International Franchise Association Franchise Law Virtual Summit August 12-13, 2020

CRISIS MANAGEMENT IN THE ERA OF FAKE NEWS

Bethany Appleby Appleby & Corcoran, LLC New Haven, Connecticut

John B. Gessner Fox Rothschild LLP Dallas, Texas

Kathryn M. Kotel Smoothie King Franchises, Inc. Dallas, Texas

Sarah A. Walters DLA Piper LLP Dallas, Texas

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Table of Contents

Page

I. Introduction and Examples of PR Crises in Recent Years ...... 1

II. Can Your Company Weather the Storm? ...... 4

A. Development of a Crisis Response Plan...... 6

i. The Crisis Response Team ...... 6

ii. Formulating a Crisis Response Plan ...... 7

iii. Crisis Communication Strategies ...... 8

iv. Controlling Communications from Franchisees and Personnel ...... 9

v. Crisis Response Training and Mock Crisis Response Trials ...... 10

B. Considerations for Involving Franchisees ...... 10

III. When Crisis Happens – Run Into the Flames...... 11

A. Crisis Management Plan Execution and Parallel Paths to Resolution ..... 11

B. Stabilize Stakeholders – Owners, Franchisees and Customers ...... 13

C. Resolve Central Technical and Operational Challenges ...... 14

D. Repair the Root Causes ...... 14

E. Repair the Organization ...... 15

IV. Navigating the Aftermath ...... 15

A. Regulatory Actions and Administrative Proceedings ...... 16

B. Litigation ...... 16

i. Consumer Claims ...... 16

ii. Third Party Claims Against Franchisees ...... 17

iii. Franchisee Claims ...... 17

iv. Indemnity Obligations and Termination ...... 17

v. Special Litigation Considerations ...... 18

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Page

C. Alternative Dispute Resolution ...... 18

i. Negotiation and Mediation ...... 18

ii. Arbitration ...... 18

V. Conclusion ...... 18

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CRISIS MANAGEMENT IN THE ERA OF FAKE NEWS

I. Introduction and Examples of PR Crises in Recent Years

The general counsel of a company answers her phone to learn from her CEO that customers from one of their restaurants are reporting foodborne illnesses and have been posting on their social media accounts about the illness related to the restaurant. Or the general counsel learns that store employees refused service to a Black customer and called the police to have him arrested, and other customers videoed the entire incident and are now posting it on social media. And just like that, the company finds itself in the middle of a crisis. If the company is a franchisor, an added layer of complexity is present. The incident could have occurred in a franchised outlet. Perhaps more importantly, the potential adverse impact to the brand could cause damage to all of the franchisees. How does a franchisor react to the crisis to prevent damage to its brand? This is of even greater importance today when a crisis can be created on social media in only a few minutes and often before the company learns all of the facts of the actual incident. This paper will address actions that franchisors should take to prepare for the inevitable crisis.

A good definition of a crisis that can impact an organization is:

“any global, regional, or local natural or human-caused event or business interruption that runs the risk of escalating in intensity; adversely impacting the (organization’s) financial position; causing harm to people or damage to property or the environment; falling under close media or government scrutiny; interfering with normal operations and wasting significant management time and/or financial resources; adversely affecting employee morale; or jeopardizing the (organization’s) reputation, products, or officers, and therefore negatively impacting its future.”1

In the past, if an incident occurred at a single location, the franchisor had time to investigate the incident and determine its severity and overall impact to the brand before the incident became known to the public. Moreover, in the sometimes seemingly bygone days of in-depth and responsible journalism, the news outlet might have reached out to the franchisor for comment before publication. In recent years, this timing has been greatly reduced by social media and individuals’ ability to record the incident and immediately post it. In many instances, this may be how the franchisor learns of the incident. After investigation, the franchisor may learn that the overall incident has been resolved with the customer or employee. However, privacy concerns for the customer or employee or the franchisor’s desire to slow the spread of the story by not responding on social media may ultimately keep the story alive as individuals continue to voice their opinions about the brand on social media or elsewhere without having all of the facts (or, often, inaccurate facts). As discussed in Section II below, the role of social media as a news source has changed the way companies have developed their crisis management plans, as crisis incidents now may go beyond requiring just a legal response and may be

1 Ass’n of Corp. Couns., Crisis Management and the Role of In-House Lawyers: Company Leading Practices, June 2011, p.8, citing to American University Emergency Management and Continuity of Operations Plan, p. 8.

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more focused on the social media and other public relations impact to the brand. This has created the need for more focus on the reputational risk associated with a crisis incident than ever before.

Large, well-known brands have had their share of public relations crises growing out of actual incidents of various types over the last several years. While the incidents were in-and-of themselves cause for serious concern to each company, their impact as a result of the associated news stories and social media posts turned them into a potential reputational, brand damaging, crises.

From 2015 to 2018, Chipotle experienced at least 1,100 cases of foodborne illness in customers.2 While in April 2020 Chipotle settled federal criminal charges brought against it for serving tainted food to customers by agreeing to pay a $25 million fine3, the reputational damage to the brand may take years to recover.

In 2018, a Starbucks employee at a store in Philadelphia had two Black men arrested for trespassing when the men were present in the store but had not yet purchased any product.4 This episode quickly grew to a national incident with significant brand damage to Starbucks as a result of the news stories and social media posts about racism among its personnel. Shortly after that, Starbucks announced it would close 8,000 stores on the same day to conduct racial bias training in an attempt to prevent this type of behavior across its system in the future.5 Starbucks again faced scrutiny in June 2020 in response to its policy restricting employees from wearing Black Lives Matter pins and face masks.6 The social media backlash was immediate and widespread, prompting Starbucks to reverse its policy days later.7

Also in 2018, Papa John’s experienced its own crisis when its CEO and founder used racist language on a conference call.8 This was disclosed to the public, presumably by someone on the call, and word spread through social media and ultimately the national news. This came on top of comments the CEO made voicing his criticism of the NFL’s

