More Burger King Innovation Potentially Rolling Out to Franchisees

I have written before about the feud between Burger King and its franchisees over the $1 double cheeseburgers, a feud which is still generating headlines as a test for pushing prices through a franchise system. But something even more insidious to America's waistline may be rolling out if the flame-broiled franchisor finds success with the launch of its newest innovation - beer.  That's right.  As tantalizingly stated in a CNN.com report:

To keep up with Miami's night life, Burger King (BKC)'s new Whopper bar will offer American beer and Whopper sandwiches around the clock, staying open 24 hours a day, seven days a week.

Nothing says 'America' like being able to drink a brewski in the middle of the night with a meal out of a Michael Pollan nightmare.  Better yet, the beer will come in aluminum cans from the "formerly-American-beer-companies-but-now-part-of-international-conglomerates-in-other-countries" Anheuser-Busch and MillerCoors.  For now the chain is wisely eschewing the drive-thru window for a "walk-up window for orders on the go" in addition to outdoor seating and delivery service, though according to another report, beer is not available as part of the delivery service.  Boo.

What will they think of next?

Trinity and Me

A quick aside from my regular posts to bring you some news on my practice.  As you can see by reading the updated sidebar on the right, I have recently joined Trinity Law Group LLC, a boutique business law firm in greater Boston.  Trinity is made up of some of the best lawyers (and people) I have had the chance to work with and I am very excited to be a part of the team. Watch for developments and more news throughout the social sphere as we intend to utilize some great new technology to better provide value to our clients.  You can read more about my move and about Trinity generally at www.trinitylg.com but you can read the press release in full below.

NEWS RELEASE

BUSINESS LAWYER DAN RYAN JOINS BOSTON’S TRINITY LAW GROUP

January 1, 2010 WESTWOOD, MA – Trinity Law Group LLC, a greater Boston law firm, announced that Daniel J. Ryan has joined the firm as an attorney and counselor at law.

Mr. Ryan will focuses his practice on the organizational, operational, and transactional needs of entrepreneurs, startups, emerging and mid-sized companies as well as angel and venture capital investors. He has counseled and represented clients ranging from the Fortune 500 companies and elite venture capital firms to solo entrepreneurs throughout the business and investment life cycle – from inception and formation, to franchising, licensing and other contracts, to growth and investment, and liquidity strategies. Dan Ryan previously practiced with large, international law firms, first in Denver, Colorado, and then in Boston.

According to Walter Wright of Trinity Law Group,  “We are thrilled to have Dan Ryan join us at Trinity Law Group. His substantial training, experience and competence, client commitment and passion for effectively using technology in the law fit perfectly with Trinity Law Group’s progressive and innovative approaches to working with clients and practicing business law.”

The author of THE BUSINESS LAW BLOG, “A business lawyer's thoughts on business law”, Mr. Ryan also presents on business and corporate law topics to attorneys, entrepreneurs, and other professionals, and has been a recurring guest speaker at the University of Colorado.

Daniel Ryan is a graduate of Boston College Law School (J.D.) and the University of Michigan (B.A.) and is licensed to practice in Massachusetts and Colorado. He is a member of the Massachusetts and Lawrence Bar Associations and is active in local organizations in North Andover and the Merrimack Valley. You can follow Dan Ryan on twitter @dryanesq.

About Trinity Law Group LLC. Trinity Law Group LLC is a greater Boston law firm that practices a broad range of business, corporate, and securities law throughout New England, United States and the world with well-recognized attorneys of stellar academic and professional accomplishment who leverage technology and relationships.  Founder Attorneys Walt Wright and Daniel Clark are business savvy and entrepreneurial lawyers who started the firm in 2007 after serving in leadership positions in the Boston law firm Rich May, where Mr. Wright served as Managing Director and Mr. Clark served as President. Trinity Law Group attorneys leverage relationships, technology and strategy to create a competitive advantage for its clients in the business law sector. Trinity Law Group LLC attorneys share a “trinity” of values as cornerstones of professional life: competence, commitment and communication. Trinity Law Group holds the distinction of being named a “Preeminent Law Firm” for its legal ability and ethical standards in the Bar Registry of Preeminent Lawyers. Additional information on the firm and Attorney Ryan is available at www.trinitylg.com.

