There is no definitive answer. If the answer is that franchises have done relatively worse why might that be the case? There are myriad answers from excess liquidity in the capital markets to the simple fact that franchising did so well over the past two decades that it was only natural that it would experience a temporary set-back.

Another possible reason, and the subject of this essay, may be that by its very nature franchising has a greater inherent risk profile due to the fact that franchising necessarily entails the transmission and transference of trade secrets and confidential. Consequently, the more popular a franchise becomes the more difficult it is to maintain its trade secrets and confidential information.

This, in turn, impacts the long term economic health of the franchise. A franchisor therefore makes a bet that it can parlay its franchise system into a profitable venture without losing the value it already has staked in its trade secrets.

So to the extent that the growth of a franchise system impacts the ability of the franchisor to carefully monitor its trade secrets, the financial health of the franchise will be affected. The growth of franchising has not been driven by thousands of uniquely derived and/or recently invented products. The growth of franchising, and the ensuing fragmentation of many markets within franchising, is a direct result of former trade secrets and confidential information being disseminated in the market place.

Unlike patents, which carry a protectable interest of 20 years, trade secrets are protectable for an indefinite period of time. Realistically speaking, however, trade secrets do not usually provide indefinite value to the franchisor. The more popular the franchise becomes the more likely it is that someone in the future will either receive trade secret information or will reverse engineer the trade secret. Thus the problem obtains in the ability of the franchisor to protect the trade secret long enough such that the franchise itself has enough brand loyalty to compensate for any dissemination of information that may have formerly been classified as trade secrets.

Much, if not all, of the value in a franchise is contained in the unique manner in which the franchise is sold and the unique nature of the product itself i.e., its trade secrets. The ability of the franchisor to sell franchise units is a direct function of a prospective franchisees belief that the franchisor has created a product and a product distribution system that cannot be easily replicable. The value of the franchise is necessarily derivative of how easily a non-franchisee (or ex-franchisee) can replicate the franchisors’ offering. A franchisors “gold” lies in its trade secrets. A franchisor derives value from its franchise system because its unique system is not generally known by the public. Therefore a franchisor must be diligent in preventing the unique means and methods it has of conducting business from being readily known by the public.

What is a trade secret exactly? The Uniform Trade Secrets Act which has been adopted in some form or fashion by more than 40 states– defines trade secrets as
Information, including a formula, pattern, compilation, program, device, method, technique or process that: i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The Restatement of Torts identifies six useful factors to consider in determining whether something is a trade secret:

1) The extent to which the information is known outside of the business,
2) The extent to which it is known by the employees and others involved in the business,
3) The extent of measures taken to guard the secrecy of the information,
4) The value of the information to the business and to competitors,
5) The amount of effort or money expended in developing the information, and
6) The ease or difficulty with which the information could be properly acquired or duplicated by others.

The fundamental function of contract law is to deter contracting parties from behaving opportunistically toward one another in order to encourage the optimal timing of economic activity and obviate costly self-protective measures. It is an ineluctable fact of human nature that during times of difficult economic circumstances people are more prone to exhibit behavior that pushes the envelope on what society considers fair business practices. People are more inclined to put to the test exactly what is considered legal and/or acceptable when it comes to business dealings. This is evidenced by the rise of litigation on contractual disputes over the past two years. Some of these disputes are a function of one party simply not being able to adhere to its side of the bargain. But more than a few are likely the function of one party testing the limits of the terms of the contract. Stated differently, one party to the contract behaves in an opportunistic manner.

With fewer real dollars being exchanged in the marketplace, the competition to achieve relative wealth in our society is magnified. Thus a party to a contract who during better economic times might have not been inclined to behave opportunistically might during leaner economic periods test the limits of what is permitted under the contract. Because the licensing of trade secrets is so often the prime repository of the value of the franchise, understanding what a trade secret is and how to protect it is of particular importance in franchising.

By definition, a franchisor allows an erstwhile stranger to license, distribute and sometimes produce the very product that the franchisor created and upon which it relies to generate revenue. Given the nature of the franchisor/franchisee relationship franchisors need to be acutely aware of the opportunities for harm that inhere in the franchisor /franchisee relationship. During the best of times, the franchisor/franchisee relationship is balancing act of mutual self-interest. During times of economic uncertainty, the franchisee may find itself struggling to keep its business afloat. Or maybe worse even, as the franchisee finds itself as Bruce Springsteen put it – with debts that no honest man can pay. Through no particular fault the franchisee may be faced with financial difficulties; difficulties that the franchisee may think could be alleviated extra-contractually or opportunistically. And so an opportunistic franchisee may seize upon the chance to exploit loop holes in a franchise agreement. The opportunities for harm most often manifest themselves in the dissemination of trade secrets and confidential information.

A franchisor must therefore be extremely diligent in its protection of its trade secret information. It starts and ends with the franchisor being certain that it has done all it can do to keep the trade secret information confidential. As an initial matter, only employees who need to know the trade secret information should be allowed to learn of the exact nature of the trade secrets. Second, the franchisors employees and officers should sign confidentiality agreement acknowledging the confidentiality of the trade secrets and expressly prohibiting the dissemination of said information.

The next step is to clearly identify the trade secrets in the franchise agreement. The agreement must make clear that the trade secrets are being licensed and not sold. The franchise agreement should also require the franchisee’s to have its employees sign confidentiality agreements similar to the one’s the franchisor. The franchisee should be required to take reasonable steps to preserve the confidentiality of the trade secret information.

