News Briefs

South Africa Moves to Codify Franchising Rules

South Africa soon may adopt national standards for franchising, if a proposed Consumer Protection Bill is finalized and signed into law. The country's parliament has passed the bill, and it would become effective 18 months after signature by South Africa President Kgalema Motlanthe.

“The bill codifies many franchise practices that have been advocated by the Franchise Association of South Africa since the early 1990s and expands on existing provisions of South Africa's Competition Act, 1998,” said Kendal Tyre, attorney, Nixon Peabody LLP (Washington, DC). Tyre identified these key aspects of the bill:

Franchisees are “consumers.” Franchisees are defined as “consumers” in the bill, thus entitling them to consumer rights. These include equality, privacy, choice, disclosure, fair and responsible marketing, honest dealing, fair agreements, fair value, good quality, safety, and supplier accountability.

Franchise agreements are defined. The new definition conforms to franchise definitions in other countries by emphasizing a franchisor's grant to a franchisee of a right to use trademarks, advertising schemes, and business systems. A franchisee may cancel a franchise agreement without cost within 10 business days after signing the franchise agreement by giving notice to the franchisor.

Right to disclosures. Franchisors will be required to make disclosures to franchisees prior to the signing of contracts; the actual disclosure requirements will be determined by the South Africa Department of Trade and Industry (“DTI”) if the legislation is passed. “Providing franchisees with the right to disclosure was a driving force behind the inclusion of franchisees in the bill because DTI found that many franchisees had been devastated financially after investing their life savings into a franchise that was sold to them on the premise that it would be far more profitable than it ever actually would be,” said Tyre.

Tying of products. “Currently, franchisees in South Africa have limited protection against unfair practices by franchisors under that country's Competition Act, particularly in relation to the tying or bundling of unrelated products by a dominant franchisor or when it comes to exclusive dealing,” said Tyre. The proposed law would restrict franchisors by extending protections to franchisees under the Competition Act even when the franchisor does not have a dominant market share. The proposed law would prohibit bundling or tying of products by a franchisor, unless the franchisor can show either that the bundling results in economic benefits for consumers, or that the convenience of bundling outweighs any restriction on consumer choice.

Tyre added that the bundling and tying rules could affect franchisors that have been accustomed to being the sole supplier of goods and services to franchisees. These arrangements will likely be disallowed, he said, “unless it can be shown that the products and services are 'reasonably related' to the brand.” Obviously, however, the definition of “reasonably related” has yet to be tested in court.

“In other words, the bill suggests that franchise agreements provide for core and non-core products. Core products or services would be the primary, unique products related to the brand,” Tyre said.

Class Action Against Melt Franchising Dismissed

A class action lawsuit filed by seven franchisees against Melt Franchising, a gelato franchise system, was dismissed by the Los Angeles County Superior Court in March (Gold, et al. v. Melt Franchising, LLC, et al., Los Angeles County Superior Court Case No. BC377783). The franchisees alleged fraudulent sales of franchises and violations of state franchise statutes.

The franchisor challenged the class action on the basis of a waiver in the franchise agreements that precluded a class claim and argued that the claims lacked the unity necessary to support a class action, according to a media statement from Mulcahy Reeves LLP, which represented Melt Franchising. The dismissal was given with leave to amend, and Melt was awarded costs in the amount of $6,130. The franchisees have filed an appeal.

Legislative Update: MD Passes Retail Price Maintenance Law

Maryland's legislature passed a new retail price maintenance law, The Maryland Antitrust Act: Establishment of Minimum Sale Price for Products or Services ' Prohibited. The law was signed by Gov. Martin O'Malley on April 14, and it is in effect.

The law prohibits trademark licensors, manufacturers, and resellers from setting price minimums for resale of products. As such, it is likely that a franchisor's ability to set minimum prices will be limited by the law. Analysts say that it will deflect the impact of the 2007 U.S. Supreme Court decision Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

Litigation Update: L.A. Tan Lawsuit Settled

In March 2009, franchisor L.A. Tan settled a lawsuit filed by two female customers last year who alleged that they were spied upon in a franchisee's tanning rooms in Orland Park, IL, in 2006 (see FBLA, February 2008). The amount of the financial settlement is confidential, and it was paid by the franchisor's insurance company.

Although the settlement only includes compensation for the women, the attorney who brought the suit on behalf of the plaintiffs, Steven M. Dicker, Dicker and Dicker (Chicago), added that “we hope that L.A. Tan will inspect their rooms more carefully and screen their customers and staff more diligently.”