"Is VC Past Its Prime?" or "Five Things I learned at the MIT VC Conference"

The keynote speaker at the MIT VC Conference, Alan Patricof of Greycroft Partners, was clear:  venture capital funds are getting 'inappropriately' large and change is coming.  Mr. Patricof is a legendary pioneer in the VC world (but note: while he is fine with being termed a "generational figure", compare him to Bono or Sting but never Tony Bennett), but the current market is not sustainable.  Because of the investment metrics and their need for certain returns, LPs writing larger checks means that VCs are forced to make larger investments into companies that don't need that much money.  The prevailing winds in the VC industry are heading toward capital efficiency and VC2.0, which he summed up as: "small is beautiful".  VCs, said Patricof, need smaller, more targeted investing; smaller funds will find the most success in this economy. Overall, the MIT VC Conference was, in my view, a big success.  MIT always does a great job bringing together talented and accomplished speakers and attendees to advance learning.  And it is always good to reconnect with friends in the industry as well as new many new faces.  While I could go on at some length about the information presented at the conference, here are a few points that I thought were valuable:

1. Capital Efficiency is Key.  As Alan Patricof noted in the keynote, which was echoed by several of the presenters, the trend of ever increasing VC funds is not sustainable.  Oversized funds investing $20-50MM in companies will become the exception rather than the trend.  The current economic environment will force VCs to focus on targeting their investments and using more discipline.  That could be good news for early stage companies.  I will note that not all of the VCs on the panels agreed that funds are too large.  Some argued that they invest their funds in different ways, or have founded new efforts like Dogpatch Labs or Start@Spark to bring seed capital to startups, but nonetheless did agree that the market is applying new pressures on VCs.
2. Will This Bring New Relief to the Funding Gap? The effect of this pressure on VCs in relation to angel investors was touched upon at the conference, but will likely be looked at in more detail as the market develops.  As VC funds increased in size over the past few years and angel investors increasingly formed angel groups to invest larger amounts, a capital gap increased for early stage companies struggling to locate seed funding.  If VCs retreat to smaller funds, angel groups may have to do the same, which may alleviate the situation and provide much needed seed capital to entrepreneurs.
3. Entrepreneurs Need to Focus on the Problem.  More discipline in the VC market means that entrepreneurs will need to be ready.  As Rich Wong of Accel Partners noted, it is not enough to pitch the next best thing as a solution - VCs need more than just a cool app.  To paraphrase, "entrepreneurs need to spend more time on articulating the problem rather than just pitching the solution".  If you are not focused on solving a problem, your solution will come up short.  True.
4. Mobile Hardware Doesn't Matter.  An interesting discussion about the future of mobile devices showed that in the greater scheme of things, mobile hardware design is not the future - unless of course it solves a new problem.  Humphrey Chen of Verizon noted that it has 66 mobile devices in its catalog, each of which is pretty similar in functionality in relation to its competitors.  But that means there are 66 different ways for which developers have to design solutions.  That is not sustainable.  As mobile communications develop and people begin to move more services into the cloud, your mobile device will not matter as much.  It is the software that will drive innovation.  But even there, where apps are currently selling for an average price of $2.78, innovation is needed to propel the industry forward.  John Backus of New Atlantic Ventures noted that the current "chaos in the mobile market is a great fertile opportunity for entrepreneurs".
5. Be Bold, Fail Fast.  ChaCha CEO Scott Jones presented important tips for entrepreneurs to remember: you have to be bold in your vision and be sure to fail fast.  Don't be afraid to try new things.  If they don't work, stop doing them.  But also be willing to come back to them later - maybe it was the timing that wasn't right.  The key is that entrepreneurs need to be focused on solving problems and taking risks to provide the right solutions.
6. Oh, and Hubspot can really throw a party.  Thanks Brian and Dharmesh!