It is also a good idea to have a compliance officer monitor the use of the trade secret information. The compliance officer would be in charge of conducting audits of the franchisees. A concomitant obligation of the franchisees would be to provide compliance reports to the compliance officer which demonstrate that the necessary precautions are being taken to protect the trade secret information. If it is discovered that trade secret information has been misappropriated, a franchisor is going to need to prove inter alia that has taken reasonable steps to protect the secrecy of the information. Adhering to the aforementioned recommendations will ensure the franchisor a better position in the fight.

The popularity of franchising as a method of doing business will inevitably have its peaks and its valleys. Its robust popularity will come back. But the very thing that makes it effective as a means of doing business is the very thing that makes it risky. The higher the risk, however, means the greater the return. And so it is that the more popular the franchise becomes the more chances it has of falling prey to an opportunistic franchisee–the more chances it has of having its trade secret information lost. But every new idea one day will die and that’s a fact. It is therefore important for the franchisor to protect its trade secret long enough to build up its brand such that the death of the trade secret merely gives rise to the birth of a household brand with no need for recourse to the court.

Google had proven successful in a majority of the suits but last year Google was delivered a bit of a setback in the case of Rescuecom Corp. v. Google Inc., 562 F.3d 123 (2d Cir. April 3, 2009).  There the Second Circuit reversed the lower court and said that Rescuecom properly alleged that Google’s keyword ad practices constituted a “use in commerce”. Given the fact that Google is fighting so tenaciously the lawsuits filed against it one could assume that the practice is widespread, and Google is making considerable amount of money from it.  The Rescuecom Corp, ruling may have opened the door for many other suits against Google, and revivified others that were “on the mat”.  It is not clear that Google is going to lose any of them, but the momentum has shifted.

Notwithstanding whether Google has any liability, from an on-line marketer’s perspective one should ask the following two questions before diving into the purchasing of another company’s trademarked keyword: is it legal and what are the risks?

As to whether it is legal, stated simply, the law is not settled in this area.  Assuming that there is an enforceable trademark interest, the analysis then turns to whether the trademark was actually infringed upon.  Under the standard infringement analysis, if a party owns the rights to a particular trademark, that party can sue subsequent parties for trademark infringement. The standard is “likelihood of confusion. The plaintiff would also have to show that the trademark had acquired a secondary meaning, and was used in commerce.

In an advertiser on advertiser suit, however, the courts are looking primarily at what has come to be called initial interest confusion. (Although there are a few district cases that do not reach the initial interest confusion doctrine analysis because the courts held that there was no “use in commerce” in the first instance.) Unlike the likelihood of confusion test that is found in section 43 of the Lanham Act, the courts created the initial interest confusion test in the 1970′s.  An amorphous legal concept it has generally been used to prove actual confusion by implying the confusion occurred more quickly on the part of the consumer.

In branded keyword suits, the courts have looked to see whether the branded keyword was used in the ad.  If it was not, then there appear to be no plaintiffs who have been successful in bringing a trademark infringement suit of course that is not to say that suit have not been brought and settled out of court.  If the branded keyword is used to not only trigger the ad but also the branded keyword is used in the advertisement, the few courts that have looked at this issue then determine whether the consumer was diverted from the search in which he was interested, thereby creating possible confusion as to the origination of product.

One of the primary cases in advertiser-on-advertiser (competitor v. competitor) trademark infringement suits is Storus Corp. v. Aroa Marketing Inc., 2008 WL 449835 (N.D. Cal. Feb. 15, 2008).  In Storus, a federal district court held that displaying a competitor’s trademark in an Adwords ad copy constitutes impermissible initial interest confusion, leading to a summary judgment win for the trademark owner. This is one of the few advertiser-on -advertiser search advertising cases where the plaintiff has won the trademark claims.

The commentary on this case from the legal community has generally been rather critical.  See generallyhttp://blog.ericgoldman.org/archives/2008/03/adwords_ad_crea.htm.

It is so because the defense’s challenge is problematic where a court places the burden on the defendant to disprove that consumers experienced initial interest confusion. What the initial interest confusion doctrine requires is for the defense to undertake the task of proving that a “diversion” did not occur.  (As an aside, the initial interest confusion doctrine is a legal example of exactly what Karl Popper was criticizing in science with his exposition on the concept of falsifiability.)

This case is also instructive in so far as the fact pattern demonstrates why these advertiser-on-advertiser cases are not likely to proliferate—it does not make economic sense to do so.  As Professor Goldman points out, in Storus the court determined that over 11 months Aroa (defendant) got 1,374 clicks on its ads (from 36,164 ad impressions, yielding a 3.7% rate). If you value each click at $1/click, Storus could have acquired the “diverted” clicks for $1,374.  $1,374 would amount to a fraction of the cost to litigate a case like this.

Therefore, if one decides that there is a sufficient ROI on the branded keyword purchase one might also reasonably assume that even if one was to receive a cease and desist letter from the trademark owner, the likelihood that an actual suit would result from the infringement is minimal. At the end of the day, however, if one buys another company’s branded keyword and the trademark name is displayed in the ad and/or copy text there exists a violation of the Lanham Act and one is subject to the penalties set forth in same.

If, however, one wants to roll the dice and ignore the cease and desist letter because there is a tremendous ROI on the purchase of the branded keyword, well, then that is an option.  But it does not come without risks. For at the end of the day, if the ROI is high for the purchase of trademarked keywords then the owner of the trademark has more incentive to see that the infringement cease AND be paid for the damage to its brand.

