5 Reasons to Hire a Franchise Attorney

 It goes without saying considering I am a franchise lawyer, but I agree completely with the Franchise King who offered his Top 5 Reasons to Hire a Franchise Attorney in a recent post.

In my experience a lot of prospective franchisees skimp on hiring a franchise lawyer to review their FDD and franchise agreement. Many of those people seem to have serious misunderstandings about their rights and exactly what the franchise agreement says. I'll never understand how someone can invest their life savings in a business without legal advice. Interestingly, people tend to get legal advice when they buy independent businesses but the lure of franchising seems to gives prospects a comfort level that should not exist. Franchised businesses tend to fail at the same rate as independent businesses. Don't buy a franchise without legal representation. It's a big mistake!

Thanks to The Franchise King, Joel Libava, for the post.

 

Selling or Buying a Business: Pay Attention to Why Deals Don't Close

Steve Sink wrote recently wrote a blog post on IowaBiz covering Why Deals do not Close. I recommend buyers and sellers of businesses to read the post. Fortunately, most of the deals I work on tend to close but from time to time there are issues with a deal or perhaps even litigation after a deal closes.

One of the biggest reasons I've seen that hampers a deal is when a buyer or seller has an unrealistic view of the sales price. This is particularly true for a seller. While I understand the notion that you want the best price possible, a seller should understand that it is important to have the transaction be a win/win. A Seller should want the buyer to be successful (particularly if seller financing is involved). Unfortunately there are lots of times that the seller, or maybe the Seller's advisors, don't understand this concept.  Even if your deal closes, you may run into litigation issues if the business is priced too high which will eat into the proceeds of the sales price.

Want your deal to close without litigation on the back end? Don't be greedy. Be sure to read the rest of Steve's list

Vote 'Yes' to Renovate and Update Polk County Courthouse

I generally try to stay away from politics on this blog but there is an important vote on November 5th regarding Measure A:  The Polk County Public Safety Judicial System Bond. I encourage you to vote 'Yes" for this measure.

Our Polk County Courthouse has been in use for over 100 years. While it is an architectural gem it is also badly in need of updating.  Most importantly, it is not adequately designed for security and safety needs. Violent criminals often roam the same halls with the public including jurors and children.  Also, there are numerous courtrooms crowded into the facility that were not designed for that purpose. Polk County is the busiest courthouse in the state. It was originally designed for just four courtrooms but now houses over 20 courtrooms in an effort to meet the needs of the public.

The old adage is that you can pay now or pay later. If we don't pass this measure the costs will be substantially higher down the road. At some point in the near future you can be assured that the courthouse will be overhauled or perhaps a new one built. We cannot avoid that fact much longer. It is an absolute necessity.  A smarter approach would be to approve the measure now. The cost is approximately $1.50 per month for the average homeowner. It is a small price to pay to ensure fairness and to keep our families safe.

Again, please vote 'Yes' on this important measure. 

 

Government Shutdown Teaches Lessons in Negotiation

 I read an interesting blog post on the LexBlog Network from Tom Crane of the San Antonio Employment Law Blog called What We Can Learn from the Government Shutdown. The lesson Crane preaches that bullying tactics usually do not work very well in negotiation and tend to invite an equal response from the other side.

I agree with Crane regarding the fact that bullying tactics don't work well in negotiations. In my view there a couple of things you should remember in your next business negotiation. First, you need to leave some room for the other side to save face. This is true even if you have the upper hand and likely don't need to give in to the other side's demands. People need to feel as though they have gotten something from you. How can this be accomplished? One of the easiest ways is to have throw away points in the negotiation that you are willing to give up. So even if these points aren't important to you, the other side can still feel like they received something in return for their compromise.

Secondly, don't use ultimatums or say that you will "never" do something unless you really mean it. And even if you do mean it, it still is not the best idea to use this strategy. Ultimatums and saying you will "never" agree to something invites the same strategy in return. Such techniques build roadblocks to compromise and a successful negotiation.

