Franchise Marketing Fund Disclosure: A Cold Stone Creamery Case Study
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.
Interview with SailTime: NetJets-Style Fractional Sailing and Boating
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GRANITE TRANSFORMATIONS ANNOUNCES FRANCHISE OPPORTUNITIES IN THE RAPIDLY EXPANDING HOME REMODELING SPACE
MIAMI, FL (March 10, 2016) – Granite Transformations, a global full-service residential and commercial remodeling franchise known for their revolutionary, proprietary resurfacing process, is pleased to announce that franchise opportunities are now available throughout North America. With more than 20 years of franchising experience, the company offers a unique and thriving business model that has made its presence known in eight countries on four continents across the globe, with more than 150 franchise locations worldwide, including 74 North American locations.The home improvement business has seen continued growth and success over the past several years, and with a moderate entry-level investment, the opportunity proves to be an enticing venture for prospective franchise owners with a significant potential for profit and future growth.The Granite Transformations story is a rich, centuries-old Italian heritage turned global entrepreneurial dream. The company presents time-challenged and quality-conscious homeowners a premium surface design solution without the demolition hassle of traditional kitchen and bath remodeling. Using an exclusive selection of the highest-quality granite, recycled glass and quartz counter tops and mosaic tiles – all offering a lifetime warranty – its "over-the-top"installation process virtually eliminates the need for demolition, shortening a project timeline and easing the stress and mess of typical home renovations. The product’s versatility allows for a wide range of uses and brings added value and growth potential, appealing to both homeowners and commercial businesses alike looking to renovate or build new.“Granite Transformations offers one of the most dynamic and fulfilling franchise opportunities in the rapidly expanding home remodeling space,” says Andrea Di Giuseppe, International Chief Executive Officer. “Customers are looking to spend wisely and make a smart investment – they want the most attractive, quality, sustainable product, which is exactly what we offer coupled with the fastest install process available to immediately increase home value.”With renovations continually on the rise, franchise owners enjoy minimal risk and consistent demand no matter the state of the economy. Homeowners are choosing to renovate the key areas of their homes – kitchens and bathrooms– rather than build or buy new, and their recognition of the value of this important, long-term investment is an undeniable owner benefit.Di Giuseppe continues, “From the very beginning, Granite Transformations has stayed true to its artistic tradition,respect for natural resources and commitment to innovation, and the company is committed to the continuing expansion, growth and success of our franchise system.”