The answer to this question depends largely on the individual fact pattern of each case. It also depends as to whether the facts are being analyzed under state or federal law. Broadly speaking, however, under federal law an employer does not owe a pregnant employee special accommodations simply because she is pregnant. At the same time, an employer may not withhold an accommodation that normally would have been granted to a non-pregnant employee simply because the employee is now pregnant.

An analysis of the facts begins with an understanding of the laws that affect and impact the analysis. [For purposes of this brief article, I will primarily analyze the federal laws. A few states such as California have laws that provide additional protection to the employee.] The primary federal statute in this are is the Pregnancy Discrimination Act (“PDA”). Claims have also been brought under the American with Disabilities Act and the Family Medical Leave Act. The PDA is the one most often utilized by plaintiffs. The PDA amended Title VII of the Civil Right Act. In pertinent part the PDA states:

“(k) The terms ‘because of sex’ or ‘on the basis of sex’ include, but are not limited to, because of or on the basis of pregnancy, childbirth, or related medical conditions; and women affected by pregnancy, childbirth, or related medical conditions shall be treated the same for all employment-related purposes, including receipt of benefits under fringe benefit programs, as other persons not so affected but similar in their ability or inability to work, and nothing in section 703(h) of this title shall be interpreted to permit otherwise”.

In Armindo v. Padlocker, Inc., 209 F. 3d 1319 (11th Cir. 2000) the plaintiff argued that she was discriminated against on account of her pregnancy when she was terminated in from her job as an entry level clerical employee after three months of probationary employment. The employer contended that the plaintiff was terminated because of her poor attendance record. The court framed the issue thusly:

“The issue, generally stated, is whether the PDA requires an employer to treat favorably a pregnant employee whose pregnancy caused her to miss work, as compared to a non-pregnant employee who missed work on account of a different medical condition.”

The court held that “the clear answer is that the PDA does not require favorable treatment in this respect.” Citing the case of Armstrong v. Flowers Hosp., 33 F.3d 1308 (11th Cir.1994), the court stated that:

“although the language of the statute does not address whether employers are required to give favorable treatment to pregnant employees, statements in the legislative history “make it clear that the PDA does not require employers to extend any benefit to pregnant women that they do not already provide to other disabled employees.” See Armstrong, 33 F.3d at 1316-17. In support of its holding, the panel cited the Seventh Circuit case of Troupe v. May Dept. Stores Co., 20 F.3d 734, 737-39 (7th Cir.1994), drawing from it the principle that while the PDA requires the employer to ignore the pregnancy, the employer need not ignore absences, unless the employer likewise ignores the absences of nonpregnant employees.” [emphasis added] See Armstrong, 33 F.3d at 1317.

With Armstrong as a guide to how far the courts are willing to extend the PDA, what exactly does the PDA protect? Under the PDA and according to the EEOC the following obtain:

–An employer cannot refuse to hire someone because she is pregnant or has a pregnancy-related condition.
–An employer can’t require a pregnant women to submit to special procedures in order to determine whether she can perform her job duties unless the employer requires all employees to submit to those procedures.
–An employer must treat a pregnant woman who can’t perform her job due to a medical condition related to her pregnancy the same way he treats all temporarily disabled employees.
–An employer may not keep a pregnant woman from working or prohibit a woman from returning to work after giving birth.
–Any employer-provided health insurance plan must treat pregnancy-related conditions the same as other medical conditions.
–Pregnant employees cannot pay a larger health insurance deductible than other employees pay.

While there may be any number of accommodations requested there have been a few common accommodations that have been litigated rather extensively in the courts. Foremost among them is breast-feeding and/or the expressing of breast milk in the work-place. For the most part, women have been unsuccessful when suing their employers for breast-feeding related claims.

Professors Boller and Peterson have concluded that “[t]he courts have also not been receptive to the assertion that breast-feeding is a condition contemplated by the 1978 PDA. Sex discrimination may occur under the PDA if an employer discriminates on the basis of pregnancy, childbirth or related medical conditions. Breast-feeding and weaning are both considered to be natural concomitants of pregnancy and childbirth, but they are not specifically covered by the law. The PDA relates exclusively to disabilities caused or contributed to by pregnancy, miscarriage, abortion, childbirth or recovery from any of these conditions. Other courts have concluded that the PDA provides protection only to the condition of the mother, not to the disabilities or conditions of the child. See http://www.entrepreneur.com/tradejournals/article/160714657_1.html

In Wallace v Pyro Mining, 789 F.Supp. 867 (W.D.Ky. 1990). Aff’d. without opinion 951 F.2d 351 (6th Cir. 1991) the district court held that

“[n]othing in the Pregnancy Discrimination Act, or Title VII, obliges employers to accommodate the child-care concerns of breast-feeding female workers by providing additional breast-feeding leave not available to male workers. If Congress had wanted these sorts of child-care concerns to be covered by Title VII or the Pregnancy Discrimination Act, it could have included them in the plain language of the statutes.”

Plaintiffs have also tried to bring claims under the Americans with Disabilities Act (“ADA”). In the case of Martinez v. N.B.C. Inc, 84 FEP Cases 1683 (1999) the plaintiff was a producer for NBC. She alleged that NBC had “failed to provide her with a safe, secure, sanitary and private area to breast pump” and that her complaint to human resources on same was followed by retaliatory conduct, verbal harassment and work schedule changes. Martinez filed a charge of discrimination with the EEOC complaining that lactation constitutes a disability within the meaning of the American with Disabilities Act. In dismissing this claim, the court noted:

“Every court to consider the question to date has ruled that ‘pregnancy and related medical conditions’ do not, absent unusual conditions, constitute a [disability] under the ADA.”

