This means that before entering into these partnerships, the client would be required to provide the financial “partner” with a disclosure document discussing information about the business and trademark, background information on the client and its business and affiliates, and other “partners” or franchisees of the client.

 

There are serious consequences for selling a franchise without complying with the franchise laws and regulations. These consequences include rescission of the business transaction, damages and attorney’s fees, plus the potential of fines or other penalties from state or federal agencies. In some cases, the transaction can be seen as criminal.

 

Next time you are setting up a business concept that has any of these elements (trademark, marketing plan, and/or fee), it is worth the time and cost to consult a franchise attorney to make sure that you are not an accidental franchisor.

Financing your Franchise

If you are considering purchasing a franchise, one major hurdle to overcome is how to fund the new business. If you have tried to obtain a loan or refinance a business, you know the lending environment today is very different from what it was even 5-6 years ago. In essence, it is harder to obtain financing, even for those with great credit ratings. There is money out there, but it harder to access that it was previously.

When looking at funding the new business, you first need to evaluate all the financing options available and determine which will be the best route for you to take. Because lack of sufficient capital in the initial stages of starting a business (whether your own concept or a franchise) is one of the leading reasons businesses fail, you want to make sure to have adequate financing in place before you purchase. The International Franchise Association (IFA) has a dedicated website to help you look at all available funding options to help you choose which option(s) is right for you: http://franchise.org/IFACreditAccess.aspx.

Below is a brief overview of some of the financing options available to franchisees:

1. Cash. Obviously, if you have enough cash, you have greater options both with conventional financing options, and in quickly getting your business started. As they say, cash is king. But you don’t want to make the mistake of using all your cash up front and not having the ability to access additional capital or to obtain financing down the road.

If you don’t have the cash available, you may want to consider taking on a partner who does have sufficient capital. This is a risk that you will have to carefully weigh when determining if a person is the right partner for you and the business.

2. Veteran Programs. If you in the military and close to retirement, or are the spouse of an active member of the military, you may qualify for the Patriot Express Pilot Loan Initiative. This program is an SBA-guaranteed loan program in which the SBA guarantees up to 85% of the loan, up to $500,000 at the SBA’s then-current lowest rates. The SBA website contains eligibility criteria and requirements.

In addition, the IFA has started the VetFran program to help honorably discharged military personnel finance their purchased franchise. Franchisors who participate in the VetFran program will typically offer reduced initial fees and/or reduced ongoing and other initial expenses.

3. SBA Loans. This option is especially viable if you are looking at a franchise system that has registered on the SBA Registry. The process to obtain financing is faster and easier with a registered franchise system.

4. 401(k) and IRA. This is a risky option, but has its advantages if properly done. Before moving forward with this option you should speak with a qualified tax attorney or accountant who can discuss the tax implications in using retirement funds.

5. Equipment Leasing. Remember, you don’t always need to purchase everything up front. If the franchisor allows you to lease, this can be a great alternative.

6. Conventional Loans/Commercial Lending. This type of funding is often difficult to obtain because your credit score is the most important factor in determining to grant or deny a loan. Even then, a great credit rating will not often overcome a high debt to income ratio. You will often need to put 20-30% down in order to qualify.

7. Franchisor Financing. This option is rarely made available. However, if it is, the financing and terms will be set out in Item 10 of the FDD.

8. Other Options. In addition to the above there are home equity loans, signature credit lines and online loan portals. 

Franchisor Control and Liability Issues

One area of a franchise system that must carefully be examined by franchisors is the amount of control exerted over both franchisees and the franchise system. Courts are increasingly finding ways to impose liability on the franchisor for the actions or omissions of the franchisee. As a rule of thumb, a franchisor is able to exercise the amount of control necessary to protect the brand, goodwill, trademark and quality control of services and products. Overstepping this can lead to devastating consequences.

When examining the possibility of imposing liability on a franchisor, the courts look at both the franchise agreement and the actions of the franchisor. The greater the level of control in the day-to-day operations or the details of the franchisee’s business, the greater the likelihood of imposing liability on the franchisor. For example, becoming involved in the hiring and firing of a franchisees employees can lead to imposition of liability, dictating the exact method of how floors should be cleaned, at what times and with which products can lead to liability, as can having security cameras on the franchisee’s premises that the franchisor continually monitors.