2 U.S. Department of Justice, “Chipotle Mexican Grill Agrees to Pay $25 Million Fine to Resolve Charges Stemming from More than 1,100 Cases of Foodborne Illness,” U.S. Food & Drug Administration, (Apr. 21, 2020), https://www.fda.gov/inspections-compliance-enforcement-and-criminal-investigations/press- releases/chipotle-mexican-grill-agrees-pay-25-million-fine-resolve-charges-stemming-more-1100-cases- foodborne. 3 Id. 4 Matt Stevens, “Starbucks C.E.O. Apologizes After Arrests of 2 Black Men,” The New York Times (Apr. 15, 2018), https://www.nytimes.com/2018/04/15/us/starbucks-philadelphia-black-men-arrest.html. 5 Shep Hyken, “Starbucks Gets an A in Crisis Management,” Forbes (May 10, 2018), https://www.forbes.com/sites/shephyken/2018/05/10/starbucks-gets-an-a-in-crisis- management/#26daf7187998. 6 Jordan Valinsky, “Starbucks reverses its stance and will now let baristas wear ‘Black Lives Matter’ apparel,” CNN Business (Jun 12, 2020), https://www.cnn.com/2020/06/12/business/starbucks-black-lives- matter/index.html. 7 Id. 8 Noah Kirsch, “Papa John’s Founder Used N-Word on Conference Call,” Forbes (Jul. 11, 2018), https://www.forbes.com/sites/noahkirsch/2018/07/11/papa-johns-founder-john-schnatter-allegedly-used-n- word-on-conference-call/#14ab8c9e4cfc.

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handling of players kneeling through the national anthem.9 The CEO and founder resigned as chairman of the board under pressure from Papa’s John’s Franchise Advisory Council, and its stock was negatively impacted by the former CEO’s actions and the public’s reaction to them.10

Today, all companies face issues associated with the COVID pandemic, as well as the actions being taken in response to treatment of Black Americans by police in certain communities. With issues like government-directed shut downs of business operations and concerns about employee and customer safety, further complicated by arguments surrounding an individual’s right to refuse to comply with government- mandated requirements like masks and curfews, the ongoing management of a business during this COVID crisis created a unique challenge for many companies with or without conventional crisis management plans. As the COVID crisis continues, related issues have created reputational risk for companies, including franchisors. Should the franchisor force a franchisee to open for business if the government allows them to be open, even if the franchisee is concerned about the virus or, as is occurring across many businesses, the franchisee cannot get employees to return to work either as a result of ongoing concern for their own health or because they are making more money weekly on unemployment than they would make working? Should the franchisor require all employees at all locations, including franchised locations, to wear masks, even if not required by law? What will the franchisor do if a franchisee refuses to force its employees to wear masks, even if the franchisor has changed its uniform policy to require masks? What personal protective equipment (PPE) should the franchisor require each location have to protect customers or franchisees’ employees? Can the franchisor require each franchisee to spend money on putting up plastic shields at ordering and payment stations? Look at the social media for any franchised brand and you will see numerous complaints about locations where customers did not feel safe due to a lack of masks in the location, or conversely, where customers with personal opinions against masks cheer for a location that did not require masks or demonize one that did. How does the franchisor respond to these while protecting the brand for all franchisees? Hopefully, all franchisors are working closely with their public relations companies and thoughtfully crafting responses without rushing to respond to each post.

In addition to all of the COVID related issues companies face today, they also find themselves dealing with issues related to the recent actions against Black men and women by police, including whether to publicly support Black Lives Matter and dealing with protests occurring around some of their locations. Franchisors will likely want to give their franchisees advice about how to deal with protests occurring near their units so that franchisees act consistently throughout the system and do not act inconsistently with the brand’s position. However, this means that the franchisor must have a position on supporting the Black Lives Matter movement or supporting racial equality in general. The franchisor may also decide not to take a position, which could have its own reputational

9 Id. 10 Id.; see also Sarah Whitten, “Papa John’s founder John Schatter apologizes for using the N-word on conference call,” CNBC (Jul. 11, 2018), https://www.cnbc.com/2018/07/11/papa-johns-shares-crater-after- report-that-founder-used-a-n-word.html.

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consequences. This issue requires frank and ongoing communications between the franchisor and its franchisees. It goes beyond the stance the franchisor takes, extending into the actions it allows in its locations. In what is likely to be the first of many class- action cases, employees of Whole Foods recently filed a class-action lawsuit against Whole Foods, alleging race discrimination and retaliation under Title VII of the Civil Rights Act of 1964 as a result of Whole Foods’ enforcement of its uniform policy prohibiting any slogans or other messages, including Black Lives Matter on masks worn by employees while working.11 If employers permit employees to wear Black Lives Matter masks or pins, what about a White Lives Matter or Blue Lives Matter mask or pin? Can an employee wear a confederate flag belt buckle? While franchisors may attempt to work through these questions by relying on their uniform policy, what happens when a franchisee’s employee starts posting on social media about not being allowed to wear a particular item to work? Brands are being pulled into these issues as a result of social media posts that create unanticipated and unasked-for reputational crises, often with little or no time to consider an appropriate response.

All of these matters raise unique issues within a franchised system. In their franchise agreements, franchisors typically reserve the right to control a crisis within the system, even at a single franchisee’s location, so that the franchisor can protect the brand and all other franchisees. This includes all statements to the media and all social media posts. But can the franchisor require the franchisee’s employees to stop posting about the matter? Does the franchisor’s requirement that all employees in all locations, including franchised locations, wear masks and other protective gear cross the joint employer line? Does the franchisor cross that line when it prohibits pins or t-shirts or other expressions of support for Black Lives Matter by franchisee’s employees? Or provides guidance to franchisees about what to do when one of the franchisee’s employees tests positive for COVID? These issues are new and evolving, and the authors cannot provide definitive answers to many of these questions. We raise them for our readers to consider when counseling their own clients. As we discuss more traditional responses to a crisis and the development of a crisis management plan below, we encourage our readers to consider these new issues as they assist their clients in developing or amending their crisis management plans.

