UK: Social Media In Franchise Networks: Reducing The Risks And Reaping The Rewards

Introduction

There are now over 1 billion members of Facebook and internet enabled devices are tipped to outnumber the global population this year. The relatively recent explosion in the use of mobile technology, tablets and increased access to the internet has disrupted the traditional one-way marketing approach of "control, command and influence" and lengthened the buying cycle of consumers. Brand owners now need to engage in a genuine two-way conversation with their target customer by finding, following, engaging, creating relevant content and building trust with their target online customer – all in the name of ultimately making a sale.

Social media is a powerful tool for any business, but there are a number of legal risks which can arise if it is misused and social media has the potential to create more harm than good for a brand.

For businesses which use third party structures such as franchising, there is an additional layer of risk and opportunity. Franchisors therefore need to develop a clear online strategy and look to harness the resources of their employees and franchisees to drive brand participation, awareness and sales, whilst at the same time retaining ultimate ownership over the brand, its presentation and the key brand messages.

What are the key commercial opportunities and legal risks?

Some of the key commercial opportunities include:

• the ability to reach a wider audience and engage with a new generation of customers;
• learning what customers want and expect;
• establishing the brand as a thought leader in its field of expertise; and
• using social media as a recruitment tool for franchisees and also as a platform to develop online manuals and share best practice within a franchise network.

The key legal risks include:

• the misuse of the brand online which can lead to reputational damage;
• engaging with consumers and user generated content can create liability for website operators in respect of defamation, infringement of third party intellectual property rights and breaches of advertising codes of conduct and regulations;
• relationship theft and potential breaches of confidentiality and data protection; and
• an increased risk of misrepresentation where franchise sales and franchisee recruitment is being conducted online.

Can and should franchisors prohibit their franchisees from participating in social media?

Outright bans on "passive selling" are not permitted under European Competition law and franchise agreements which include these types of "hard core" restrictions put the franchisor at risk of substantial fines and/or having their entire agreements rendered void and unenforceable. Operating a website is deemed to be passive selling but the European Commission's (EC) guidelines are unclear where the use of social media sits with this definition, and in particular social media on third party platforms.

It is arguable that a franchisor can prohibit this type of activity within the EU, but even if that is true now, the general direction of competition law suggests it will not hold true for much longer. In time, the EC may deal with social media and other forms of online marketing and bring them expressly within the meaning of "passive selling".

Outside of the European Union, subject to the local laws of the territory in which the franchisee operates, it may or may not be possible to prohibit a franchisee's participation in online activities.

However, whilst this may be legally possible in some jurisdictions, from a commercial point of view, is prohibition really in the interests of a franchisor's target consumer who expects a seamless and consistent brand experience, regardless of where they are in the world and whether the interaction is with the franchisor itself or one of its franchisees?

The answer to that question is invariably "no". One of the strengths of franchising is the ability for a brand owner to tap into a franchisee's capital resources and their knowledge of the local market (and local language and culture, in respect of international franchising). If this is true for a bricks and mortar business, then as technology increasingly integrates the digital and the physical world, it is logical that franchisees should also play a role in the online activities, such as e-commerce and social media.

Identifying the Potential Sources for Misuse and Managing the Risk

There are, broadly speaking, four potential sources of misuse and they all need to be managed differently:

Employees' personal use of social media

A few years ago, two employees of a well-known pizza chain posted obscene video-clips of themselves on YouTube "experimenting" with novel and unhygienic pizza toppings. The YouTube clip received over 1 million hits and was an international news story overnight and caused significant brand damage.

Whilst it is impossible to prevent employees from doing stupid things, it does nevertheless highlight the importance of ensuring that you have appropriate guidelines and training for an employee's use of social media within the workplace. These guidelines should ensure that:

• the personal use of social media does not make any reference to the company for whom they work and this would include the use of the company name in Twitter handles for example or Facebook account names;
• it is clear what is acceptable and not acceptable behaviour; and
• employers have a right to monitor employees' use of social media.

An effective social media policy and social media guidelines have been used successfully as a defence against unfair dismissal. However, it is important to note that dismissing an employee for breaching these guidelines must be proportionate to the harm done.

Employees' business use of social media

The issues of ownership and use of social media accounts (and access to their followers) have been widely debated, but little judicial guidance exists. However, the courts have confirmed that LinkedIn contacts can constitute confidential information belonging to an employer.

In the US, a widely reported dispute (which was settled before trial) involving the mobile phone company Phone Dog, its ex-employee Noah Kravitz and Twitter raised interesting questions regarding the extent to which a list of followers can be deemed either to be a trade secret, particularly as it is an open list, or to have any monetary value.

Franchisors should consider approaching the ownership of social accounts in the same way as they do with trade marks and domain names. The main social media platforms grant non-exclusive and non-transferable licences to the account holder and are reluctant to be drawn into disputes over account ownership. If the ownership of the account is with an employee or franchisee, it can be very difficult for a franchisor to take back ownership of that account once its relationship with the employee or franchisee comes to an end and the franchisee or employee is unwilling to transfer the account to the franchisor.