As stated above, some states have enacted laws that grant additional work-place protection to pregnant women and/or nursing mothers. As to breast-feeding in the workplace, the following states have explicit statutes that either require the employer to make reasonable efforts to accommodate a female employee who needs to breast-feed or suggest employers do so: Ark., Cal., Col., Ga., Ill.,Ind., Maine, Minn., N.M., N.Y., N.D., Ok., R.I., Tenn., Vt., Va., Wash, and Wy. To understand the laws as they apply to each state one needs to review carefully both the state law and how the law has been interpreted by the state courts.

Understanding fully the myriad laws regarding what constitutes reasonable accommodation in the work-place is best left to an employment lawyer. This article was meant merely to give an over-view of the law as it currently stands. If faced with a request by an employee for a special accommodation due to her pregnancy or recent pregnancy, one is well advised to speak to a lawyer. Simply calling H.R. is not good enough. Many times a Human Resource department is staffed with flow-chart myrmidons. The type of legal analysis that is required for a complete understanding of an employers rights and obligations in this area of the law should be handled by a qualified legal professional.

Friedrich Nietzsche wrote this of eternal recurrence:

“What, if some day or night a demon were to steal after you into your loneliest loneliness and say to you: “This life as you now live it and have lived it, you will have to live once more and innumerable times more; and there will be nothing new in it, but every pain and every joy and every thought and sigh and everything unutterably small or great in your life will have to return to you, all in the same succession and sequence” even this spider and this moonlight between the trees, and even this moment and I myself. The eternal hourglass of existence is turned upside down again and again, and you with it, speck of dust!”

Would you not throw yourself down and gnash your teeth and curse the demon who spoke thus? Or have you once experienced a tremendous moment when you would have answered him: “You are a god and never have I heard anything more divine.” If this thought gained possession of you, it would change you as you are or perhaps crush you. The question in each and every thing, “Do you desire this once more and innumerable times more?” would lie upon your actions as the greatest weight. Or how well disposed would you have to become to yourself and to life to crave nothing more fervently than this ultimate eternal confirmation and seal?”

Friedrich Nietzsche wrote these words in the Gay Science over 100 years ago.  Eternal recurrence is the idea that every event in the universe necessarily repeats itself exactly an infinite number of times. With respect to individuals, this means that our life has already occurred and will recur exactly the same way, without deviance, over and over and over again. Nietzsche states that eternal recurrence necessarily follows from the theories of eternal time and the conservation of energy and matter.  That is, if time is infinite but the physical world is finite, then there will be a limited number of combinations of the physical world that must repeat endlessly.

He titled this aphorism das schwerste Gewicht which means either the greatest stress, greatest weight or greatest burden depending on the translation.  Would that appellate judges in America understand the significance of at least the possibility that eternal recurrence (or some simulacra thereof) exists. According to doctrine of eternal recurrence every second of our lives recurs an infinite amount of times.  In the context of jurisprudence this is particularly profound because of the American legal system’s quite proper adherence to the doctrine of stare decicis (Latin for “let the decision stand”) in which the courts have an institutional prejudice to not overturn prior decisions.  When put into the context of eternal recurrence that means that decisions are eternally left to stand. This should be, in the words of the Czechoslovakian novelist Milan Kunderas, a terrifyi prospect.

In the world of eternal recurrence the weight of unbearable responsibility lies heavy on every move we make.  If this is the case for the mass of men who lead inconsequential lives, how much more so is it for those among us who shape the path of the law?  The answer is infinitely more, and thus das schwerste Gewicht should be recognized for its singular importance.

And so it is that the doctrine of initial interest confusion in trademark law is all the more perplexing given das schwerste Gewicht. The test for trademark infringement typically focuses on the likelihood of confusion at the point of sale, i.e., the likelihood that a consumer will be misled by the unauthorized use of a trademark and purchase goods or services sold by someone other than the trademark owner. By contrast, initial interest confusion, although dispelled prior to the point of sale, allows a competitor to get its foot in the door with consumers seeking to purchase goods and services sold by both the competitor and the trademark owner. So by way of example:

a consumer sitting at his desktop one evening types in the keywords Smith’s Sauerkraut into his Google search bar. Google returns multiple different organic results—the top result being the official Smith’s Saurerkraut site.  But the top paid advertisement reads Smith’s Saurkerkraut but has text that speaks of food generally and it links to wilhelmsdogs.com  The consumer hits the link to wilhelmsdog.com. But he then quickly realizes that he is not at Smith’s Saurkraut and hits the back button whereupon he sees the top organic listing for Smith’s Sauerkraut and follows the link.  20 seconds elapsed from the time the consumer typed the keywords in untill the time he found his way to the Smith’s Sauerkraut site.

A layman looking at this scenario would be hard-pressed to say that Smith’s Saurkraut was in anyway harmed.  But unfortunately the American courts have discovered a disease where none existed and then invented a cure for the non-existent disease. And so now we have the doctrine of initial interest confusion.  In the example above, it was that 20 second time period where there was the possibility that some confusion existed that the courts now say is actionable.  The fact that no confusion can ever be proven is irrelevant to the doctrine. Nor is it relevant that the consumer actually found what he was looking for—and did so in less than 20 seconds.  All that matters in analyzing the case under the initial interest confusion doctrine is that there was some possibility that there was momentary confusion.