II. Can Your Company Weather the Storm?

According to the Institute for Crisis Management, “smoldering crises” (or, crises that emerge slowly) occur more frequently than sudden crises at a rate of approximately 3:1, yet smoldering crises continue to account for the majority of new stories related to crises.12 Thus, mismanagement of, and poor preparation for, crises continues to account for the majority of crises facing companies today. Navigating a crisis to mitigate damage to the brand requires preparation: a crisis management plan supported by the franchisees that has been tested and continues to evolve with the brand. A preliminary

11 Frith, et al. v. Whole Foods Market, Inc., No. 1:20-cv-11358 (D.Mass. filed 7/20/20). See also https://www.cnn.com/2020/07/27/opinions/no-constitutional-right-to-wear-a-black-lives-matter-mask-at- work-callan/index.html (last visited 7/29/20) 12 Institute of Crisis Management, “ICM Annual Crisis Report” (May 2020), https://crisisconsultant.com/wp- content/uploads/2020/05/ICM-Annual-Crisis-Report-for-2019.Issued-May.4.2020-1.pdf.

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step in developing a crisis management plan is conducting a risk assessment to identify vulnerabilities in the company.13 Certain risks – foodborne illness and contamination in systems with food and beverage offerings, data breaches and cybersecurity threats – are familiar vulnerabilities for which most franchisors have established recall procedures14 or data breach response plans, with the lessons of Chipotle’s foodborne illness crisis and Wyndham’s data breach crisis still front of mind.15

But, as we have seen with crises borne from social media uprisings and economic boycotts like those that recently plagued Chick-fil-A, Papa John’s and Starbucks in response to public statements by their executives or internal policies related to sensitive human rights issues, identifying vulnerabilities in a company requires an assessment of operational vulnerabilities in addition to the cultural vulnerabilities of the brand’s position in a rapidly evolving and politically polarized environment.16 And, months into a global pandemic that has left companies across industries struggling to recover from unprecedented revenue losses and has resulted in widespread increases in unemployment and decreases in consumer confidence, the environment is ripe for crisis. The tension is evident in the impassioned responses on both sides of issues ranging from mandated social distancing and mask requirements to protests regarding police activity, race relations, and treatment of protestors. As discussed in Section I above, while many companies previously remained silent on politically charged issues to avoid offending consumers on one side of the line or the other, the rising influence of social media no longer affords companies the luxury of standing on the sidelines of such issues, and companies that refrain from choosing a side will be defined by the side social media perceives them to have chosen. In what is perhaps the most ironic example of a company’s silence on political issues giving rise to a brand crisis, Facebook suffered the loss of millions in revenue in a period of three days when 800 companies worldwide, including Coca-Cola, Unilever and Ford, pulled advertising support in connection with a boycott demanding that Facebook take a stand against hate speech on its social media platform.17

13 See Leslie Curran, et al., Crisis and Reputation Management: Shaping Standards of Behavior and Implementing Response Plans, 36th A.B.A. Annual Forum on Franchising (2013) and Michael Fox et al., Strategic Crisis Management for Today’s Franchise Systems – Planning Ahead to Mitigate Risk and Minimize Adverse Consequences to the Brand When Crisis Hits, 48th Annual International Franchise Association Legal Symposium (2015). 14 See Fox, supra note 13, at 11-12. 15 See David Yaffe-Bellany, “Chipotle, With Food-Safety Issues Behind It, Recovers Strongly,” The New York Times (Jul. 23, 2019), https://www.nytimes.com/2019/07/23/business/chipotle-stock-earnings.html (describing the four-year recovery period of Chipotle following the E. coli and norovirus outbreaks beginning in 2015); Timothy Cornell, “Wyndham – A Case Study in Cybersecurity: How the cost of a relatively small breach can rival that of a major hack,” Corporate Counsel Business Journal (Mar. 19, 2015), https://ccbjournal.com/articles/wyndham---case-study-cybersecurity-how-cost-relatively-small-breach-can- rival-major-h). 16 Daniel J. Oates, Franchisor Political Speech: The Disclosure Question, 34 FRANCHISE L.J. 4, at 558-559 (2015); Heather Murphy, “Starbucks Will Allow Employees to Wear Black Lives Matter Apparel,” The New York Times(Jul. 12, 2020), https://www.nytimes.com/2020/06/12/business/starbucks-blm-ban-reversed.html. 17 Nancy Scola, “Inside the Ad Boycott that has Facebook on the Defensive,” Politico (Jul. 3, 2020), https://www.politico.com/news/magazine/2020/07/03/activists-advertising-boycott-facebook-348528.

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Accordingly, an assessment of potential risks in the company should include, in addition to surface-level vulnerabilities like supply chain disruption, foodborne illness and contaminants, weather catastrophes and data breaches, a deeper dive into the brand’s position on social and cultural issues meaningful to its consumers, franchisees and stakeholders. This analysis may include soliciting feedback from consumers, franchisees and stakeholders, in addition to third party resources including PR consultants and brand strategists.

Once vulnerabilities are identified, franchisors may consider classifying them based on the anticipated risk of damage to brand reputation to facilitate development of a multi-tiered crisis response plan.18 And, as the unpredictable journey of the spread of COVID and varying governmental responses to containment have taught us, while this preliminary analysis is useful in formulating a crisis management plan that is tailored to the franchise system, it is not feasible to identify all vulnerabilities that may give rise to a crisis within the system. In addition to a franchisor-established crisis response plan, franchisors may consider maintaining relationships with PR consultants familiar with the brand to support quick responses in the face of an unexpected crisis that the crisis management plan cannot address. Finally, the use of artificial intelligence (AI) to identify warning signs of vulnerabilities developing within a company is gaining widespread adoption as a tool to minimize or prevent a crisis. AI is being utilized as a web listening tool in addition to a predictive analytics tool to identify potential vulnerabilities before they occur and to simulate a real crisis to enhance training of crisis response teams.19

A. Development of a Crisis Response Plan

To be effective, a crisis response plan should include, not only the steps that the franchisor and the franchisees will take to protect the brand in the event of a crisis, but also the protocols related to communication to the media and the public. And, in the era of “fake news” where false information consistently spreads faster than true information, the crisis response plan must be supported by a robust social media policy to minimize the dissemination of fake news.20 A recent MIT study found that fake news consistently reaches a broader audience and travels deeper into social networks than real news.21 So, while the components of a strong crisis response plan remain the same, the variable factor in the effectiveness of a crisis response plan in protecting a company’s brand reputation is driven by the speed at which the company is able to control the narrative about the crisis.

i. The Crisis Response Team

The first step in establishing a crisis response plan is identifying the crisis response team that will implement the plan. The crisis response team is often comprised of

18 See Currant, supra note 5, at 16. 19 Deloitte Touche Tohmatsu Limited, “A Crisis of Confidence,” (2016), at www.deloitte.com/acrisisofconfidence. 20 Soroush Vosoughi et al., “The spread of true and false news online,” Science (2018) https://science.sciencemag.org/content/359/6380/1146. 21 Id.