There are generally three types of liability imposed: vicarious liability, liability in a co-employer relationship, and liability in that the franchisor acts as the actual business instead of the franchisee. For the last type of liability, the courts looks at whether a franchisee can and will reasonably and justifiably believe the franchisor actually controls the operations of the business, and not the franchisee.

Avoiding the above-types of liability and other possible liabilities requires a franchisor to make careful considerations. Clearly maintaining a level of control is a necessity in a franchise system. However, the issue of control and the imposition of liability will continue to be a litigated issue. Franchisors should exercise caution when expanding controls, and should speak with a qualified franchise attorney to help them understand if the controls exerted stay within the acceptable levels of control or if they carry with them the possibility of liability. 

Helpful Resources:

Franchisor Liability for Franchisee Actions

Franchise Registration Process

Initial Registration

For new and existing franchise systems, registration states can create a headache if the registration process is not handled correctly. The process can be time consuming and expensive, especially if not handled correctly the first time.

There are 14 registration states: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. The initial registration fees vary from $125 to $750. In each of these 14 states, a franchisor must not only comply with the FTC Disclosure Rule, but must also comply with the individual state rules which often impose additional disclosures and restrictions on the franchisor. Simply put, if you are interested in taking your franchise system into one of the above 14 states, you are restricted from offering or selling to either an individual residing in that state, or to an outside individual looking to franchise within that state.

As a baseline, all franchisors must comply with the FTC Disclosure Rule and have appropriate and compliant documents before offering or selling a franchise. From there, a franchisor can add state-specific addenda or create a state-specific FDD for registration purposes.

Depending on the registration state, registration is either immediate (meaning once the state receives the FDD packet and required documentation, the franchisor can begin to offer and sell in that state) or the registration will take time, after an examiner has reviewed all the provided documents to make sure they are compliant with state law. Often a state examiner will provide the franchisor with a list of issues that need to be addressed and corrected (a “Comment Letter”) before the state can register the franchise for offers and sales.

Renewal

Once a franchise is registered in a state, that registration is generally effective for a one-year period, after which the franchise must be renewed, for a fee, in that state in order for the franchisor to continue to offer or sell there. However, not all registration states count this “year” in the same way. Some states have an expiration one year from the date of registration. Other states have an expiration date of 90-120 days from the end of the franchisor’s fiscal year end. Your registration letter will provide the date of expiration. You should calendar this date and be aware that it might be sooner than expected.

Renewal is also required in all non-registration states. The difference is that once the disclosure documents have been updated (including an updated audit) then the franchisor can generally begin offering and selling franchises in non-registration states. (The one caveat here is that if the state is a business opportunity state, you must make sure you file the appropriate exemption before selling in that state.)

Exemptions from Registration

Both the FTC and Registration States provide limited exemptions to registration. These vary from state to state. In most instances, the exemption only removes the registration requirement, not the disclosure requirement. You will still need to have accurate and up to date documents, and to comply with the timelines for disclosure.

If you are looking at taking your franchise system into a registration state, you should speak with a knowledgeable franchise attorney to ensure compliance with state-specific laws and regulations.

The Multi-Unit Franchise Agreement

According to FranData (a franchise services firm), approximately 50% of all franchise businesses are part of a multi-unit franchisee. The clear trend in franchising right now is for a franchisor to find the prospective franchisee with the experience, capital and desire to develop more than a single franchise unit in a territory.

The Multi-Unit franchisee provides many advantages to a franchisor including:

·         Opening franchise units in a more planned and strategic manner

·         Fewer franchisees to manage and oversee

·         Accelerated growth

·         Reduction in training and other initial obligations

·         Faster new market penetration

While the multi-unit development may look like the best way to grow a franchise system, there are some cautions to both the prospective multi-unit franchisee and the franchisor.

Prospective Franchisee

Any prospective franchisee looking at the option of purchasing a multi-unit development agreement should consider their current: 1) experience not only in the industry of the franchise system, but their experience in successfully running a business; 2) access to sufficient capital; 3) current infrastructure or ability to develop the infrastructure to handle the development obligations, operations and administration of all the franchise units.

One clear advantage of the multi-unit option is the ability for a franchisee to leverage success, and the possibility to combine certain operations.

Franchisor

When determining whether a prospective multi-unit operator is going to work within a franchise system, a franchisor should examine the franchisee’s abilities on several fronts, including: 1) whether she/he has strong management experience; 2) do they have experience in the underlying industry; 3) their financial capacity to meet the development and ongoing operational obligations; and 4) a demonstration of their ability to fulfill the development obligations.