A key is to disagree without being disagreeable. Something our politicians desperately need to learn.

 

 

Insight on Business - The News Hour with Michael Libbie

You can catch me tonight on the Insight on Business - The News Hour with Michael Libbie this evening at 5 pm on AM 1350-KRNT.

Michael and I will be talking franchise law and more.

It's a great program you should check out. The show runs Monday-Friday each week at 5 PM.

U.S. Patent Law Changes: The First-Inventor-to-File One Year Grace Period

* This is a guest post from Jessica Susie of the Brick Gentry Law Firm. Jessica is a registered patent attorney.

The America Invents Act, which President Obama signed into law on September 16, 2011, has been gradually overhauling the United States patent system. March 16, 2013 marked the biggest change – the United States switched from a first-to-invent to a first-inventor-to-file system. Subject to some limited exceptions, the first-inventor-to-file his patent application will be entitled to patent protection, even against an earlier inventor who later files. With the switch, the requirements for patentability have also been revised. Inventions still must be novel, nonobvious, and useful to secure patent protection. However, the definitions of what constitutes a “novel” and “nonobvious” invention are now different. In particular, the one year statutory bar, also called the grace period and on-sale bar, has changed.

Previously, an inventor had a one year grace period after disclosure of an invention in which to file his application. Disclosures included printed publications in the United States and foreign countries, public use in the United States, and sales or offers for sale in the United States. Importantly, it did not matter who made these disclosures. In practice, most businesses associated the statutory bar with their own actions – one year from putting a product on the market or publishing a journal article, the application was due. However, what many businesses and inventors may not have realized, is that the one year grace period also affected the prior art used by the United States Patent and Trademark Office (USPTO). “Prior art” is a term used in patent law to describe information that has been made available to the public and that is relevant to a particular application. It may include previous patent applications and patents, journal articles, books, and event websites. In most situations, the USPTO examined applications using prior art references dated earlier than one year prior to an application’s filing date.

However, the new one year grace period only applies to certain disclosures, namely those that originate with an inventor. The one year grace period applies if (1) the disclosure was made by an inventor or a third party who obtained the subject matter from an inventor or (2) the disclosure, although not traceable to an inventor, was made after a disclosure by an inventor or a third party who obtained the subject matter from the inventor. The policy behind these rules is the hope that they will promote early disclosure of inventions to the public, which will increase innovation in the United States.

So, what does this mean for businesses going forward?

  1. The USPTO will consider more recent prior art when examining applications.
  2. Public disclosures by businesses must be documented. All businesses should have procedures in place to document inventions as they are made. However, it will be more important to document when and to whom disclosures are made as part of these procedures. Having this information may determine the outcome of prosecution of a patent application or many years down the line in a patent infringement proceeding.
  3. Confidentiality remains critical. Businesses should have a confidentiality agreement on file to use during private disclosures.
  4. Consider provisional patent applications more often. The USPTO does not examine provisional patent applications, and oftentimes they are much less detailed than nonprovisional patent applications. A provisional patent application secures a filing date and is useful when an invention is in its early stages. A related nonprovisional patent application must be filed within one year of the provisional patent application to benefit from the provisional filing date.  
  5. Do not rush to disclose inventions if you intend to file a patent application and have not yet done so. While disclosure may have benefits in some situations, the law is just too new in this area right now to know all of the negatives associated with disclosure.

How to Deal with Partner Disputes

 I saw an interesting article on the LexBlog Network regarding how to deal with partner disputes. The post written by Texas restaurant lawyer, Matthew Sanderson, dealt specifically with restaurants, but the information contained in the post is applicable to any business. Sanderson recommends the following when a dispute occurs:

  1. Avoid the conflict by identifying motivators and doing your homework;
  2. Open the lines of communication;
  3. Stand up for yourself and your rights (but don't lose your cool).

I often compare partnerships to a marriage. In any marriage good communication is essential to maintaining a happy household. Where I've seen partnership disputes fester and cause problems is when the partners fail to communicate with one another. So I think Sanderson's bullet points are right on target.