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representation from the franchisor and franchisees and may also include third party consultants (e.g., PR consultants, brand strategists, media representatives, social media consultant and insurance advisors). Where a crisis response plan is comprised of a multi- tiered approach, the crisis response team may consist of a primary team that directs the strategy of the response and a secondary team to carry out the implementation of the strategy.22

ii. Formulating a Crisis Response Plan

While a franchisor may have a single crisis response strategy, the crisis response “plan” is often comprised of crisis-specific plans to address vulnerabilities in the system, including plans to address system-wide crises (e.g., data breach, food recall) and location-based crises like the infamously viral video posted by two employees of a North Carolina Domino’s violating a pizza or the toxic tea incident at a Utah Dickey’s Barbecue Pit restaurant.23 Many franchisors maintain a manual of crisis response policies containing checklists and instructions applicable to each crisis, including emergency preparedness response checklists in the event of a natural disaster, instructions for withdrawal of a recalled food or beverage item, and steps to mitigate leaking of consumer data in the event of a data breach.

The crisis response strategy typically is directed by executive leadership of the franchisor (often with the help of outside consultants and in certain cases with input from franchise advisory councils). This primary response team is responsible for communicating the brand’s position regarding the crisis to the media and the public. In an era where communications to the public must be made in 280 characters or less and are distributed worldwide in seconds, the importance of getting it right the first time cannot be overstated. Companies are advised to be proactive, transparent and accountable in their crisis response communications and ensure they issue such communications immediately so they can control the narrative. Regardless of how quickly communications are issued, companies should prepare for a social media backlash and respond with humility. Responses like “we are looking into it” and “we are gathering the facts” do little to quell a surge on social media, particularly where the issue is culturally sensitive. In response to nationwide protests as part of the Black Lives Matter movement following the death of George Floyd, Starbucks issued public statements via its Twitter account and other social media channels in support of the movement but internally issued directives to employees restricting wearing face masks and pins bearing “Black Lives Matter” while on duty at Starbucks stores, citing the potential for amplifying divisiveness.24 However, Starbucks reversed its policy days later amid social media backlash and widespread boycotts, issuing a statement that it “continues to listen to [employees] about how they want to take a stand for justice” and supplying Black Lives Matter shirts to baristas.25

22 See Currant, supra note 13 at 16-17. 23 Stephanie Clifford, “Video Prank at Domino’s Taints Brand,” The New York Times (Apr. 15, 2009), https://www.nytimes.com/2009/04/16/business/media/16dominos.html. 24 See Murphy, supra note 16. 25 Id.

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Where a crisis occurs at a single franchised location (for example, a location damaged due to a hurricane), a franchisor may elect to implement the response through the franchisee to build relationships between the franchisee’s location and the local community in the disaster response efforts. To facilitate unit-level execution of crisis response plans, the plans should identify clear warning signs of a crisis, include detailed steps for implementing response plans and provide for post-crisis reporting and debriefing to the franchisor. Critical to the effectiveness of unit-level execution of plans is training of all parties responsible for plan execution and mock crisis response exercises to confirm response readiness, as described further below.26

In addition to establishing system-wide and localized crisis response plans to address specific crises, companies should develop guidelines for crisis response that may be adapted by the company and franchisees to address those crises that are unpredictable and for which no specific crisis plan exists (i.e., a global pandemic and months-long quarantine). Such guidelines should provide for flexibility to create a crisis response plan that addresses location-specific issues (e.g., executive orders requiring or permitting a modified service offering like restricting restaurants to take-out and delivery but allowing restaurants to sell meal kits and grocery items) but reserve control of communications related to brand messaging and position with the company.

While the immediate response to a crisis is critical to the success of a company’s crisis response strategy, equally critical is the company continuing to communicate with key stakeholders regarding resolution of the crisis to demonstrate that it has been resolved and regain trust that changes have been implemented to minimize the impact of a similar crisis in the future.

iii. Crisis Communication Strategies

To counteract the impact of fake news and shape the narrative regarding the company’s response to a crisis, the company may also utilize various online and social media tools, including the following:

a) Digital News Sources – Companies have access to a host of online national, regional and local sources through which to disseminate messages in response to a crisis, including The New York Times, Huffington Post, Politico, CNN, Fox News, the Wall Street Journal, and Reuters in addition to regional NBC, ABC and CBS channels.

b) Social Media – social media “influencers” have reached celebrity status on applications like Instagram, Twitter, Tik Tok and YouTube, commanding audiences of thousands (and in some cases millions) of followers. Companies may deliver

26 For a thorough discussion of training and mock trials of crisis response plans, see Curran, supra note 13, at 11-15.

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crisis response communications to key stakeholders through its influencer relationships.

c) Search Engine Optimization Strategy – if a company has a search engine optimization strategy in place as part of its crisis response plan, it can be a powerful tool in controlling the narrative related to the crisis, ensuring the company’s message online remains consistent and manage authority on the search engine results page.

d) Utilize Online Tools to Manage Conversations and Publications About the Crisis – a company’s crisis response strategy should also include tools that monitor social media mentions of the company, buffering tools that allow the company to manage (or “pause”) social media conversations, communication tools that allow the company to communicate with primary and secondary crisis response team members in real-time (switching from direct one-on-one communications to group communications seamlessly and without the inefficiencies of communicating via email), dark websites that can be turned on in the event of a crisis to disseminate information and directions to crisis response teams and the operating outlets in the system and canned response tools to facilitate responding to inquiries from stakeholders (which often are repetitive in nature but critical to respond to expeditiously).