Many franchisors will find it beneficial to look to their current franchisees and ask high performing single unit operators if they would like to develop additional franchise units. Another key place to find successful multi-unit franchisees is from another franchise system. If looking to another franchise system, a franchisor should look at the prospective franchisee’s current compliance, reliability and reputation in the franchise system, as well as where they are in that development schedule. This last point is important because while it may appear a prospective franchisee has sufficient capital, if they are in the middle of their development obligations for another franchise system, the capital may not be sufficient to carry them through both development obligations.

When setting out the obligations for a multi-unit franchisee, a franchisor should also be aware of the ability on a functional level to meet the development obligations (i.e. is real estate available at the right price, how easily can the permits be obtained, what type of capital is needed from both the franchisee and the franchisor). In addition, the size of the territory will often determine the development speed and number of units in the development schedule.

More helpful information on multi-unit franchising can be found at:

International Franchise Association (IFA)

NASDAQ Community Board

A Spouse and the Non-Competition Agreement

The enforceability of a non-competition agreement on a non-signing spouse has been the source of much litigation over the years. The courts are divided as to whether or not a non-signing spouse can be held to the terms of the non-competition agreement. A recent Wisconsin ruling has brought this issue to the forefront of business owner’s minds as they try to sort through what can and cannot be enforced.

In Everett v. Paul Davis Restoration, Inc., 2012 U.S. Dist. LEXIS 133682 (E.D. Wis. Sept. 18, 2012) the Wisconsin court held that the non-signing wife had not directly benefited from her husband’s franchise agreement and therefore could not be bound. The court wrote, “In order to hold Ms. Everett to a contract she did not sign, PDRI must show that she benefitted directly from the contract, not the business that the contract made profitable.” This case is particularly egregious to many in the franchise industry due to the fact that the signing husband “sold” the business to his wife. He stopped being a franchisee, but his wife took the concept and began operating a competing business.

However, several other courts have held exactly the opposite. Tennessee, Indiana and Massachusetts all have cases that hold in favor of the franchisor or the business being harmed by the violation of the non-competition agreement by the non-signing spouse. (See: Servpro Indus., Inc. v. Pizzillo, 2001 Tenn. App. LEXIS 87 (Tenn. Ct. App. Feb. 14, 2001); McCart v. H & R Block, 470 N.E.2d 756, 761 (Ind. Ct. App. 1984); Sulmonetti v. Hayes (1964), 347 Mass. 390, 198 N.E.2d 297).

If you are a business owner, how can you know if your non-competition agreement will be upheld against a non-signing spouse? Ultimately, the courts finding a violation of the agreement against a non-signing spouse examine the issue on three levels.

First, did the spouse benefit from the agreement at the heart of the non-competition agreement? If a spouse worked in the business (franchise or otherwise) then there is a more likely argument that the spouse received an actual benefit from the agreement.

Second, is the non-signing spouse acting as the alter-ego of the signing spouse. Similar to a corporate veil argument, many courts will look at who is actually running the business and how much information from the prior business is being used to make the current business successful. One Illinois court put it this way, “there must be evidence that she aided or operated in concert with the covenantor to breach the covenant or that she was the alter ego of the covenantor.” Norlund v. Faust, 675 N.E.2d 1142, 1157 (Ind. Ct. App. 1997).

Third, how much confidential information did the non-signing spouse have access to? This is difficult to prove, but the greater the access to confidential information, the more likely the non-compete will be enforced.

The safest way to move forward if you are worried that a spouse might try and circumvent the purposes of the non-competition agreement, is to have every spouse sign an agreement. This presents problems in and of itself, but it does give the protection that many courts fail to provide to franchisors and other business owners.

Food Trucks -Part II: Franchising

Last week we posted on the food truck revolution in the United States. The post dealt with broad issues related to the food truck industry. Today’s post is about the food truck in the franchise context.

The Pros and Cons set out in last week’s post (Food Truck (R)evolution) all apply in a franchise setting. The ability to test a market, the advantage of the travelling billboard and ability to move to the customers all are advantages to a franchisor. However, determining whether or not a food truck can and should be a part of your franchise is something that takes a lot of consideration and analysis. This post is meant to give a few ideas on how a food truck could work into your existing franchise system, or how it can become a franchise system all on its own.