The problems with this reasoning are manifold. First and foremost, there is the evidentiary problem as to how you could prove that confusion occurred and who should have the burden of proof.  Unfortunately, some courts have resolved both of these favorably to the Plaintiff.  But on another level you have the issue of factual irrelevancy.  If the consumer found what he was looking for and did so alacriously it is irrelevant that he might have been momentarily confused.  Just as it is irrelevant to most every person alive today that in the 7^th century there might have been a great and bloody battle against two African tribal kingdoms.

And so we have now a doctrine that will be repeated endlessly throughout time based on a possibility that some slight confusion might have occurred.  There is the saying that hard facts make bad law.  There are no hard facts in the cases where the doctrine of initial interest confusion is applied.  There is only bad law when it gets applied. Traditional trademark infringement analysis is well-suited to address any and all actual wrongs. Eternity is far too long to have to spend with bad law made without even the slight concern for das schwerste Gewicht.

The Court stated : “Appellant contends that the clause at issue is a “loyalty provision” and not a restrictive covenant such that it is not subject to being scrutinized for its reasonableness as to time, territory and scope. We disagree. A plain reading of the clause shows that it prohibits the franchisee from engaging in a certain type of business during the term of the parties’ agreement and, thus, it is a partial restraint of trade designed to lessen competition.

Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy…. When such restraints are found in franchise or distributorship agreements, our jurisprudence has held time and again that these restraints are subject to strict scrutiny, receiving the same treatment as non-competition covenants found in employment contracts… “A non-competition covenant entered into in connection with a franchise or employment contract is enforceable, but only where it is strictly limited in time and territorial effect and is otherwise reasonable considering the business interest of [the party] sought to be protected and the effect on the franchisee.” [internal citation omitted]. 285 Ga. 587 (2009)

According to data supplied by FranchiseOpportunities.com and FranchiseSolutions.com Georgia ranks as the 5th most popular state for prospective franchisees. Consequently, given the importance of Georgia to the franchising world this case is particularly important for the entire franchise community and the reason why the IFA filed an amicus briefs in the case. This ruling is perhaps of even greater importance and scope to the franchise community than it might appear on its face because it would also apply to the in-term non-compete agreements that many franchisees have in place with their employees. Unless in-term provision contain precise limitations on geography and scope of activity they will be invalidated. And, since Georgia courts “blue-pencil” employment agreements, the presence of an unenforceable in-term covenant in any employment agreement in any business will invalidate any other non-compete or non-solicitation covenant contained in the agreement.

Thus the franchisee must also be cognizant of any limitations it attempts to place on its employees in its employee agreements. So what might appear at first glance to be a slam-dunk ruling in favor of the franchisees might at some later date be used franchisees by their own employees.

While it may be true that the civil court dockets have seen a increase in activity on account of the recession it remains the case that for many disputes the courts are not being utilized to the degree intended by the legislature. Whereas the judges bemoan the “clogging” of the state court calendars the “small claims” calendars are many times underutilized by small business as far too many a small business simply writes off debt without attempting to collect through the courts.

In many instances if the claim is under $10,000 the business makes the sound economic decision that it makes little sense to pay a lawyer thousands of dollars simply to just to get the chance to collect the money that is already owed to it. And so many a small businesses turns their over 120 day aged receivables list to a collection agency where the small business will only have to pay if, and when, any money is ever collected.

The problem with this scenario is that while any one $10,000 claim may not bankrupt a small business enough thousand dollar bad debt accounts strung together over a couple of year period will retard the growth of the company by lessening cash flow. While collection agencies are an option (although the statistics clearly show that collection agencies at best collect on 25% of the bad debt accounts) they are not always the best option. Collection agencies control the process.

There is little, if any, involvement, by the small business. Granted, that is one of the benefits to the turning over collectables to a collection agency. But the control of the case that one would have with hiring an attorney is all but gone once the cases is assigned to the agency.

Instead of handing over its collectibles to a third-party and/or racking up attorney’ fees small business have the option of settling the problems themselves in small claims courts. This is an option, as I say above, is too often ignored. Small claims courts are the perfect venue for small business. No attorney is required and no experience is needed. While the opposing party in most jurisdictions does have the right to have an attorney, it has been my experience that most judges give plenty of leeway to pro se litigants while holding the attorneys in small claims courts to the precise letter of the law.

There is still yet another reason why small business should avail themselves of small claims courts and that is that doing so promotes the macro-economic interests of our economy. To not settle the problem and simply turn it over to a collection agency in the off chance that it gets collected actually disrupts the economy.

This disruption occurs in the same way that a crime disrupts the free market system. Whereas, if one party to a business transaction can breach a duty or obligation to which it had erstwhile agreed, and do so without any repercussions, then not only will the “victim” be adversely affected, so to will the entire market. The disruption will evidence itself in an increase in the cost of goods. But if one firm can cause an unrecoverable loss, then a situation exists that is substantively similar to the increase in prices that is the result of shoplifting. Whereas the retailer can recoup its cost only by increasing the price of its goods, the small business can recoup the cost of being unable to fight certain legal battles only by increasing its costs.

A business that has small profits cannot afford to have its pricing structure adversely affected to too great a degree. Assuming that the price of the product was appropriately set by the market, a distortion of the market price (increase) may lead to fewer sales, which if persistent will lead to a cessation of business.

Though the ability to distort the market is present in all forms of dispute, it has its greatest impact on those transactions in which the amount of dispute is relatively small compared to the amount of attorney fees to be incurred. Consequently, many times the small company or individual will recognize that since the cost to litigate will be equal to or less than the amount at stake, it will simply “write-off” the loss.