iv. Controlling Communications from Franchisees and Personnel

While a franchisor may have some latitude in restricting franchisee and employee communications related to the activities of and issues relating to the company, an absolute bar on communications is impermissible.27 Franchisors should include contractual provisions in the franchise agreement requiring franchisees to adhere to policies related to crisis management and guidelines for responding to the same.28 Franchisors commonly restrict franchisee and employee communications about the company on social media platforms through social media policies incorporated into the company’s brand standards and operating manuals and confidentiality and non- disclosure agreements. Social media policies may restrict communications of a franchisee on a social media page bearing the franchisor’s trademarks or branding but a franchisor is limited as to the restrictions it may impose on a franchisee or employees related to their respective personal social media pages.29 Franchisors are prohibited from restricting certain franchisee communications related to the franchise system and should

27 See Kevin Batik and Jamie Edwards, Controlling the Personal Habits of Franchisees Within and Outside the Franchise Environment, 32 FRANCHISE L.J. 1 (2012). 28See Currant, supra note 13, at 24-28. 29 See Batik, supra note 27, at 20-22.

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be careful in crafting social media policies to avoid running afoul of such prohibitions.30 In addition, while employee comments that are merely gripes about the company may not be protected, the NLRB has construed overly-broad restrictions against an employee’s online communications involving “the company, management and/or co-workers” as unlawful on the grounds that the restrictions violate the employee’s right to protected concerted activity under the National Labor Relations Act.31

In addition to restricting franchisee and employee communications, a franchisor should include in its agreements with suppliers and vendors policies related to the franchisor’s crisis response strategy, particularly as it relates to recalls and withdrawals of products and disclosures related to the same to media and consumers. Finally, a franchisor should be mindful of responses filed in connection with legal proceedings related to a crisis that may be inconsistent with the franchisor’s messaging to key stakeholders regarding the brand’s position.32 For example, in recent lawsuits accusing hotel chains of turning a blind eye to sex trafficking taking place at its hotel establishments, hotel chains have found themselves caught between asserting defenses against any liability and appearing insensitive to egregious exploitation of women in the midst of the #MeToo movement aimed at exposing gender bias against women.33

v. Crisis Response Training and Mock Crisis Response Trials

Notwithstanding the above limitations on a franchisor’s right to control franchisee and employee communications, a franchisor may nonetheless encourage cooperation in strategic crisis response communications directed by the franchisor by implementing processes that promote compliance with the response strategy. For example, franchisors may distribute checklists or wallet cards that describe in simple terms what an employee should do when a crisis occurs, including the appropriate person(s) to identify and the relevant contact information and examples of events that should be considered a crisis so that the employee knows when to take action.34 In addition, franchisee training should include a crisis response module, including familiarization with crisis response strategies and plans, instructions for communicating with the media, customers and via online channels regarding the crisis, and post-crisis reporting and information-gathering requirements. To assess crisis response readiness, a franchisor should conduct mock crisis response tests with its company-owned and franchised outlets and include as part of its quality assurance evaluations of franchisees metrics confirming that franchisees have trained their employees on crisis response plans.

B. Considerations for Involving Franchisees

When a “standard” crisis occurs in a franchise system – for example, a food or product recall, the franchisor and franchisee are generally aligned in the appropriate response to the crisis. But, in recent years, crises impacting brands have been driven by

30 Id. 31 Id. 32 Hilton, Marriott and Wyndham sex trafficking suits. 33 Id. 34 See Curran, supra note 13, at 8.

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consumer activism and boycotts, particularly in the United States where politics has played an increasing role in anti-brand activism.35 Franchisors should consider the impact of such consumer activism and the potential for system-wide boycotts when formulating its position in response to social issues, particularly where those issues are politically or culturally divisive. Consider the impact to SoulCycle of one of its owners hosting a fundraiser to support Donald Trump’s campaign efforts, which led to calls by high-profile celebrities to boycott the system, citing the fundraiser as SoulCycle signaling its support of “Trump’s position on issues of climate change, gun violence and healthcare.”36 At the same time, companies remain silent on politically and culturally sensitive issues, as previously discussed related to recent social media backlash against Facebook regarding its inaction against hate speech. Accordingly, franchisors should devote careful consideration to the public position it takes with respect to such issues and the potential impact to the brand and its franchisees. This consideration should take a key position as franchisors navigate their responses to COVID, as issues such as mandated mask requirements are already driving social and political responses in various regions of the country. As crisis management plans are developed or adapted to address vulnerabilities within the system related to COVID, franchisors should consider consulting franchise advisory councils and third party public relations consultants in formulating their crisis response plans and take the opportunity to ensure that personnel and franchisees are trained in those crisis response plans.

III. When Crisis Happens – Run Into the Flames.

As the old saying goes, “When the going gets tough, the tough get going.”37 Different personality types react differently in times of crisis and urgency. Some can maintain or increase focus and set aside the “noise” of crisis. Others become paralyzed and unable to make rational or speedy decisions. The latter type should probably avoid vocations with frequent crises. However, all personality types can help improve their confidence and effectiveness in crisis or emergency situations by developing a pre-crisis “playbook” to follow when lightning strikes, as discussed in Section II above. Post-crisis root cause analyses and “lessons learned” process improvements will also pay dividends in the future.

A. Crisis Management Plan Execution and Parallel Paths to Resolution

Having an existing written Crisis Management Plan, as discussed in Section II above, should prevent any glaring omissions and free up participants’ mental energy to deal with the crisis at hand, rather than developing processes and procedures under extreme pressure. The Plan should also include the full names, titles, and contact information for individuals who should be involved or notified under various circumstances. Of course, depending on the type of crisis, different individuals and different departments (or geographic offices) may need to be involved.

35 Crisis Management Institute, supra note 12. 36 James Hamblin, “People Actually Quit Soul Cycle,” The Atlantic (Sept. 6, 2019), https://www.theatlantic.com/health/archive/2019/09/soulcycle-boycott/597478/. 37 Attributed to Joseph P. Kennedy.

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There should generally be one person who is the point person or project manager in times of crisis. This individual will serve as “quarterback,” making sure that the Plan is followed and that all involved are fulfilling their obligations under the Plan. This quarterback should have a clearly identified backup to cover when they are unavailable because of travel, illness, or any other reason. Having a point person reduces stress and confusion among team members and also cuts down on unnecessary and potentially competing communications.