Further, a helpful piece of advice for avoiding partnership disputes is to set clear expectations of what each partner is bringing to the table. Even though it isn't a part of your typical operating or shareholder agreement, you may what a letter of understanding defining the roles of each partner. Partnerships work best when the partners have complementary strengths. For example, a strong sales person combined with strong operations or details person may have a strong partnership together where two partners with the same skill set lack the balance needed to run the overall business.

Partnerships are not easy. Be sure to have a partnership agreement in place that details what happens if a dispute occurs or the partnership ends due to death, disability or other reasons. Sanderson's last point on not losing your cool is especially important. Make sure you think things through before you react and hopefully you'll be able to avoid costly mistakes if a partnership dispute occurs.

Iowa Business Court Judges Selected

In January  I wrote about the new Iowa Business Specialty Court Pilot Project.  This week the Iowa Supreme Court announced that three judges have been selected to hear cases for the business court. The judges include:

  • Judge Michael Huppert of the 5th Judicial District, which includes Dallas, Polk and Warren counties;
  • Judge Annette Scieszinski of the 8th Judicial District;
  • Judge John Telleen of the 7th Judicial District.

I have had the opportunity to appear before or work with all three of these judges. It's an excellent list of judges to get this pilot project off the ground.  Again, I'd like to see the threshold amount come down from $200,000 so that more business cases can be involved but it will be interesting to see how the new business court is received by lawyers and the public. Eligible cases can begin to be transferred May 1, 2013.

Trend Moving Toward Greater Protection for Franchisees?

With the recent passage of a new state law in Ohio and a new bill offering greater protection for franchisees in California, it will be interesting to see whether this growing trend of more pro-franchisee laws continues.

Interestingly enough it is Iowa that is often cited as a pro-franchisee state because of its franchise act. However, the growing economic market in Des Moines and throughout Iowa has not kept franchisors from establishing businesses in the state over the recent years. In my view, the opportunities for growth in Iowa far outweigh any negativity franchisors may have toward the Iowa franchise act.

But added protections for franchisees isn't necessarily a bad thing. Most franchise agreements are very one-sided in their terms and often have significant legal protections for the franchisors. You generally have a sophisticated business entity on one side (the franchisors) and less sophisticated people (the franchisees) on the other side. Most franchisees are small business people just looking to make a good living and may be investing their life savings into a franchise. Offering greater protections to franchisees should not hurt good franchise operators that deal fairly with franchisees. It will set them apart in the long run. Moreover, franchisees may feel more comfortable to go into franchise businesses.

So it will be interesting to see if the trend continues toward tougher franchise laws and the impact these laws will have on the industry.

Iowa Business Law Services: Rush on Business Companion Web Site

 I am very happy to announce my new companion Web site to go along with this blog at www.iowabusinesslawservices.com. The site will feature information on my legal practice areas, a simple way to submit information for formation of a new corporation or LLC and also a video resources section with tips on business and franchise law. We'll also feature many other business and franchise law resources as we develop out the site.

A new offering with the new site rollout is that I am immediately implementing a Subscription Services Plan to make legal services more affordable for the new or early stage company. Check it out for details.

I also set up a new Facebook page for the blog be sure to 'Like' the page for easy access to updates on business and franchise law.

Thanks so much for following Rush on Business. And look for some other exciting offerings from me very soon relating to franchise law.

Lesson # 5 From Hard Luck Franchisees: Restrictions on the Products and Services Sold

 The Classic Battle

A group of franchisees file a lawsuit contending the franchisor forces them to buy products and/or services at inflated prices while setting retail prices so low the franchisees cannot profit. The lawsuit also alleges that the franchisor omits or misrepresents key facts about its business operations when selling the franchise.

The franchisor, of course, denies the allegations and intends to vigorously defend the lawsuit.

The Issue

Many franchise agreements contain restrictions on the products and suppliers the franchisee may use. While this may seem reasonable in the beginning, (after all, you're buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than they can using the franchisor's system.  The franchisees begin to question why they are paying for higher priced products along with paying royalties which eat into profits even more. When this happens franchisees tend to get upset and file lawsuits like the one described above.