Make no mistake, filing in small claims court does not guarantee one success. Nor does it guarantee that if a favorable judgment is received that the judgment will be collectable. What it does do is allow the small business the ability to control the process and to receive almost 100% on the dollar on everything that is collected. For cases that exceed the dollar amount limits for small claims courts then hiring an attorney is almost always the best choice. But for debts that are under $10,000 and that would otherwise have been written-off and/or turned over to a collection agency, small claims courts are a viable option.

I recently posted a blog at iMedia Connection regarding the the state anti-spam statutes. Many of these state statues are simply restatements of the CAN- SPAM Act. But more than a few go beyond the rules set by Congress in the CAN- SPAM Act and in doing so impose additional burdens on e-mail marketers. With a federal statute and no less than 37 state statutes, how should a responsible e-mail marketer approach his job? The answer revolves around who has the right to bring an action, should an e-mail marketer run afoul of anti-spam legislation.

I wrote the blog entry at iMedia Connection with e-mail marketers in mind. But given that e-mail is put used more and more by franchisors and franchisees, and the fact that these anti-spam rules impact our entire economy, I thought it might be helpful to link to it here. Spam Litigation: A Guide for E-mail Marketers

In the case of Wachovia Ins. Servs. v. Fallon, 299 Ga. App. 440 (2009) the Georgia Court of Appeals took up the issue of whether a customer/client list was protected under the Georgia Trade Secrets Act, OCGA § 10-1-760. The facts presented at trial showed that Fallon left his job with Wachovia and went into business for himself in the same line of work. Wachovia alleged that Fallon misappropriated Wachovia’s client list and thereafter profited from the list to the Fallon’s benefit and Wachovia’s detriment.

The Court pointed out that in order for a client/customer list to be given protection as a trade secret under OCGA § 10-1-761 the information must

(A) Derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Wachovia sought to obtain relief inter alia under Georgia’s trade Secret Act.

The interesting part of the opinion was the Court’s ultimate determination that because the client list was obtainable from sources other than Wachovia, Fallon could not be said to have missappropriated the information under Georgia law. Specifically, the Court held:

“In order to prevail on its claim regarding misappropriation of this client contact information under the Georgia Trade Secrets Act, Wachovia Insurance must show that the client contact information in its former employees’ Blackberries was a “list of actual or potential customers or suppliers which is not commonly known by or available to the public.” OCGA § 10-1-761 (4). The record shows without dispute that a public website titled “freeERISA.com” contains all of the information about the customers of an employee benefit broker such as Wachovia Insurance, including the name and contact information of the customer’s decision-maker. Indeed, a Wachovia Insurance representative (Benjamin) testified that “all of the employee benefits work that Wachovia Insurance Services does in Atlanta” could be obtained from this website. He described it as “a great prospecting tool to go out and find out who might be writing an account.”

Going forward franchisors and franchisees need to be aware that clients lists that they assume to be protectable under Georgia law might well not be. For if the party who “misappopriates” the client list can demonstrate that the list was readily obtainable from some other source, then the company may not have a colorable claim in Georgia under Georgia Trade Secret Act.

If one’s business is a franchise then it is very wise to consult a lawyer early on in the process, be it the process of starting a franchise or buying a franchise. Franchise law is not easily labeled. It is actually a collection of many different types of law –including agency law, ant-trust law, employment law, contract law, administrative law, trademark and patent law, debtor/creditor law, tort law, trade secrets law, financial services law, and international law.

Everybody loves a good lawyer joke. And people have coffee mugs adorned with the Shakepearean quote: “The first thing we do, let’s kill all the lawyers.” But the fact of the matter is that what everybody loves even more than a good lawyer joke is to be secure in the knowledge that he/she has a good lawyer. Lamentably the cost of legal services has risen significantly in the last decade. This has driven some people to take a pro se approach to their legal needs. Undoubtedly this pro se approach works for many. What is also equally true is that it does not work for a great many others as well. And the aggregate cost to those who failed to spend money on the front-end in forfeited rights and missed business and legal opportunities dwarfs the amount of money that was saved.

All lawyers are not created equal. Some are better than others. Lawyering is no different than any other skill or talent, and like any other skill or talent there are many factors that go into the making of a good lawyer. A “one size fits all” approach does not work well when it comes to choosing a lawyer. Considerable time and care should be taken when choosing a lawyer–after all, entering into franchising is likely one of the greatest single investments one will make in their business career. But be sober and judicious in the choice. Just because the lawyer charges $500 an hour at a large law firm does not necessarily make her a better lawyer than a lawyer who charges $200 in a solo practice. Moreover, just because a lawyer has an Ivy League education does not necessarily make him a better lawyer than a lawyer who does not. (Elsewhere on this site I go into more detail on the requisite skills that one should look for in a lawyer.) With that said, both the hourly rate and the education are important factors that should be considered when choosing an attorney.

The key is that it makes little sense to eliminate altogether the expense of hiring a lawyer when one is talking about one of the biggest decisions of one’s life. Cut back on going out to eat or taking that extra trip to the beach. But don’t cut back on solid legal advice. You will likely not be able to recall what you spent money on last year by dining out but you will never forget how much you lost by not hiring an attorney if you find yourself in a dispute involving the legal intracies surrounding the franchising documents and agreements that YOU signed.

