The Sharing Economy. What General and M&A Counsel Need to Know About Intellectual Property Franchises:
Is HomeAway's Property Rental Subscription Agreement a "Franchise?"
(Copyright 2016 by David Laufer, CEO, Laufer Specialty I-Risk LLC; DavidLaufer@Lsirllc.com
The Sharing Economy(SE) is based on using third party assets and labor to deliver products and services to consumers from an Internet Platform. HomeAway integrates real property and labor to create a new business opportunity (BO) that it sells to owners of the properties listed on its websites. The HomeAway Subscription Agreement (SA) requires BOs to use its trademarks, proprietary marketing, advertising systems and payment systems to list their rental property on its websites. The BOs pay a fee to HomeAway. Expedia bought the HomeAway Group for $3.9 Billion.
California's Franchise Law, Cal. Corp. Sec. 31000 et seq., defines when a business agreement is a "franchise." References to HomeAway's, "Terms and Conditions" ("Terms") also apply to its "VRBO" owned trademarks and websites. The Terms discussed are dated February 9, 2016.
A "franchise is a contract by which: "(1) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; (2) The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logo type, advertising or other commercial symbol designating the franchisor or its affiliate; and (3) The franchisee is required to pay, directly or indirectly, a franchise fee." Cal. Corp. § 31005(a).
HomeAway grants to BOs the right to list property for rent on HomeAway's proprietary websites, to use its trademarks, marketing, advertising and payments systems.
User is granted a limited, revocable, non-exclusive license to access the Site and the content ... solely for the purpose of advertising a vacation or short term rental property... all in accordance with the Terms. Terms, Para. 2.
The HomeAway name and logo and those of the HomeAway Group [VRBO] and other affiliates are registered trademarks in the United States and other jurisdiction around the world. Terms, Para. 27.
In Kim v. Servosnax Inc. (1982) 10 Cal.App.4th 1346, 1348, the court said: "We observe that ... a specific grant of authority to use [franchisor's] name would be conclusive on the 'substantially association' issue..." (emphasis added).
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HomeAway prescribes a marketing plan or system in substantial part and control its use.
We reserve the right to decline to permit the posting on this Site or to remove from the Site any user contributed content that fails to meet our Content Guidelines ... Finally, we re serve the right ...to edit a member's content... (Terms, Para. 8).
A "franchisee fee" is "any fee or charge that a franchisee is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including but not limited to any payment for goods or services. Cal. Corp. §31011.
In Thueson v. U-Haul International, Inc. (2006) 144 Cal.App.4th 664, 673, the Court said: "for a business relationship to legally be a 'franchise' a 'franchise fee' of more than $100 must have been paid for the franchise rights."
HomeAway subscription fees determine the level of ranking of property listings on its websites.
Yearly subscription fees for 2015-2016 are:
"Classic" - $399/yr
"Bronze" - $499/yr
"Silver" - $699/yr
"Gold" - $899/yr
"Platinum" - $1,249/yr
"Just about any payment can be interpreted as satisfying the 'fee’ element, regardless of whether the parties call it something else in their agreements. You don't want to find yourself in court or in front of the [Department of Business Oversight, formerly the Department of Corporations] arguing that a payment is not a fee - it is a losing argument." Kurtz and Clements, "What Every Lawyer Should Know About Franchise Law," http://acbbnanews.wordpress.com/2013/03/28/franchise-law-mcle/p2.
The SE-BO model creates economic, legal and social policy questions in the states in which they operate. The cases pending against Uber and Lyft focus on when a "contractor" is an "employee" under Federal and State Labor laws. However, just as important to the success of SE-BO model, are compliance issues arising under the Federal and State Franchise laws. General Counsel must advise management of compliance risks, potential class actions, SEC disclosure issues and to buy insurance to protect against class actions and potential liability for the acts of its BOs.
People v. Gonda (1982)
138 Cal App. 3rd 774; 188 Cal.Rptr. 295 (Criminal prosecution and discussion of "willful" violation of Franchise Laws)
Cal. Corp. Code Section 31512 ( Franchisee can't waive compliance with franchise law).
Release 3F from the California Commission of Corporations, reprinted at Bus. Franchise Guide (CCH Para. 5050.45 (June 22, 1996).
* David Laufer is the founder and CEO of Laufer Specialty I-Risk LLC. He consults with businesses and professionals on M&A due diligence and purchasing new insurance coverage for the regulatory and litigation risks arising out of the new business models created and used in the Sharing Economy. He taught Franchise Law at Loyola Law School in Los Angles and has published many articles on legal risks and the need for appropriate insurance coverage. For over 40 years, he litigated cases involving: franchise terminations, sale of franchises below cost, consumer and labor class actions, regulatory enforcement actions, false advertising claims, insurance recovery, Prop 65 defense and M&A due diligence disputes. He served as Vice President and General Counsel of a public health products company in charge of all regulatory compliance. He is a licensed to practice law in California and as a P&C Insurance Broker.
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