By Michael Seid, Managing Director, MSA Worldwide
One of the more routine and easily understood issues for franchisors and franchisees has always been the question of encroachment. How close can or should a franchisor space its locations from one another?
There is another type of encroachment, dealing with a different “turf” battle in franchising. What, if any, boundaries are there for the services lawyers and consultants provide to their clients?
- Can lawyers provide their clients with business advice?
- Can consultants provide clients with legal counseling?
Lenny Vines, a partner in the law firm of Greensfelder, Hemker & Gale in St. Louis and I presented a paper, “The Respective Roles of the Franchise Consultant and the Franchise Lawyer in Structuring the Franchise System,” at the ABA Forum a few years ago. Some of the material included in this article is extracted from the paper the two of us wrote.
The Law and Business – Two Sides of the Same Coin
Every business requires a structure that blends business strategies and practices with legal requirements. An understanding of the balance required between beneficial business practices and acceptable legal risk is what often separates successful enterprises from those that fail.
In the real world, most franchise lawyers routinely provide business advice to their clients as part of their practices. Experienced lawyers routinely deal with a host of business issues, and based on that experience many have the requisite skills to give their clients competent advice on complex business issues.
Similarly, knowledge of franchise laws is essential for franchise consultants in assisting their clients in structuring and managing their franchise systems. Depending on their experience, some consultants may actually have more knowledge in certain aspects of “franchise law” than some lawyers do.
Clearly consultants are not licensed to practice law, and the question becomes how far can they go before they cross the line into the “unauthorized practice of law”? For lawyers, the question is: Does the absence of a required license to “practice business” create a safe harbor when they provide business advice? The answer for both professions may not be as clear as either would desire.
The Unauthorized Practice of Law
In a law review article by Ann MacNaughton and Gary Munneke, Special Section: Unauthorized Practice of Law: An In-Depth Look at the Issue, the authors opined:
“Beyond a professional monopoly to represent others in court, there is little consensus about what work, if any, should fall exclusively within the purview of lawyers. This lack of clarity makes it virtually impossible to define what constitutes the practice of law.”
The Federal Trade Commission and the Department of Justice, in their comments to the “Model Definition for the Practice of Law” proposed, but never adopted, by the American Bar Association in 2003 stated:
“… the ‘commonly understood’ test defines the practice of law as composed of activities that lawyers have traditionally performed. There are a number of exceptions to this test, such as permitting nonlawyers to perform activities usually performed by lawyers if those activities are incidental to the profession or business of the nonlawyers. Another exception to the ‘commonly understood’ test allows lay people to provide services that are commonly understood to be the practice of law as long as those services do not involve the difficult or complex questions of law.”
This question is how far is too far in providing legal advice for nonlawyers? While there doesn’t appear to be any bright line test, it’s clear that drafting legal documents for clients or representing clients in court or before regulators is the domain of lawyers. It’s important for consultants to recognize that while their knowledge of franchise laws may be extensive, lawyers use their education and experience to filter those laws through the body of other laws and cases.
One example of blurring the lines between consultants and lawyers is packaging firms. For example, Francorp is a franchise packaging firm that includes in its business services the preparation of various legal documents including franchise agreements, offering circulars, licensing agreements, and state registration documents which it advises its clients to review with their outside lawyers. In a lawsuit titled Francorp, Inc. v Siebert, the court examined Francorp’s practices regarding the drafting of legal documents for its clients. As there were facts in dispute, the court refused to grant summary judgment against Francorp, and the case settled before the court could issue its opinion. However, the court determined that:
“No matter how knowledgeable the lay person, or how inexperienced the lawyer, however, Illinois has rendered its judgment that certain tasks are to be performed only by licensed attorneys directly engaged by the client.”
The court noted that the type of services provided by Francorp were those typically provided by lawyers to their clients, and made it clear that an in-house attorney can only perform legal services for their employer and not for his or her employer’s clients. While the court did not opine on the issue of Francorp’s “unauthorized practice of law,” it is clear that providing the types of “legal services” provided by Francorp and other franchise packagers is likely the type of practice which is ill-advised to be provided by non-lawyers.
The role of the consultant, then, is to provide services such as feasibility examinations, strategic planning, development of the terms of the franchise offering, franchise sales and compliance, and earnings claims, even though they are based on the consultant’s understanding of the law would be considered “legal advice.”
The Unauthorized Practice of Business
Consultants, who are Certified Public Accountants or members of other professional organizations, are required to meet certain professional standards. However, other consultants, including those who have been awarded the Certified Franchise Executive (CFE) designation issued by the International Franchise Association Educational Foundation, may not have such mandated professional standards
While there may not be any licensing requirements for the “practice of business,” this does not alleviate lawyers from the burden of standards and requirements in their practice with clients.
- One of the significant privileges that lawyers have, which may not be available to consultants, relates to the confidentiality of discussions they have with their clients. However, attorneys may risk the loss of the work product doctrine and attorney/client privilege if the underlying purpose of the engagement includes business rather than legal advice.
- Many licensed outside consultants and business advisors practice their craft to their profession’s professional rigor. However, lawyers may find that their malpractice insurance does not extend to professional negligence when their business-related services are not provided to that same professional rigor. While malpractice policies vary, lawyers should review their policies to determine their coverage for non-legal services and the requirements for coverage when they provide business-related advisory services.
- Attorneys are obligated to recognize their limitations when providing services that may be outside their area of expertise. Model Rule 2.1 states: “Matters that go beyond strictly legal questions may also be in the domain of another profession… Where consultation with a professional in another field is itself something a competent lawyer would recommend, the lawyer should make such a recommendation. At the same time, a lawyer’s advice at its best often consists of recommending a course of action in the face of conflicting recommendations of experts.”
Where does this debate leave us? For lawyers and consultants, the lesson to be understood is that each needs to respect the other’s discipline when working for the client’s benefit. Competent franchise consultants and competent franchise lawyers provide the experience and balance that franchisors need today to be successful. Besides, the one thing franchising doesn’t need is more encroachment issues.
For new franchisors, the lesson is that using a franchise packaging firm for the development of their franchise system may not be in their best interest, either in the short term or the long term. Franchising is too complex to allow your concept to be developed based upon some preconceived formula. Selecting independent business and legal specialists enables you to work with some of the top professionals in franchising and, generally, the costs of their combined services will be less than settling for a one-stop-shop.
Do you have further questions about encroachment in franchising?
MSA can provide expert guidance on developing a successful and sustainable franchise system.