America is experiencing a re-assessment of the belief that laissez-faire, free market capitalism is an unalloyed good. With the collapse of the capital markets in the Fall of 2008, it is beyond peradventure that a certain amount of state controlled economic governance is likely to be the result of what some are calling the “Second Great Depression”. Many on the Left are saying that a critical investigation into the merits of the Austrian school of economics that has held sway over our public policy since the early 1980’s is long over due. While many on the Right say that the problem is not with free market capitalism it is that free market capitalism has not been thoroughly tried; that we have had state intervention in the economy in some form or fashion since the last Great Depression.

One problem with looking at our current economic situation in such a manner is that it is dichromatic—Black or White, Left or Right. Economic dichromaticism is myopic in so far as it blinds one to the possible merits of a third way — Distributism. Simply stated, Distributism holds that the ownership of the means of production should be spread as widely as possible among the general populace rather than being centralized under the control of the state (socialism), or a few large businesses or wealthy private individuals (capitalism). Distributism cannot be categorized as a strictly economic or social or even political philosophy as it is in fact all three. Distributism is best described a policy of a philosophy.

How does Distributism work? In the broadest possible terms, under a Distributist a system, most people would be able to earn a living without having to rely on the use of the property of others to do so. But each individual is not forced to go it alone; rather, Distributism envisions a cooperative approach to economic ordering such that property and equipment may be “co-owned” by local communities larger than a family, e.g. partners in a business. The philosophical genesis for the Distributist movement that arose in the early 20th century was the papal encyclical Rerurm Novarurm. In Rerurm Novarum Pope Leo XIII states that people are likely to work harder and with greater commitment if they themselves possess the land on which they labor, which in turn will benefit them and their families as workers will be able to provide for themselves and their household. He puts forward the idea that when men have the opportunity to possess property and work on it, they will learn to love the very soil which yields in response to the labor of their hands, not only food to eat, but an abundance of the good things for themselves and those that are dear to them.

Unlike Distributism most people in America have some rudimentary knowledge of how franchising works. A franchisor has a business that he wants to expand and instead of laying out the time and the capital to open each store himself he grants a licenses to individuals to do open the store and carry out the business —these individuals are known as franchisees. In so doing, the franchisor gives up his right to collect all the profits of the business. The franchisor dictates certain means and methods of doing business but is largely absent from the every day running of the business. His stake in the business is largely provided to him by royalty payments set percentage of the business receipts– that the franchisee remits to the franchisor. For his part, the franchisee buys the right to collect the vast majority of the profits he produces. Concomitant with this reward also goes the risk as the franchisee now bears much of the burden of the success or failure of his store.

While franchising is a fairly well understood means of conducting business its impact on the American economy is underappreciated. Franchising is a part of our every day life in America. Franchising biggest cultural impact is in the fast food arena. From McDonalds to KFC, nearly American has frequented a franchised business sometime in their life. But its not just fast food concepts that are franchised, businesses from auto repair to janitorial services to mail box centers are also franchises. Nearly 10% of American’s GDP is related to the concept of franchising. The economic, cultural and social impact of franchising is significant.

How do these two seemingly dissimilar concepts tie into each other? In order to understand the relationship, one must first understand three of the primary tenets of Distributism: subsidiarity, cooperative business associations, and the widespread distribution of property. A primary tenet of Distributism is the concept of subsidiarity. Subsidiarity holds that we should never entrust to a higher body what can be done equally well by a lower body. Production ought to be done by the smallest possible unit; often, the smallest such unit is the individual owning his own productive equipment and operating his own productive business. Subsidiarity is best fulfilled in an economic environment by the wide distribution of productive property. Distributism holds that the area of production should as far as possible be coterminous with consumption.

This ideal of subsidiarity underlies the concept of franchising in so far as the franchisor has chosen to separate the production of the product into many smaller parts. In so doing, the productive property resides placed (licensed) by the franchisor– in the hands of the franchisee. Granted he is also employing others to help him produce the product but as regards the concept of subsidiarity franchising clearly concentrates the economy into smaller parts. Distributism views production as the conscious and intelligent transformation of man’s environment, and in his creation of the product there inheres the peculiar intelligence and creative faculty of man. The franchisee is using his own labor to produce a product. That the product was not ultimately the franchisee’s idea is largely irrelevant to this analysis. Agriculture is the epitome of the Distributists idea of commerce and there is little if anything that can be said to be unique in agriculture. With that said, the Franchisor did use his creative faculty and it his creative faculty, combined with the productive capability of the franchisee, that creates a cooperative business venture.

As to cooperatives, one of the primary concerns of Distributism is also the reestablishment of what the used to be called guilds. While the present day tendency is to call to call these associationsunions rather than guilds, Distributists prefer to use guilds. Essentially, a guild is an association of workers, assembled for the benefit of those workers and to control that particular type of work within a given jurisdictions. Current day labor unions do not constitute a realization of this facet of Distributist economic order, as unions are organized along class lines to promote class interests, whereas guilds are mixed class syndicates composed of both employers and employees cooperating for mutual benefit.

It is not a broad leap to see the similarities between the cooperative some could argue symbiotic–nature of the franchisor/franchisee relationship. Franchising is the collaboration of two producers of one product to form a unified and coordinated delivery mechanism. It is this conjoining of the productivity of the franchisee and the creativity of the franchisor that creates a union. In the strictest sense they form a business partnership that embodies the essence of Distributism in so far as the franchisee and franchisor’s success is codependent on the other parties desire to embrace fully the desire to work for himself.