The existing franchise system can use the food truck in a number of ways. The most apparent way, at least to me, is to add a food truck as a separate franchise offering. Instead of offering a restaurant franchise in the traditional store-front sense, you can offer a prospective franchisee to become your food truck franchisee. The advantage is potential cost savings with lower overhead and start-up costs for the franchisee. If you do decide to go this route, you have the option of either wrapping in the food truck concept into your current Franchise Disclosure Document (“FDD”), or to have a separate FDD for the food truck concept. The decision on which route to take should be made with your qualified franchise attorney.

If you do not want to add the food truck as a franchise offering, you could purchase a franchise truck (or several), outfit it, wrap it and offer it for ‘rent’ to your franchisees in an area so that they can use it for special event purposes. This increases your exposure and helps to reach out to an audience that might not know your restaurant exists. This also is a great add-on benefit to your franchisees that are looking for ways to increase business and to get their name more fully into the community.

A new restaurant concept that starts as a food truck could expand their food truck business by offering food truck franchises. Unlike an existing restaurant franchise system, this type of franchise is limited to just the food truck. The advantage is that it potentially keeps franchisee costs down and gives someone the option for a (often seemingly) part-time business that the traditional store-front restaurant often does not allow for.

No matter how you choose to incorporate the food truck into your business, always talk to a qualified professional, including attorneys, and those in the industry, who can help you decide the best option for your business. 

The Food Truck (R)evolution

The food truck business has been around for decades. In recent years we have seen the food truck evolve from the ice cream truck to the truck with gourmet and specialty food offerings. Even television has picked up on the trend with the Food Network offering a reality show called The Great Food Truck Race.

Many have stated the food truck is a fad, but from what I have read, it appears that this next generation of food truck trend is here to stay. Many franchises are taking advantage of this trend and opting for a mobile expansion as part of their franchise offerings. Other food service businesses are opting for the straight food truck model forgoing the traditional brick and mortar location. There are pros and cons in determining both if the food truck business is right for you and whether it is a good business move for your business.

Pros

The biggest pro to the food truck option is the lower overall cost. A food truck is going to cost a lot less than a traditional storefront space. In addition, there are typically fewer employees and lower utility costs. And since location is everything in a business, the food truck can easily pick up and move its location to one that will better capture the market share. Food trucks also offer a level of convenience that many traditional restaurants struggle with.

This type of business is also a traveling advertisement. The traveling billboard saves on marketing and advertising dollars that a traditional restaurant would have to invest. With the growing interest in food trucks by the public, and the wider variety of food options offered by food trucks, free or low cost social media marketing was made for this type of business.

Food trucks also offer the customer a different type of food experience and because of the small size, it can provide for a more personal interaction between the owner and the customer. Businesses can engage the customer in a new way that may prove highly beneficial.

Lastly, the food truck offers the opportunity to test a market or location, without a lot of risk. If you are considering opening a traditional restaurant in a specific market or location, the food truck can help you determine relatively quickly and easily if there is interest in your concept.

Cons

If you think that a food truck will be an easy and simple business that you will only have to run 2-3 hours a day a couple of days a week, you are probably in for a big surprise. While open for businesses only 2-3 hours at a time, the successful food truck business can take up many more hours in a day. It has been referred to as a part time business requiring a full time effort.

The food truck that cannot get its food delivered quickly and efficiently to the customer, will fail. A food truck’s menu has to be compatible with the smaller layout and the different format for preparing and serving food. In one food truck experience I had, I waited for 35 minutes in 105º weather. Needless to say, they lost a customer. The business needs to be structured in a way to meet the expectations and needs of the food truck customer.

There are also more permits that may be required from the state, county and city/town which can often cost more in terms of time and money. 

Forgotten Essentials: Estate Planning for Business Owners

Business owners understand better than anyone that there are not enough hours in the day. With all the time, effort, and duties surrounding owning a business, a business owner can get overwhelmed with the number of items on their to-do list. Often a business owner will overlook one legal area that may ultimately be most important: estate planning.

 

Business owners work hard to build their businesses. This is usually done with the goal of providing for their family. However, without some estate planning, if the business owner passes away, all the hard work will not have been worth it because the family will not be protected.

 

The first estate planning tool for a business owner to consider is a buy sell agreement. This is an agreement that governs what happens if an owner dies or chooses to leave the business. This protects the interests of all owners. By agreeing beforehand how to handle these situations, the owners reduce the risk of lawsuits or other issues which could harm or ultimately ruin the business.