If the franchisee agreement you are considering contains restrictions on products and suppliers be sure to consider those provisions very carefully. Be prepared to ask the tough questions of the franchisor when it comes to products and suppliers. Also, don't take for granted just because you are going with a franchise that you are getting the benefit of the franchisor's "bargaining power."

Above all, make sure to talk with as many current franchisees as possible regarding the products and services of the franchise and conduct your due diligence.

Lesson # 4 From Hard Luck Franchisees: Buying a Franchise in a Saturated Market or Industry

 

I've seen it many times. A certain market or industry becomes "hot" and all the sudden franchises start popping up all over the place. For example, a few years ago the 24/7 fitness market took off. In the Des Moines, Iowa area there were all kinds of fitness franchises that entered the 24/7 fitness market. Unfortunately many of them went out of business and only a few major players remain.

This happens in other industries. Right now the self-serve premium yogurt market seems to be really taking off. You add the toppings yourself and then weigh the cup just prior to paying. Looks to be a "hot" concept. But in the end how many of these franchises will be around in 10 years? Don't know but it's safe to say there will probably be some winners and losers in that market. 

It's not a surprise that a significant percentage of franchises will fail. After all, the majority of businesses fail within the first 5 years. With the typical franchise agreement lasting 10 years, it's important to choose a concept that will have staying power rather than just the latest "hot" concept.

Buying a franchise is a major investment. Success is not guaranteed. Choose wisely.

For interesting reading take a look at this article on the Top Franchise Trends for 2013.

Lesson # 3 From Hard Luck Franchisees: Franchisor Reservation of Rights to Sell or Transfer Business

This is Lesson #3 in a five-part series on the top reasons I've seen franchisees fail. 

Tucked away in nearly every franchise agreement is a provision that very few franchisees consider when they are purchasing a franchise business. The provision I am referencing gives a franchisor the right to sell or transfer its business to another person or entity. Now I am not saying that a franchisor shouldn't have that right. Of course a franchisor would like to reserve the right to sell its business as a succession plan or outright sale for profit. But unfortunately I've seen many franchise relationships change dramatically after the sale.

On many occasions I've found that the new franchise owners lack the spirit and care for the franchisee that the original owners may have possessed. The new franchise owners may not have the same goals or aspirations as the original owners. They may even change business models, pricing or marketing which could have a significant impact on your business. As a result, many franchise operations fail after the franchise has been sold.

If you are going into franchising, have careful and detailed talks with the franchisor about their goals. Find out if the franchisor is in talks with anyone to sell the franchise business or whether that is an ultimate goal of the franchisor. The franchisor may not always be candid with you but perhaps they will be and you will have gained valuable information in the process. If sale talks are imminent, you may be better off waiting to see what the new owner has in store for the franchise business. But no matter what be aware that the franchise business could be sold and consider carefully whether you are buying a "system" or whether you are getting caught up in the persona of the franchise owner. Because if you are buying the owner rather than the system, you may be in for a rude awakening if the franchise business is sold.

In the end, you are not likely to eliminate the risk that the franchisor could sell. An astute franchisor would not negotiate that provision away in a franchisor agreement. But consider that possibility from the start and whether the franchising "system" is right for you.  

Business Partnerships Need Communication

 Mike Colwell of THE BIZ posted a presentation I have on Partnering for his Raising Capital series. One of the biggest things a partnership needs is communication. Like any good marriage, communication is the key. Business partners that communicate effectively are much more likely to be successful. Also, proper documentation is a key. Without documentation, many partnerships are doomed to fall into litigation if problems arise.

View my presentation on Partnering here.

VIew all of presentations on Raising Capital here.

 

Lesson #2 From Hard Luck Franchisees: Buying a Franchise with No Brand Recognition

The franchising model is available in almost every industry. (Even law firms apparently). Reports have indicated there's nearly 1 million established franchised businesses in the U.S. Among those franchises are many unknown (or relatively unknown) franchises. In my opinion it is critical to buy franchises with brand recognition.