What do you think?  Is venture capital working for entrepreneurs?  Can something new provide a better solution?

Do Franchisee Associations Have the Power to Block Franchisor Actions? Cheap Burgers Hang in the Balance.

Interesting situation flaring up with the flame broiled king.  Burger King franchisees are revolting against the franchisor with a lawsuit over the company's new promotion to sell $1.00 double cheeseburgers.  This situation raises a few issues and provides a glimpse into how a large franchise organization operates. First, the legal issue in the suit is whether Burger King has a right to force its franchisees to sell double cheeseburgers at $1.00.  Franchisors must be cognizant of anti-trust laws which exist to prevent companies from using their size and power and collusion to set artificial prices - aka "price fixing" - in an effort to restrain trade.  This includes an absolute bar against setting minimum prices, but allows franchisors a bit of latitude in setting maximum prices for products.  The Supreme Court requires these pricing mechanisms to be evaluated with a "rule of reason" test, and only prevents those schemes that unreasonably restrain trade.  (Is it reasonable to sell double cheeseburgers at $1.00? I can't get the image of the kid in Fast Food Nation out of my head: "there's a reason they only cost 99 cents".) This effectively gives franchisors the right to set promotional pricing as Burger King has done here.

But even if it is legal for franchisors to set promotional pricing, is it good for the system?  In large franchise systems, franchisees often form associations - independent organizations designed to allow collective action - to work with the franchisor on a number of issues relevant to the franchisees.  Here the National Franchisee Association of BK franchisees is pushing back against the franchisor on the pricing promotion:

While costs vary by location, the $1 double cheeseburger typically costs franchisees at least $1.10, said Dan Fitzpatrick, a Burger King franchisee from South Bend, Ind. who is a spokesman for the association. That includes about 55 cents for the cost of the meat, bun, cheese and toppings. The remainder typically covers expenses such as rent, royalties and worker wages.

After testing the $1 deal in markets across the country, the discounted burger went on sale nationwide last month even though franchise owners, who operate 90 percent of the company's 12,000 locations, twice rejected the product because of its expense. (emphasis added)

First of all, 55 cents for all of the ingredients in a double cheeseburger?  Yup.  Secondly, the franchisees are simply arguing that they don't want to lose money with every double cheeseburger sold.  However the courts come down on whether the lawsuit has any merit, the bottom line is that the franchisees just want more say in what the chain requires of them, and are using this collective action by the franchisee association to get it.

We'll have to watch and see whether BK will respect the wishes of its franchisees to "have it their way", but this episode at least provides a good example of the what can happen when a franchisor goes against the wishes of its franchisees.  In the mean time, enjoy your cheap burgers.

What do you think?  Is BK being unreasonable to its franchisees?

When Does Your License Become a Franchise and What Can You Do About It?

In response to my earlier post about franchising as a business model came the following:  "but my business is not a franchise, it is just a licensing arrangement where I use distributors to sell my product".  This is where bells start ringing, red flags are raised, and whatever other metaphorical warnings you like pop up. Many successful businesses license the right to use software, technology, a trademark or name, copyrighted information, or other intellectual property to other businesses or individuals.  However, when it becomes tied to a business model or you use dealers, distributors, or other licensees to sell your product, you face an increased risk of liability.  Here's why.

That three-pronged franchise test is definitional, not chosen - once you meet each of the three criteria, you are deemed a franchise under federal law and under certain state laws.  That automatically subjects the company to an entire scheme of regulatory requirements for which there are penalties for failing to comply (ignorance of your status is not a defense).  Here's a common example:  a business (1) contracts with distributors to sell products using its trademark to create a brand awareness, (2) takes payments from the distributor in the form of a fee or royalties, and (3) exerts control over where the the distributor located and how it operates its business and sells the product.  That business just became a franchise regardless of what it calls its arrangement.