South Africa Moves to Codify Franchising Rules

South Africa soon may adopt national standards for franchising, if a proposed Consumer Protection Bill is finalized and signed into law. The country's parliament has passed the bill, and it would become effective 18 months after signature by South Africa President Kgalema Motlanthe.

“The bill codifies many franchise practices that have been advocated by the Franchise Association of South Africa since the early 1990s and expands on existing provisions of South Africa's Competition Act, 1998,” said Kendal Tyre, attorney, Nixon Peabody LLP (Washington, DC). Tyre identified these key aspects of the bill:

Franchisees are “consumers.” Franchisees are defined as “consumers” in the bill, thus entitling them to consumer rights. These include equality, privacy, choice, disclosure, fair and responsible marketing, honest dealing, fair agreements, fair value, good quality, safety, and supplier accountability.

Franchise agreements are defined. The new definition conforms to franchise definitions in other countries by emphasizing a franchisor's grant to a franchisee of a right to use trademarks, advertising schemes, and business systems. A franchisee may cancel a franchise agreement without cost within 10 business days after signing the franchise agreement by giving notice to the franchisor.

Right to disclosures. Franchisors will be required to make disclosures to franchisees prior to the signing of contracts; the actual disclosure requirements will be determined by the South Africa Department of Trade and Industry (“DTI”) if the legislation is passed. “Providing franchisees with the right to disclosure was a driving force behind the inclusion of franchisees in the bill because DTI found that many franchisees had been devastated financially after investing their life savings into a franchise that was sold to them on the premise that it would be far more profitable than it ever actually would be,” said Tyre.

Tying of products. “Currently, franchisees in South Africa have limited protection against unfair practices by franchisors under that country's Competition Act, particularly in relation to the tying or bundling of unrelated products by a dominant franchisor or when it comes to exclusive dealing,” said Tyre. The proposed law would restrict franchisors by extending protections to franchisees under the Competition Act even when the franchisor does not have a dominant market share. The proposed law would prohibit bundling or tying of products by a franchisor, unless the franchisor can show either that the bundling results in economic benefits for consumers, or that the convenience of bundling outweighs any restriction on consumer choice.

Tyre added that the bundling and tying rules could affect franchisors that have been accustomed to being the sole supplier of goods and services to franchisees. These arrangements will likely be disallowed, he said, “unless it can be shown that the products and services are 'reasonably related' to the brand.” Obviously, however, the definition of “reasonably related” has yet to be tested in court.

“In other words, the bill suggests that franchise agreements provide for core and non-core products. Core products or services would be the primary, unique products related to the brand,” Tyre said.

Class Action Against Melt Franchising Dismissed

A class action lawsuit filed by seven franchisees against Melt Franchising, a gelato franchise system, was dismissed by the Los Angeles County Superior Court in March (Gold, et al. v. Melt Franchising, LLC, et al., Los Angeles County Superior Court Case No. BC377783). The franchisees alleged fraudulent sales of franchises and violations of state franchise statutes.

The franchisor challenged the class action on the basis of a waiver in the franchise agreements that precluded a class claim and argued that the claims lacked the unity necessary to support a class action, according to a media statement from Mulcahy Reeves LLP, which represented Melt Franchising. The dismissal was given with leave to amend, and Melt was awarded costs in the amount of $6,130. The franchisees have filed an appeal.

Legislative Update: MD Passes Retail Price Maintenance Law

Maryland's legislature passed a new retail price maintenance law, The Maryland Antitrust Act: Establishment of Minimum Sale Price for Products or Services ' Prohibited. The law was signed by Gov. Martin O'Malley on April 14, and it is in effect.

The law prohibits trademark licensors, manufacturers, and resellers from setting price minimums for resale of products. As such, it is likely that a franchisor's ability to set minimum prices will be limited by the law. Analysts say that it will deflect the impact of the 2007 U.S. Supreme Court decision Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

Litigation Update: L.A. Tan Lawsuit Settled

In March 2009, franchisor L.A. Tan settled a lawsuit filed by two female customers last year who alleged that they were spied upon in a franchisee's tanning rooms in Orland Park, IL, in 2006 (see FBLA, February 2008). The amount of the financial settlement is confidential, and it was paid by the franchisor's insurance company.

Although the settlement only includes compensation for the women, the attorney who brought the suit on behalf of the plaintiffs, Steven M. Dicker, Dicker and Dicker (Chicago), added that “we hope that L.A. Tan will inspect their rooms more carefully and screen their customers and staff more diligently.”