Does that take out many new franchises from consideration? Perhaps even the future Subway or McDonald's? Why yes, it does. Let someone else be the guinea pig. (This shouldn't be too hard in Iowa because most franchises become popular somewhere else before coming here). My rule of thumb - ask 10 of your friends if they have heard of your franchise opportunity. If they haven't, perhaps you should reconsider the opportunity. The upfront costs of franchising are often considerable higher than starting your own business. If the brand isn't recognizable, can you really justify the higher costs associated with buying a franchise or perhaps you are better off starting your own independent business?

I've seen several franchisees buy unknown franchises. In many instances it hasn't worked out. They spent a lot of money but really didn't get much in return. Part of the appeal of franchising is to license someone else's trademark. An easily identifiable trademark gives a franchisee a potential leg up. It doesn't guarantee success, but all things being equal, look to franchises with brand recognition. Sinking money into an unknown franchise is generally a poor investment in my experience.

For a good discussion on the pros and cons of buying well-known franchises read Does Buying a Big-Name Franchise Ensure Success?

Iowa Business Specialty Court Pilot Project

The Iowa Supreme Court has announced that it is beginning a three-year project for an Iowa Business Specialty Court for complex cases with $200,000 or more in dispute. To begin the project, three Iowa judges will be hired for the court based upon their educational background, judicial and trial experience with complex commercial cases and personal interest.

Participation in the pilot project will be voluntarily and all parties to the dispute must agree to opt into the business court pilot program. It is anticipated the court will begin accepting cases no later than May 1, 2013. The Court covers the following:

 

Only cases in which compensatory damages totaling $200,000 or more are alleged, or claims seeking primarily injunctive or declaratory relief, will be eligible for assignment to the business court docket. In addition, to be eligible a case must satisfy one or more of the following criteria:

      I.        Arise from technology licensing agreements, including software and biotechnology licensing agreements, or any agreement involving the licensing of any intellectual property right, including patent rights.

   II.        Relate to the internal affairs of businesses (i.e., corporations, limited liability companies, general partnerships, limited liability partnerships, sole proprietorships, professional associations, real estate investment trusts, and joint ventures), including the rights or obligations between or among business participants, or the liability or indemnity of business participants, officers, directors, managers, trustees, or partners, among themselves or to the business.

   III.        Involve claims of breach of contract, fraud, misrepresentation, or statutory violations between businesses arising out of business transactions or relationships.

 IV.        Be a shareholder derivative or commercial class action.

  V.        Arise from commercial bank transactions.

 VI.        Relate to trade secrets, non-compete, non-solicitation, or confidentiality agreements.

 VII.        Involve commercial real property disputes other than residential landlord-tenant disputes and foreclosures.

VIII.        Be a trade secrets, antitrust, or securities-related action.

  IX.        Involve business tort claims between or among two or more business entities or individuals as to their business or investment activities relating to contracts, transactions, or relationships between or among them.

 

This is a step in the right direction in my opinion. I first starting writing about business courts here in Iowa in 2008. At that time, I asked whether Iowa needed a business court to compete. While I think it's a great step in the right direction, I'd like to see the threshold amount come down. Many small business owners express frustration because the costs of litigation are so high. Perhaps we can have a modified "business small claims" that would include cases in a minimum amount of $25,000 or so. That's real money for a lot of small businesses. But I am excited to see how the pilot program works and commend the Iowa Supreme Court for taking this initiative.

Iowa Supreme Court Rules Employer Can Fire Woman Because She's Too Attractive

Happy New Year everyone! The first blog post of the year centers on a controversial Iowa Supreme Court decision handed down right before the holidays.

In Nelson v. Knight, the Iowa Supreme Court was presented with the question whether a male employer could terminate a female employee because the employer's wife, due to no fault of the employee, is concerned about the nature of the relationship between the employer and employee? The district court had ruled in favor of the employer on summary judgment and the employee appealed. The Iowa Supreme Court affirmed the ruling of the district court.