Can you Avoid Being a Franchise?

So what can companies do to grow their businesses while avoiding the cost and expense of the franchise regulations?  Some companies will try to contract around the franchise laws.  Since the test is a definitional one, you can eliminate one of the criteria to remove yourself from the franchise model.  Some will complain (WARNING: more metaphors ahead) that lawyers - particularly franchise lawyers - see everything through franchise-colored glasses, or that when holding a franchise hammer, everything looks like a nail.  But there are practical steps that you can take to reduce the risk of falling into the franchise scheme.  For example:

1. Remove the trademark.  If you don't license a trademark and allow your distributors to sell product with your assistance but without using your name, you might be able to avoid the franchise regulatory scheme.  However, you still have to be mindful of the related business opportunity laws that play a similar but more flexible role.  These are often associated with the vending machine business and similar systems of product placement, but can be triggered in elsewhere.
2. Don't charge a fee.  Eliminating the fee is not as easy as it sounds because most licenses include some form of payment.  Not charging an upfront fee is not enough here; the fee component can be satisfied by a variety of payments made to your business in the first six months, including royalties and the like.
3. Don't exert control or provide assistance.  Licensors can often maintain their contracted relationships, even with the use of a trademark and payment of a fee, if they do not control how the distributors operate.  The licensor is always able to control, for example, how a trademark is utilized.  Control over the use and image associated with a mark is important not only from a business branding perspective but also from a legal perspective in that trademark owners have a responsibility to control its use.  So a license agreement can impose quality control standards over use of the mark, such as submitting products bearing the mark for testing and monitoring or inspections.  But there is a hazy line across which a licensor steps into the franchise world.  The more that quality control extends to the business operations of the licensee, the closer it comes to franchising.

Do You Need to Avoid Being a Franchise? (or, can't I learn to embrace the system?)

As I mentioned before, franchising can be a very successful business model and is responsible for a sizable percentage of this country's economy.  The vast majority of the people in the United States (if not everyone) has purchased products or services at some point from a franchised business.  But creating and maintaining a franchise system is an expensive and time consuming endeavor.  I always tell business owners who are thinking of franchising that starting a franchise system is not an extension of their business, it is a new business that requires a full-time effort.

Franchise regulation is a creature of consumer protection.  The excesses and fraud of franchise schemes in the early to mid-20th century led the FTC to enact regulations in the late 1970s that treat franchises like the sale of securities.  Each franchisor is required to provide a detailed disclosure document called the Federal Disclosure Document (NOTE: until 2007, this document was called the Uniform Franchise Offering Circular or UFOC) which provides prospective franchisees with information about the system and the people involved in it to make an educated decision on purchasing the franchise rights.  I will save the details of the FDD and the other requirements for a subsequent post, but very generally speaking, you are looking at spending somewhere between $20,000 and $50,000 in legal costs for the first year alone to meet your regulatory obligations.

Risks of Noncompliance

The risk of failing to register a deemed franchise does not necessarily come from government.  While the federal government can enforce through the FTC Rule and some states have specific powers to penalize through their own state laws, the real risk of liability comes when your distributors become dissatisfied for whatever reason and decide to sue you for selling illegal franchises.  You could be subject to fines and other penalties (in addition to exorbitant legal fees and court costs), including offering rescission to each of your licensees.  So businesses that try to take the relatively inexpensive route of trying to contract around franchise laws may end up spending much more money in the end.

So what is the moral of this story?  Licensing can be an effective method for rapidly building your brand awareness and product sales.  However, exercise caution before you jump in and consult a qualified attorney who can counsel you on the specifics of your model to help you avoid major headaches and costs down the road.