Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!
Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!

Franchise Marketing Fund Disclosure: A Cold Stone Creamery Case Study

Cold Stone marketing fund disclosure

An integral component of many (if not most) larger franchised systems is the franchisor-administered system-wide advertising fund. Typically, franchisees pay a percentage of their weekly or monthly revenues into the fund, and the franchisor—either alone or with input from franchisees—spends the contributions on marketing to build awareness and the reputation of the brand. In some systems, the franchisor commits to deposit additional monies into the fund, such as a portion of vendor rebates.

This sounds well and good, except that the franchisor generally does not have to answer to franchisees on its decisions on system-wide advertising, and most franchise agreements state that individual franchisees are not guaranteed to see any benefits whatsoever from the expenditures of the marketing fund. This is why I always counsel prospective franchisees to speak with existing franchise owners in their geographic area to find out whether and to what extent they are seeing benefits from the marketing fees they pay.

Still, or perhaps as a result, franchisor-franchisee disputes over marketing fund expenditures are relatively rare in comparison to other issues that tend to manifest in unhealthy franchise relationships. When they do arise, they typically do so in connection with the franchisor’s one primary real obligation relating to the fund (in most systems): the obligation to disclosure records of fund expenditures to franchisees.

Indeed, this is one of the primary issues underlying a Cold Stone Creamery franchisee association’s recent lawsuit against the ice cream chain’s franchisor. In the lawsuit, the franchisee association claims that the Cold Stone franchisor, Kahala Corp., has improperly failed to disclose data relating to what percentage of vendor rebates it allocates to its “Flexible Marketing Program.” If the franchisor has been retaining funds that are contractually required to be earmarked for system-wide marketing campaigns, this, the franchisees claim, causes them harm and diminishes the value of their association with the Cold Stone empire.

In the Cold Stone case, the franchisees are also seeking information relating the pricing of the supplies on which the franchisor is receiving the vendor rebates. If it turns out that the prices that vendors charge franchisees are artificially inflated in order to allow for payment of these “kickbacks” to the franchisor, then the franchisees no doubt will assert additional claims in their lawsuit against Kahala. Such claims may include fraud for inadequate or misleading disclosures in the Cold Stone FDD (if in fact information was withheld – at this point, we don’t know who is right or wrong).

The Cold Stone case will be an important one to watch for franchisees and franchisors alike. If the franchisees are able to sustain their lawsuit, I wouldn’t be surprised to see similar suits filed against other franchise systems as well.

Jeff Fabian is a franchise and trademark lawyer who represents both franchisors and franchisees. He can be reached at 866.545.7859. You can also follow Jeff on Twitter@jsfabian.

This article is provided for informational purposes only, and does not constitute legal advice.

Feel Good Fashion: Apricot Lane

“I know the opportunity to give back will be the most rewarding aspect of this job,” said Barnes, who runs the shop with her daughter, Ashley Herrin. “ We really look forward to getting involved in the community and making a positive difference.”

The Three Things You Need to Succeed With a Diet Franchise

With even the smallest bit of cursory research, you will quickly find that the difficulty does not lie in finding a product to offer, but rather in picking amongst the legion of products, services, ideas, and opportunities with which you are presented. Pick the right one, and you will be well on your way to financial success while at the same time gaining the satisfaction of knowing that you are making a positive impact in people's lives. However, it can seem that for every legitimate possibility, there are three times as many so-called "franchise opportunities" that are not only fraudulent, they border on the ridiculous.

Dickey’s Barbecue Pit Expands into Mississippi Delta

(Greenville, MS) Dickey’s Barbecue Pit announces expansion into the Mississippi Delta. The three new locations will be the first in the Mississippi Delta. The first store will be located in Greenville, and will open by the end of 2016. The additional locations will open in Cleveland and Greenwood, with timeline to be determined.