There have also been a number of reported instances of employees inadvertently disclosing confidential information via social media, breaching Data Protection and Privacy regulations or failing to respond appropriately to online reviews and posts about the brand and its products and/or services.

A further area which is particularly relevant to franchise networks which use social media as a recruitment tool for new franchisees is the risk of misrepresentation. As with all marketing collateral, it is important that any and all financial statements and projections can be substantiated, are based on clear assumptions and are accompanied with appropriate disclaimers. These principles should underpin any training which is given regarding "real time" conversations with prospects.

Franchisors should develop a business-use policy which clearly sets out:

• the roles and objectives of the relevant employee;
• who registers for and own accounts and has access to administration rights for social media accounts;
• a damage limitation policy and procedure to enable the franchisor to respond quickly and effectively to events unfolding online;
• clear "rules of engagement" for members of the sales team who might engage in "real time" conversations with potential franchisees; and
• special terms in employment contracts, particularly in relation to confidentiality and non-competition for key individuals who are entrusted with the development of the social media policy.

Consumers

"User generated content" typically means comments, video, audio clips and pictures which are posted by consumers as they engage with the brand online either on social media pages on the franchisor's or franchisee's own website or on third party platforms such as Twitter, Instagram or Facebook.

In respect of corporate websites, there is a risk of criminal and civil liability for the website operator in relation to the infringement of intellectual property rights, defamation and the breach of applicable advertising codes.

Previously, website operators ran a high risk for assuming legal liability for defamatory content which they actively moderated. The Defamation Act 2013 has improved this position for website operators and provides a new defence; website operators can use the defence where the author of the defamatory material is identifiable and the website operator responds to the complaint in accordance with the new statutory process.

Therefore, on corporately run websites it is essential that franchisors and franchisees have an acceptable user policy and also a legally compliant process for handling complaints and removing infringing content.

If franchisors wish to use user generated content as a means of marketing and promoting their products and services, it is important that they effectively obtain appropriate waivers of moral rights and consent to use such material. Franchisors in the UK should also be aware that use of this "adopted" content in online promotional campaigns (as well as any promotional content it generates itself) is subject to the rules and regulations of the Committee of Advertising Practice. US law takes a similar approach. Two large franchisors – Subway and Quiznos – became embroiled in a legal dispute relating to a comparative advertising campaign initiated by Quiznos, which encouraged customers to list reasons why Quiznos was better than Subway, but Subway contested that the posts included a number of defamatory statements which were detrimental to its brand.

Finally, in relation to third party platforms such as Facebook, franchisors need to be aware that these platforms have their own specific rules and regulations on legal liability and promotional campaigns.

Franchisees

Generally speaking, it is important to ensure that a franchisee is regulated by the franchisor in the same way as the franchisor regulates the personal and business use of social media by its employees.

Business-Use Policies and Personal-Use Guidelines should be adapted where appropriate for a franchisee to use in their own business and in respect of its employees.

There should be clear policies, procedures, processes and training in relation to the operation and presentation of social media pages which are not directly controlled by the franchisor, including which platforms are authorised and how social media campaigns are run in conjunction with the franchisee's business.

The Franchise Agreement should refer to the "social media policy", which should capture these processes and procedures and sit within the manual as an evolving policy which can be adapted from time to time to take account of changes in technology and consumer preferences. Franchise Agreements are typically out of date on this crucial area of marketing compliance.

Traditionally, the frame of reference in franchise agreements only extends to the franchisee's ability to operate a website. Franchisors should consider expressly drawing in the use of social media and ensure that the references to social media tie in with the obligations on confidentiality, contributions towards marketing funds, general marketing obligations, the rights of termination and the consequences of termination of the franchise agreement.

Social Media/Advertising Agencies

A franchisor may lack time and/or resources to implement its social media strategy, and so appoints an agency to act on its behalf.

One of the key risks in this approach is the loss of control over the brand message and presentation and also whether or not the agency really understands the business, has sufficient expertise of that industry sector and is aware of the legal rules and regulations.

From a legal point of view, there is also the issue of who assumes liability for content clearance of advertising and promotional campaigns and who is liable for the fall out of a campaign which back fires. A case in point was Hyundai's use of an agency in the US to promote its latest range of cars, which did so in part by paying bloggers to write favourable reviews – a direct breach of FTC regulations on misleading practices.

Conclusion

Franchisors and their key stakeholders should develop a social media strategy which is appropriate for their business. The strategic thinking should include identifying the key commercial and legal risks and reducing and managing those risks through effective policies, procedures and training.

Below are some final tips to help franchisors reap the rewards and minimise the risks of using social media:

• special terms in employment contracts, particularly in relation to confidentiality and non-competition for key individuals who are entrusted with the development of the social media policy.
• policies and procedures will not eliminate the risks, but they will help manage them;
• policies should be dictated by practice, not vice versa;
• educate, monitor and train employees and franchisees;
• ensure that policies and procedures link into employment contracts and the Franchise Agreement;
• if third party agencies are engaged to run social media activities, check the position on liability, assess experience and monitor performance;
• consider the approach to user generated content;
• consider special terms for key players in the social media strategy; and
• take legal advice if there is any doubt about what to do!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.