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 WEST\291447123.3 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 i WEST\291447123.3 Table of Contents (cont’d) Page C. Alternative Dispute Resolution ................................................................. 18 i. Negotiation and Mediation ............................................................ 18 ii. Arbitration ...................................................................................... 18 V. Conclusion .......................................................................................................... 18 ii WEST\291447123.3 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. WEST\291447123.3 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