 

Next the business owner must consider estate planning documents that apply if the owner is incapacitated. This includes powers of attorney and advanced directives. A power of attorney is an authorization for someone to act on behalf of another regarding that person’s financial or legal needs. If an owner is incapacitated, then someone needs to have the power to make decisions and keep the business operating until the owner is able to do so himself or herself. Advanced directives are a set of written instructions for taking care of the health care decision of someone who is incapacitated. This helps ensure that the wishes of the owner regarding the medical they would receive if incapacitated are followed.

 

Finally, the business owner should make a will and consider using a trust, family limited partnership or LLC for certain property. This ensures that the business owner’s assets are divided between his or her heirs in the way that the business owner believes is best. The estate planning tools used by the business owner may have significant tax consequences.

 

In making any of these estate planning decisions, a business owner should consult an attorney to decide what would be best for his or her circumstances.

 

 

Protecting Your Brand -Trademark Registration

When it comes to branding your business, your trademark should be at the center of the discussion. A trademark or service mark can be a word, a logo, a slogan, a color and even a sound. And making sure your trademark is registered is of primary importance to ensure that you retain full rights in your name, slogan, logo, etc. Protecting your trademark, protects your business.

Broad Spectrum Registration

While many people understand the importance of trademark registration with the United States Patent and Trademark Office (“USPTO”) for their business, most forget that the trademark or service mark (“Mark”) should be registered for all uses of the mark. In other words, if you have a registered Mark for restaurant services, but not for clothing and apparel, arguably, those shirts you are selling with your logo are not protected; anyone can use your trademark on clothing and apparel or any other use that is not a restaurant service. Multiple registrations for different classes of goods helps protect your valuable Mark. (A good example of this is McDonald’s mark in “I’m Lovin’ It®”. They have registration of this in 4 classes of goods).

Use it or Lose it

You need to be actively protecting your Mark and using your Mark. If you have a registered Mark that you stop using, you will lose your rights. The same goes for not protecting your rights –if you don’t try to stop infringing users, you may lose your rights to stop that user from infringing on your Mark. Regular searches on search engines such as Google and Bing, as well as looking at the USPTO registry, and on YouTube, Facebook and Twitter can help alert you to those users who are infringing on your Mark.

Liability and Facebook

According to Facebook’s “Facebook for Business” page[1], there are over 900 million people currently holding Facebook accounts. That is a staggering amount. It is no wonder that in 2011 it was estimated by ZNet.com[2] that nearly two-thirds of all small businesses had a Facebook page. Clearly Facebook is an advantageous marketing tool because the page itself is free and the advertising offered is relatively inexpensive when compared to the price to reach a similar market volume.

However, businesses should be aware of the potential liabilities created by having a Facebook page. Recent court decisions by the Advertising Standards Board in Australia demonstrate the liabilities created by allowing public comments to be made on a company’s Facebook page. Although the decisions are Australian-based, for those companies in the United States, these decisions provide guidance on what steps can be taken to prevent or at a minimum, limit, liability.

The Advertising Standards Board issued this opinion:

“A Facebook site of an advertiser is a marketing communication tool over which the advertiser has a reasonable degree of control and could be considered to draw the attention of a segment of the public to a product in a manner calculated to promote or oppose directly or indirectly that product… As a Facebook page can be used to engage with customers, the Board further considered that the Code applies to the content generated by the advertisers as well as material or comments posted by users or friends.[3]”

The advertising of US-based businesses, including franchises, is regulated and businesses should understand and be aware of the regulations and guidelines and make sure that they are complying in all their marketing and advertising –including on Facebook and other social media sites.

In July we posted a blog about what employers should know about social media policies (see http://tinyurl.com/83wt2ym). In order to help avoid liability from customer posts on a business’s Facebook page, the social media policies should include the manner in which the company plans to handle posts that have the potential to create liability, and these policies should be shared with employees and any outside parties that have access to or control your social media sites.

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[1] https://www.facebook.com/business/overview

[2] http://www.zdnet.com/blog/facebook/two-thirds-of-small-business-owners-use-facebook-for-marketing/1529

[3] http://www.lexology.com/library/detail.aspx?g=bcfa3cdc-cd11-404f-a3c5-a8f7dd0c5bba