Nelson was a dental assistant for Dr. Knight for ten-and-a-half years. Dr. Knight admits that Nelson was a good dental assistant and one of his best employees. Nelson in turn acknowledges that Nelson generally treated her with respect, and she believed him to be a person of high integrity. 

At some point in the last year and a half of Nelson's employment, Knight began to complain about Nelson's clothes being too tight and revealing and "distracting". (Nelson denied this claim about her clothes). Then during the last six months or so of Nelson's employment, Dr. Knight and Nelson started texting each other on both work and personal matters outside the workplace. Neither objected to the texting. Both Knight and Nelson have children, and some of the texts involved updates on kids' activities and other relatively innocuous matters. Nelson considered Knight to be a friend and father figure, and she denies that she ever flirted with him or sought an intimate or sexual relationship with him. Knight's wife found out about the texts, confronted her husband and demanded that he terminate Nelson's employment.

In reading the Court's opinion, it appears Dr. Knight allegedly made at least a few comments that may have been construed as sexual harassment.  However, it is important to note that Nelson did not sue for sexual harassment but rather sued only on the basis of sex discrimination.

In a decision roundly criticized by the Des Moines Register's Rekha Basu  because of the seeming unfairness, the Court ruled ruled that the Plaintiff was not fired because of her sex. The court seemed swayed by the fact that all of Dr. Knight's other employees were women and that Nelson was replaced by a woman.  The court thought there was a distinction between (1) an isolated employment decision based on personal relations (assuming no coercion or quid pro quo), even if the relations would not have existed if the employee had been of the opposite gender, and (2) a decision based on gender itself. The Court said that In the former case, the decision is driven entirely by individual feelings and emotions regarding a specific person. Such a decision is not gender-based, nor is it based on factors that might be a proxy for gender.  The Court went on to state,

The civil rights laws seek to insure that employees are treated the same regardless of their sex or other protected status. Yet even taking Nelson's view of the facts, Dr. Knight's unfair decision to terminate Nelson (while paying her a rather ungenerous one month's severance) does not jeopardize that goal. This is illustrated by the fact that Dr. Knight hired a female replacement for Nelson. As the Platner court observed, "[W]e do not believe that Title VII authorizes courts to declare unlawful every arbitrary and unfair employment decision." 

"[t]he issue before us is not whether a jury could find that Dr. Knight treated Nelson badly. We are asked to decide only if a genuine issue exists as to whether Dr. Knight engaged in unlawful gender discrimination when he fired Nelson at the request of his wife." 

Many have questioned this decision. Thomas Crane of the San Antonio Employment Law Blog observed,

 

This is a difficult call for all courts.  The case law is clear that in a consensual relationship, both employees should be treated the same.  If the female worker is fired, then the male manager should also be terminated.  But, how can the boss be fired?  So, instead, the courts engage in strained reasoning about what truly motivated the boss when he fired the female worker.  This decision arose after the employer moved for summary judgment.  The court should have simply found sufficient factual issue to allow Ms. Nelson' claim to go to a jury.  Doubts about motivation should always be resolved by a jury. 

Nelson's attorney, Paige Fiedler, strongly disagreed with the all-male court's ruling stating to the Associated Press,
 
"These judges sent a message to Iowa women that they don't think men can be held responsible for their sexual desires and that Iowa women are the ones who have to monitor and control their bosses' sexual desires," Fiedler told the Associated Press. "If they get out of hand, then the women can be legally fired for it."

 

Evaluating a Franchise Opportunity

In meeting after meeting with prospective franchisees I am asked what I would look for in a franchise opportunity. It's not an easy question. But trust me when I say that all franchise opportunities are NOT created the same.

