The Business Record reported this week on a federal court lawsuit recently filed by local fitness franchise Farrell’s Extreme Bodyshaping, Inc. against Kosama, another fitness franchise headquartered in the Des Moines area. Both franchises specialize in a 10-week body "transformation". Farrell’s is the established franchise in the area marketplace while Kosama is the upstart. Both appear to be having some success at developing franchise locations in several states.

Farrell’s alleges that Kosama used key words and metatags associated with Farrell’s to drive Internet traffic from Farrell’s to the Kosama Web sites. The Business Record article rightly focuses on the trademark infringement issues which are the heart of the federal lawsuit. However, in this blogpost, I’d rather discuss some issues to consider as it relates to investigating a prospective franchisor. (The considerations below are general in nature and do not relate specifically to either Farrell’s or Kosama or their pending lawsuit).

  • In my franchise agreement reviews for franchisees I always point to the trademark indemnification provisions as a point to negotiate. My goal is to always obtain trademark indemnification (including attorney’s fees) for a franchisee. This means I want the franchisor to contractually obligate themselves to stand by their name and protect the franchisee from lawsuits involving trademarks. A federal court lawsuit is an expensive proposition. Therefore, as a franchisee you definitely don’t want to end up in court defending the marks of the franchisor at your own expense. After all, if the franchisor can’t stand by their name, what are they really selling?
  • Always check the litigation history of the franchisor. That includes not only a review of the FDD but also a Google search and perhaps even a check of the various court Web sites. I also recommend that you directly ask the franchisor about whether any recent litigation is pending that is not included in the franchise disclosure document (FDD). The FDD is often not updated in time to reflect new llitigation.  So prospective franchisees may not become aware of a new lawsuit just by reading the latest FDD. You really need to ask to make sure you have the latest information. 
  • Always ask the franchisor about the competition. I think you find out a lot about a franchisor when they talk about their competition. Do they have a healthy respect for the competition? What’s their tone when they talk about the competition? What are the franchisor’s strategies to compete? How does the franchisor differentiate itself from the competition? What does the competition do that is better than the prospective franchisor? By engaging the franchisor about the competition, you can learn a great deal about the franchisor. Do they really have a legitimate plan to compete?    
  • Look closely at the franchise system, including intellectual property. Study the franchisor’s system. Is the intellectual property independently developed or does it closely resemble other systems? Do patent, trademark or copyright infringement issues exist?
  • Examine the financial strength of the franchisor. Is the franchisor financially sound? If llitigation or other contingencies strike, will your franchisor be able to withstand the potential expense?

Of course there are many other issues to consider when buying a franchises.  Smart guys like The Franchise King will tell you it’s highly recommended that you seek legal advice from an attorney experienced with franchise matters if you are thinking about buying one.