Having a clearly designated quarterback also serves a very important psychological function. There is a famous case study that has been taught for decades in first year psychology classes that led to identification of what has come to be known as the “bystander effect.” That effect can occur in times of crisis and can prevent effective action.

The bystander effect became a subject of significant interest following the brutal murder of American woman Kitty Genovese in 1964. Genovese, returning home late from work, was viciously attacked and sexually assaulted by a man with a knife while walking home to her apartment complex from a nearby parking lot. As reported in The New York Times two weeks later, for over half an hour, thirty-eight (38) respectable, law-abiding people heard or saw the man attack her three separate times. The voices and lights from bystanders in nearby apartments interrupted the killer and frightened him off twice, but each time he returned and stabbed her again. None of the thirty-eight (38) witnesses called the police during the attack, and only one bystander contacted authorities after Kitty Genovese died.38

Although some of the reported facts of the incident have since been questioned or debunked, the case shed light on a recognized phenomenon that individuals tend to assume that others are acting or taking responsibility for the situation (“diffusion of responsibility”), or simply take their social cues from others and, if no one else is acting or responding, they follow suit.39 It is therefore often recommended that if one is having a medical or other emergency, that instead of simply yelling “help,” they make specific requests of particular individuals, such as asking a specific bystander to call 911.

To combat the assumption in a crisis situation that others will act or that action is not necessary, the quarterback, or point person, should clearly communicate to each individual what their responsibilities are and then make sure (and track) that they have fulfilled those responsibilities.

Depending on the nature of the incident or situation, parallel paths may need to be pursued. Impacts and resolutions may involve operations, finance and accounting, legal, and other areas of company responsibility. Again, the point person should be responsible for monitoring the activities of each of these strands and should also be aware of communications regarding them. When different stakeholders disagree on a particular

38 https://www.britannica.com/topic/bystander-effect/Diffusion-of-responsibility (last visited 2/11/20). 39 Id.

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plan of action, the point person should make sure that the disagreement is escalated as appropriate so that a final determination can be made.

B. Stabilize Stakeholders – Owners, Franchisees and Customers

There are few things more stressful in times of crisis than silence. Imagine that you are in an elevator in a tall building and, suddenly, the elevator stops between floors, the lights go out, and it is deathly silent. In that situation, most people are wired to assume the worst. Now imagine the same scenario but, seconds later, a calm and confident voice comes over the elevator’s intercom system and says that there has been a malfunction in the building’s electrical system (or even something more serious, like a fire reported in the building), that the building’s maintenance team and external experts (firefighters, elevator company, etc.) have been notified and will be resolving the situation as soon as they can, and that frequent updates will be provided as they become available. Neither situation would be enjoyable, but the reassuring communication would go a long way in reducing stress, panic, confusion, and anger. In short, it would stabilize the stakeholder.

In times of crisis, those with the greatest interest in the situation, or the most to lose, are too often left in the dark. As in the elevator example above, no matter how much is going on behind the scenes in crisis management, if nothing is visible to those who care, it is easy for them to assume that nothing is. This can lead to anger, resentment, and lack of trust in the franchisor and its management and legal teams.

It is therefore necessary, while following the other steps in the Crisis Management Plan, to provide appropriate updates, at appropriate intervals, to the various stakeholders. The content and frequency of the communications will vary depending on situation and stakeholder.

In many, but not all, crises, the ultimate concern is customer perception of the brand. Public relations teams often struggle with how much communication strikes the right balance between demonstrating concern and not unnecessarily keeping a negative story alive in the news. A franchisor’s communications or public relations team, or its external resources, should be able to track how much social media and other attention a particular incident continues to attract. More frequent public communication may be appropriate if attention to an incident is increasing. If it is decreasing, it may be advisable to say little in hopes that it may fade in the public’s mind or be replaced by another newsworthy story unrelated to the brand.

Franchisee communications may need to be more frequent and reassuring. In many cases, franchisees have invested their life savings in the brand and understandably will be very concerned with any incident that, if not handled properly, could negatively affect that investment.

Similarly, shareholders in public and private companies alike have an interest in making sure that their investments in the brand are being appropriately protected. Some crises may be material enough to warrant Securities and Exchange Commission reporting or franchisee disclosure, and special care must be taken to make sure that no misleading

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statements are made to shareholders, franchisees, or others. Regulations S-K, for example, impose affirmative obligations on registrations to disclose “any known trends or uncertainties that have had or that the registration reasonably expects will have a material favorable or unfavorable impact on net sales or revenue or income from continuing operations.40

It bears repeating that all franchisee, shareholder, and other third-party communications, even if not intended for public consumption, should be drafted carefully with the general assumption that they are not privileged and may be leaked to the press or public.

C. Resolve Central Technical and Operational Challenges

Breakdowns in technical or computer systems and operational challenges often cause crises, and they can also often get in the way of resolution. Hopefully, individuals who can address these issues are part of the crisis management team. If not, the point person or someone else on the team will need to identify what needs to be addressed and who is able to be pulled in immediately to execute on the plan.

D. Repair the Root Causes

Responding to a crisis absorbs significant time and financial resources, particularly where the crisis results in customer boycotts or regulatory penalties, with corporations paying out billions annually in corporate infractions.41 Once the crisis is under control and key stakeholders are stabilized, companies must repair the root cause of the crisis, which seldom is a technical cause that is easily resolved. “Root cause analysis” is a common concept in engineering and other disciplines, and it has obvious application in the post- mortem period after the immediate effects of a crisis are mitigated to the extent possible.

Root Cause Analysis (RCA) is a popular and often-used technique that helps people answer the question of why the problem occurred in the first place. It seeks to identify the origin of a problem using a specific set of steps, with associated tools, to find the primary cause of the problem, so that you can:

1. Determine what happened;

2. Determine why it happened; and

3. Figure out what to do to reduce the likelihood that it will happen again.

40 17 C.F.R. § 229.303. 41 Sanjay Kalavar and Mihir Mysore, “Are you prepared for a corporate crisis?” McKinsey Quarterly, (Apr. 17, 2017), https://www.mckinsey.com/business-functions/risk/our-insights/are-you-prepared-for-a- corporate-crisis.