What separates the good franchising opportunities from the bad franchising opportunities in my experience? Here are my top four reasons:

  1. The Brand Must be Recognizable. Talk to 10 of your friends. If they've never heard of the franchise you may want to reconsider the opportunity. The upfront costs of franchising are often greater than starting your own business because of the associated franchise and other upfront fees. If the brand isn't recognizable, can you really justify paying the franchise fees or are you better off starting your own independent business?
  2. The Franchise Has a Fantastic System. Are the operational processes the franchisor has in place so special that you couldn't duplicate it yourself or perhaps it would take you years to develop?  I say a franchise better have those fantastic operational processes in place or it probably isn't worth buying.
  3. Unique Concept or Product. Does the franchisor have an unique concept or product that you are unable to duplicate yourself or perhaps it would be to expensive to develop on your own? 
  4. Protected Intellectual Property. Does the franchisor possess protected intellectual property that would make it difficult or impossible to start the business on your own? If so, then franchising may be your only alternative to break into a particular market.

Time and time again I see people invest their life savings into franchising.  Some of these people achieve great results while others do not. There is no validity to the claim that franchise operations fail less than independent business opportunities. Be sure to examine franchise opportunities carefully and conduct your due diligence. The due diligence should include extensive interviews with the franchisor's management team and as many franchisees as possible. Get advice from a franchise lawyer, accountant and a banker regarding the opportunity. Educate yourself and be willing to walk away from the negotiations to get the best deal possible from the franchisor.

In conclusion, there are many other issues to consider when evaluating franchise opportunities but if the franchise opportunity doesn't have one of the four things above, it's been my experience you can probably just move on to the next opportunity.

 

Employers Should Consider Policies on Ownership of Social Media Accounts

Daniel Burnick of the Alabama Employment Law Report has an interesting post on a case involving a disputed Twitter account where the employee left his employment, changed his Twitter account name and then kept all the followers he had with his former employer.

In Kravitz v. PhoneDog, Kravitz used @phonedog for his Twitter account while he was employed. He left his employment and changed his account to @noahkravitz. He also took 17,000 followers with him which left his former employer with the task of building an entirely new follower base. PhoneDog had no policies in place regarding who owned the social media account.  An extended legal battle occurred but was recently settled.

As Burnick points out, the key is to have policies in place about who owns social media accounts when they are used on behalf of the company. To date, I have yet to see a single employer who has taken the initiative to address the ownership of social media accounts in their employment handbook. It's an issue that many business owners may overlook. But the time required to rebuild a Twitter or other social media follower base is invaluable. If you've worked hard to capture a strong social media following you won't want to make the same mistake as PhoneDog.

It's a great idea as you enter the new year to review your handbook policies and procedures to make sure your current with existing laws and trends.  

P.S. Also consider the issue if you are buying a business. Do not assume that you will automatically become the owner of a Twitter or other social media account when you buy an existing business. You will want to specifically address the issue in your purchase agreement.

Franchisees: Think Twice About Agreeing to Paying Franchisor State Tax

In a recent review of a franchise disclosure document (FDD), I spotted a provision from a franchisor requiring the franchisee to pay any state taxes imposed on the franchisor as a result of the franchise operations within the state. Franchisees (particularly here in Iowa) should think twice before agreeing to this type of provision due to the Iowa Supreme Court's decision against KFC Corporation in December of 2010.

As I have touched on before in posts on this blog, the Iowa Supreme Court ruled that KFC Corporation could be taxed on revenues received from the state of Iowa even though the company had no physical presence within the state but rather received royalty revenues resulting from intangible property (i.e. the use of trademarks and license fees) within the state. It was probably the most significant franchise case to occur nationally over the past couple of years and understandably franchisors are concerned about it.

However, I doubt most franchisees understand the potential liability at stake. It's certainly not something most franchisees would anticipate paying in their business plan.  It could seriously cut into profitability. Given the court ruling on the subject in Iowa, tax payment shifting from a franchisor to the franchisee is not something to take lightly.

My advice for franchisees is that I would not agree to pay the franchisor's tax. Obviously a franchisor isn't agreeing to pay the franchisee's tax obligations. I have a hard time understanding how such a provision would be fair for a franchisee.