December 2006

Upward Trend: Franchising is on the Rise

As a glance through many business publications or a drive through suburbia reveals, more and more businesses are turning to franchising as a means to expand their successful and unique brands and concepts.  A recent report from the International Franchise Association and the franchising research firm FRANdata states that over 500 new franchised concepts were established in 2005.  FRANdata has identified 95 new concepts established during the first quarter of 2006, as compare to the establishment of 427 new franchised concepts in 2003 and 2004 combined!  As a result of this dramatic increase, franchised businesses now produce $1.5 trillion in output and provide 14% of private sector employment opportunities.

Not surprisingly, the greatest growth being experienced in the retail food sector, as the number of retail food systems increased by two-thirds from 2003 to 2005.  In addition, building and construction, child-related (including day care and after-school activities), maintenance services, real estate, retail, home service businesses (such as handyman services), and sports and recreation industries all saw greater than one-third growth in number of systems during this time.  Business services (such as personnel placement and accounting), education, printing, and full-service restaurants also saw significant growth.

With this increase in the variety of franchises for entrepreneurs to consider, the number of franchised units is also growing rapidly.  This growth is attributable to both the introduction of new concepts and established franchises expanding at an increased pace.  While the dramatic increase in new concepts has led to a higher proportion of franchised systems with relatively small numbers of outlets, still one-third of all systems have more than 100 units, and nearly half have 50 or more units.  The building and construction, child-related, and service business sectors each saw the greatest growth with more than a 25% increase in the number of total franchised units from 2003 to 2005.

            Business owners who are preparing to franchise their concepts should seek the advice of an experienced and concerned attorney who understands the business, legal and regulatory issues that must be addressed prior to franchising.  Experienced franchisors need a seasoned transactional attorney who can maintain up-to-date franchising documents and appropriate state franchise registrations.

Did You Know?  Recent Developments in Maryland Law

Liquidated Damages Clauses/Post-Employment Noncompetition Agreements

Willard Packaging Co. v. Javier, Maryland Court of Special Appeals, June 1, 2006

Javier and other employees of Willard Packaging Co. were required to sign non-competition covenants as a condition of their employment.  The covenant stipulated that, for one year after leaving Willard, the employee could not work for a competing business within a 75-mile radius of Willard’s main office.  It also provided that an employee’s breach of the covenant would entitle Willard to $50,000 in liquidated damages.

The Maryland Court of Special Appeals affirmed a lower court decision invalidating the $50,000 liquidated damages clause. The court based its decision on the rule that a liquidated damages provision must reasonably approximate the injured party’s anticipated damages.  The court was not convinced that the employer considered the amount of damages that might flow from a breach in crafting the non-competition agreement.  Accordingly, the court awarded $1 as nominal damages.

To be enforceable, a liquidated damages clause in a franchise agreement or employment contract must be based on a reasonable calculation of expected damages which are likely to be difficult to measure if an actual breach occurs.