The fact that a franchisee does send some of his wages to the franchisors does attenuate the argument for compatibility to a certain degree. Nevertheless, Franchising is primarily comprised of vertical businesses, and there are very few franchises that sell across industries. Thus the principle of subsidiarity seems appropriately applied–if not perfectly applied. For example, Wal-Mart and Target sell across myriad product verticals. Neither of these two commercial behemoths is and or will become franchises. Whereas specialty retail marketers like Post Net, Moe’s, and Spray Green are confined to a relatively small niche market and are prime examples of successful franchises.

Another primary tenet of Distributism is the widespread distribution of property. Distributists concern was the capitalism accumulates wealth in a plutocratic few while socialism ultimately devolves in to the tyranny of the statist economic machinery. G.K. Chesterton one of the fathers of Distributism–held that the only way to preserve property is to distribute it more equally among the citizens so that all, or approximately all, may understand and defend it. Hillare Belloc another early proponent of Distributism–observed, “[w]ithout wealth man cannot exist.and to control the production of wealth is to control human life itself.” A well-known modern day Distributist stated the problem with our current system of wealth distribution aptly when he stated

Distributists object strongly to a characteristic common to both industrial and finance capitalism, one which remains no matter how stuffed with Chinese-made garbage the non-owning worker’s heavily-mortgaged house might become: the fact that the vast majority of society are non-owning workers, with only a very few owners of productive property. In other words, while workers in the capitalist world often now have wealth, they still have no means of producing wealth, and that makes all the difference.

Thus Distributists are committed to a wide distribution of productive property, and as such the wage contract has a much smaller role in their system than it does in our current economic system. That, however, is because those who own their own means of production have no need to work for a wage, not because Distributists believe that the wage contract is evil in itself.

Franchisees do employ others to assist them in producing the product. As such the individual employee of the franchisee could not rightly be said to experiencing Distributism in its purest sense since he does not control the work and is not the direct beneficiary of his own productive property. With that said, an employee of a franchisee can become a franchisee after he has gained experience in the trade and/or become a franchisor himself. Similarly, the franchisee cannot be seen as the perfect actor in the Distributist system as in most instances the franchisees has to remit some of the fruit of his labor to the franchisor through a royalty payment. Consequently neither franchisee nor franchisor fully owns the product of his labors. So for this reason franchising does not fit perfectly within the Distributism system. But all three economic actors—franchisor, franchisee, and the employees of both- can be said to be putting their property to work for them in a manner that is similar to if not perfectly aligned with the ideals posited by Distributism.

Franchising’s greatest selling point is that it creates ownership. In fact the International Franchise Association President & CEO Matthew Shay stated recently Franchise ownership helps people get into business for themselves but not by themselves. Distributism is nothing more than an economic system in which private property is well distributed, in which “as many people as possible” are business owners. Chesterton famously remarked too much capitalism does not mean too many capitalists, but too few capitalists.” And Belloc held that the problem inherent in a capitalist society is that it generates a “proletarian” class that only aspires for employment, and an “administrative” class of owners.

Franchising tends to rectify this problem as it promotes people getting into business for themselves. Belloc lamented that most people in a capitalist society think of themselves as wage earners, their object is almost always an increase in that wage, and that to somehow cease to be a wage earner is somewhat foreign to them. Franchising endeavors to eradicate this tendency by promoting small business ownership, which has at its very essence the Distributist ideal of the widespread distribution of property and the principle of subsidiarity. Moreover, to further this end there exists a cottage industry inside franchising that deals exclusively with recruiting people to become franchisees franchise recruitment portals. These specialty portals have as their stated aim the promotion of franchising. Thus these portals help people to see themselves as something more than a simple wage earner.

As evidenced by the thousand of franchised units scattered across America, franchising works. The exact reasons why franchising works so well can be found in the common philosophical tenets of franchising and Distrubutism briefly discussed above. Stated simply it works because it fulfills man’s needs to produce his own product. As such our public policies should favor ownership, and its policy should be to induce as many people as possible to become owners. That is precisely what franchising does. And while few people may have heard of the term Distributism and fewer still may know of the specific tenets of Distributism it does not mean that people do not practice and or hold a de facto belief in some of the merits both philosophical and economic– of Distributism. The exact manner in which this de facto belief is lived out in every day economic transactions remains unexplored and for the average American simply unimportant. Franchising is one such way.

Franchising attempts to put more capitalists in the system by decentralizing the capital in the system. In so doing, franchising approximates the Distributist ideal of having the product be coterminous with the consumption as the primary underpinning of franchising is that it is local. In the end, franchising may not be the perfect example of Distributism. But “le mieux est l’ennemi du bien.” The mechanics and the impetus behind franchising make clear that it is also not a pure form of industrial capitalism and especially not finance capitalism. Many of the merits in Distributism are clearly evident in franchising. What is also clear is that some of the merits that many any in our society would point to as exemplars of capitalism are in fact rooted in a Distributist ethos—even if very few presently recognize it.

1. Pope Leo XIII, Rerum Novarum, 1891.
2. Id.
3. Blair, Robert D. and Lafontaine, Francis, The Economics of Franchising, 2005
4. McNabb, Father Vincent O.P.
5. Goodman, True Sources of Wealth, Distributist Review, 2009
6. See http://en.wikipedia.org/wiki/Distributism
7. Belloc, Hillare, Servile State, 1912
8.Id. at 3
9. International Franchise Association press release 2009
10. Chesterton, G.K.,The Uses of Diversity, 1921.
11.Id.
12.See http://www.FranchiseOpportunities.com
13. Id. at 10.