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RCA assumes that systems and events are interrelated. An action in one area triggers an action in another, and another, and so on. By tracing back these actions, you can discover where the problem started and how it grew into the symptom you’re now facing. . . . [RCA] involves investigating the patterns of negative effects, finding hidden flaws in the system, and discovering specific actions that contributed to the problem. This often means that RCA reveals more than one root cause.42

Ideally, the crisis management team should perform an RCA after each crisis, and the appropriate team member should go back to their department and involve appropriate individuals (including company leadership, if necessary) to make sure that corrective action is taken to avoid future incidents. Some of the corrective action may involve sensitive issues of employee performance and could ultimately lead to discipline or discharge. More often, there are systemic issues related to people (culture, decision rights), processes (risk governance and performance management) and maintenance systems that require substantial changes to the fabric of the company spanning a years- long resolution.43

E. Repair the Organization

Depending on the nature of the crisis, its aftermath, and corrective action steps, additional “healing” may be required. Teams may need to be retrained or educated, and some involved individuals, if appropriate, may need to be reassured that the company supports them, even if their action or inaction contributed to the crisis.

In some cases, companies may need to reposition their brand to emerge from a crisis. As companies begin to reopen during COVID, we are witnessing the transformation of industries that are required to adapt to maintain a competitive edge where the pre-COVID model has been rendered unfeasible – location based entertainment facilities are shifting to provide supplemental education services during off- peak hours to accommodate students forced to participate in virtual learning, restaurants with restricted seating capacity are pivoting to offer make-at-home meal kits, takeout cocktails and grocery items in addition to food prepared for on-premises consumption and the hospitality industry is realigning its promotional packages to appeal to local and regional customers due to restricted air travel. Setting aside the issues of implementing brand repositioning in response to a crisis in franchise systems, which is discussed further in Section IV below, companies seeking to regain competitiveness should seek the next strategic foothold as soon as the crisis stabilizes rather than wait until all remnants of the crisis have dissipated while the company has the personnel and financial resources to capitalize on opportunities to steer the company in a new direction.

IV. Navigating the Aftermath

Section III above discusses handling a crisis’s aftermath within the company. But the aftermath can also include later claims or actions by government agencies that the

42 https://www.mindtools.com/pages/article/newTMC_80.htm (last visited 2/13/20) 43 Id.

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company cannot control. Other third parties, such as customers, competitors, or franchisees may also bring claims, and the franchisor itself may want to seek indemnification or make claims against others. On many occasions, multiple claims are brought simultaneously in several forums and it becomes critically important to assemble a team that can oversee all aspects of multiple litigations and/or administrative actions and understand the implications involved in each of the matters.

Fully containing and resolving the crisis will, therefore, require dealing with these activities that may be outside the company’s control, as well as preparing and issuing internal and external communications regarding them.

A. Regulatory Actions and Administrative Proceedings

Crises, particularly those that involve consumer impact, can often spark government agency interest, investigation, and enforcement action. Instruction on how to handle each of these types of matters is beyond the scope of this paper. However, some common aftermath proceedings may involve the Food and Drug Administration (product recalls and enforcement actions), the Security and Exchange Commission (investor misrepresentation and other issues), and the Federal Trade Commission (false advertising, consumer fraud, franchise law violations, etc.). State agencies and regulators may also become involved and in some cases criminal investigations may be brought. Outside specialty counsel advice or representation is generally required under these circumstances.

B. Litigation

Crises raise a host of potential litigation or arbitration claims. If an incident involves a health and safety issue or product or service quality claim, then consumer litigation can generally be expected. Claims may be made against the franchisee, franchisor, or both (in addition to others, including company executives). The franchisor or others may also want to seek indemnification from those causing or contributing to the crisis.

i. Consumer Claims

Consumer claims come in a variety of shapes and sizes and are often asserted on a class basis. Claims may include personal injury, discrimination, defamation, false advertising, and many others. Because litigation is generally public,44 choosing a “scorched earth” litigation strategy may have the unwanted effect of keeping the crisis in the press and public eye for an extended period of time. An aggressive strategy may also backfire by creating negative consumer perception of the brand’s care and consideration of their customers. As a result, the legal team should carefully coordinate with their business and public relations counterparts when developing a litigation strategy. Companies are also often concerned that settling consumer lawsuits will be viewed as an admission of guilt or wrongdoing. Although that risk should be considered, it should also be weighed against the value of finality of settlement with an appropriate confidentiality

44 See Section __ below for a discussion of mediation and arbitration, which may increase the confidentiality of the proceedings.

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and non-disparagement provision. As typically such claims are brought against both the franchisor and franchisee, it is important to coordinate litigation strategies between the parties.

ii. Third Party Claims Against Franchisees

Customers and others may assert claims directly against a franchisee and may or may not name the franchisor as a defendant. When the franchisor is not a named party, it will need to determine whether it wants to distance itself from the situation (“this was a franchisee-specific crisis not a broader brand problem”), or if it would like to become actively involved in the litigation in order have some measure of control over the proceedings, the statements made, and defenses asserted. Moreover, the manner in which the franchisee defends itself against such claims could have a material impact upon the brand and can possibly trigger violations of provisions of the Franchise Agreement.

iii. Franchisee Claims

The most obvious target for franchisee claims after an incident is the franchisor. Many crises are caused by a franchisor’s policies, products, public messaging, or procedures. However, franchisees may also make claims against third parties involved in an incident, vendors, or others. Again, the franchisor will have to determine whether it can, or wants to, become involved in any third-party claims that franchisees may assert. A common mistake is to engage in protracted litigation with the franchisee and ignore the fact that detrimental information about either the franchisor or franchisee uncovered during the litigation will be discoverable in subsequent third party claims.

iv. Indemnity Obligations and Termination

The franchisor may also bring claims against third parties who contributed to an incident in some way or otherwise have an obligation to indemnify. It should carefully review any relevant contracts relating to the product or service involved to see if vendors or contractors have any indemnification obligations (and relevant insurance coverage) under the circumstances. If so, the franchisor should take the necessary steps to preserve and pursue indemnification. The franchisor and its franchisees should also review any insurance policies that may provide coverage for any aspect of the incident and its consequences. It is important to understand the limits of said coverage and realize that defense counsel provided under an insurance policy will usually not consider brand damage or disputes between franchisor and franchisee in connection with their representation. In cases where indemnity is provided to the franchisor by the franchisee’s insurance carrier, there very well may be a divergence of interests among the parties necessitating separate counsel and possibly even coverage counsel.

If the incident involved a franchisee or took place at a franchisee’s business location, then the franchise agreement likely requires that the franchisee indemnify the franchisor for resulting damages, attorneys’ fees, and the like. Depending on the nature of the incident, the franchisor may also be able to terminate the franchisee’s franchise agreement or take other action. In more extreme cases, the claims may exceed the

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insurance coverage carried by the franchisee thus limiting franchisee’s ability to indemnify franchisor. Additionally, representation provided by franchisee’s insurance carrier may not have experience in more complex cases.

v. Special Litigation Considerations

Privilege issues and confidentiality may have special relevance in crisis-related litigation. Appropriate protective orders and confidentiality agreements should be drafted and entered to protect the company’s proprietary information, and claims of privilege should be carefully considered. Additionally, it should be noted that such confidentiality agreements may not effectively shield information from administrative or regulatory actions.

C. Alternative Dispute Resolution

i. Negotiation and Mediation

As with any claim, it is important at the outset to decide whether immediate settlement negotiations, either informally or in a formal mediation, make sense. Settling quickly with appropriate confidentiality requirements may have particular value in a crisis situation because it may avoid prolonging the incident in the public consciousness. A formal mediation agreement may also require confidentiality of the parties’ discussions. However, if the situation is one where multiple parties could bring copycat claims, settling could set a negative precedent and encourage others to sue, effectively negating the benefits of early settlement. If the party asserting claims has a contract with the franchisor, the agreement’s dispute resolution provision may also require pre-litigation or pre-arbitration negotiation or mediation. It is critically important to develop an overall litigation strategy that considers all of the potential ramifications of the situation instead of handling each claim independently without consideration of impact upon other asserted or unasserted claims.

ii. Arbitration

If the franchisor has any contracts with any party asserting a claim, it should check to see if the dispute resolution provision requires arbitration. If so, the franchisor may seek to compel arbitration, which could help maintain more confidentiality and reduce the possibility of additional press coverage. The franchisor should also review any of its website or app terms and conditions requiring arbitration or otherwise limiting litigation remedies to see if they could cover to any asserted claims. Again, it is important to coordinate litigation strategy in handling multiple claims with different timelines.

V. Conclusion

In the months that follow in what has been thus far a year of unprecedented global disruption to businesses across industries due to COVID and with one of the post pivotal in recent history, franchisors should be highly focused on identifying vulnerabilities in their systems, fine-tuning crisis response plans and conducting training system-wide to ensure that its and its franchisees’ personnel have the knowledge and the tools to act when a

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crisis occurs, and utilizing available technology to monitor negative and “fake news” about the brand so that the franchisor may react immediately.

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KATHRYN KOTEL

Kathryn Kotel has been the General Counsel for Smoothie King Franchises Inc. since March 2020. She previously was Senior Vice President, General Counsel, and Head of Business Affairs for TGI Friday’s Inc. from 2009 to 2017. Ms. Kotel worked for McDonald’s Corporation from 1995 to 2009, most recently as Vice President, U.S. General Counsel. Prior to joining McDonald’s, she was a partner in Keck, Mahin & Cate in its Franchise and Distribution Practice Group. She also served as General Counsel for Convenient Food Mart. Ms. Kotel was a member of the ABA’s Forum on Franchising Governing Committee and its Membership Officer from 2008 to 2014. Ms. Kotel received her BS from the University of Illinois and her JD from The John Marshall Law School.

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BETHANY L. APPLEBY

Bethany L. Appleby is a franchise lawyer with over 20 years of experience. She is a founding member of Appleby & Corcoran, LLC, a business and franchise law firm in New Haven, Connecticut. Before establishing that firm, Bethany served as the Chief Legal Officer for Subway Restaurants. Before going in-house, she co-chaired the Franchise and Distribution Practice Group at Wiggin and Dana LLP. She is a member of the Governing Committee of the ABA Forum on Franchising and past Editor-in-Chief of the ABA Franchise Law Journal. She received her bachelor’s degree from Yale University, magna cum laude, and graduated with highest honors from The University of Connecticut School of Law.

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JOHN B. GESSNER

John Gessner is the National Co-Chair of the Hospitality Practice group at Fox Rothschild, LLP. Mr. Gessner advises clients predominately in the Hospitality industry especially in the areas of restaurant development; real estate and leasing; business operations and strategic planning; alcohol licensing; franchising; and formation and governance. Prior to joining Fox, Mr. Gessner served for 9 years as General Counsel of Front Burner Restaurants, LP, a restaurant development and management company and was responsible for the legal aspects of developing, franchising and operating multi-unit restaurant locations including commercial leasing, risk management and regulatory compliance as well as the development of multiple Food Hall projects. Prior to that, Mr. Gessner served as General Counsel for a large restaurant franchisee. Mr. Gessner began his career in private practice in Dallas, Texas, most recently with Gessner & Flores, PC. Mr. Gessner is a summa cum laude graduate of the University of St. Thomas and Tulane Law School and is the current Chairman of the Texas Restaurant Association.

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SARAH WALTERS

Sarah Walters is a franchise and supply chain lawyer at DLA Piper LLP. She counsels national and global clients on a broad spectrum of commercial transactions, including licensing, supply chain management (research and development, agribusiness, procurement, manufacturing, logistics, distribution, corporate and social responsibility and social compliance and cooperatives, transportation (managed transportation, freight forwarding and final mile delivery)), technology, advertising and media placement and business process outsourcing. In addition, Sarah counsels franchise companies in the spectrum of franchise and distribution laws, including structuring, regulatory compliance, franchise relationships and dispute resolution, and buying and selling franchise systems.

A formal general counsel to a national restaurant company, she also assists clients in developing strategic solutions to issues impacting their businesses.

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