August 2007 Franchising World

E-commerce may be an excellent source of revenue for franchise systems; however, it has a number of potential problems that franchise companies must avoid.
By John Rogers, Chris Bennett and Sony Grewal

What is “E-Commerce”?
The term “E-commerce” refers to commercial activities conducted electronically. It includes transactions on the Internet, closed networks such as electronic data exchange, electronic trading of goods and services, online delivery of digital content, electronic banking, electronic fund transfers, direct marketing and virtual shopping malls. It also includes e-mail, electronic retailing, bulletin boards, intranets, extranets, Web broadcasting, CD-Rom catalogues, point-of-service systems and security services such as firewalls and encryption.  The types of e-commerce are broad and constantly expanding. Two general categories of e-commerce are business-to-business and business-to-consumer.
 
This article will examine a few types of e-commerce that are popular today with successful franchisors.

Online Payment by Franchisees
Online payment processing for franchise systems enables franchisors to collect their royalties and advertising funds through electronic funds transfer or online credit card payments by franchisees. 

What is EFT?
Electronic funds transfer is a technology that enables fund transfer by electronic debit and credit banking systems to exist. Transfers take place between originating depository financial institutions and receiving depository financial institutions. Debits or credits on customer (franchisee) accounts take place and money is electronically transmitted through an automated clearinghouse to originating institutions which process deposits to merchants’ accounts.

What is Online Credit Card Processing?
When a merchant makes a sale, the card number, amount and merchant ID travel over the credit card processor’s computer network and then onto a credit card computer network. In turn, the electronic transaction goes to the bank that issued the card. The bank checks the account, verifies the purchase and sends the merchant authorization over the network. The sale is then complete, but the transaction is not since no money has yet changed hands. Despite the use of computers, it can still take two business days before the merchant’s account is credited due to banking protocols.

Benefits
Benefits of online processing include increased speed, efficiency, lower cost, less labor and less paper. Online payments can improve a franchise system’s collections dramatically. Online transactions may also be beneficial from the franchisees’ perspective, as often franchise companies allow franchisees to qualify for prompt payment discounts on their royalties and other payments.

Sales to Franchisees
E-commerce Web sites can be used by franchise systems to allow their franchisees to purchase marketing support items including promotional materials, annual subscriptions to marketing programs, marketing kits (e.g. grand opening kits), direct mail programs, CDs providing technical and sales training, uniforms and more.

Benefits
Online purchases of marketing materials allow franchisees to have a one-stop shopping experience for their marketing requirements. Franchise companies may also use e-mail marketing as an efficient means to send newsletters, coupons for product discounts and links to franchise programs.

Sales to Customers
Many retail franchise systems find opportunities offered by the Internet as a new source of revenue. While geography normally is crucial to franchise retailers who locate near potential customers, the Internet may allow them to reach out to new customers virtually anywhere.
 
However, exclusive territory and potential encroachment issues mean franchise systems should proceed cautiously in the e-commerce arena and consider adopting e-commerce models that either actively involve franchisees or provide monetary benefits to them. If franchisees participate in sales and servicing, the franchise company needs to consider a host of issues that may not be covered by the franchise agreement and which may require additional agreements with its franchisees. For example, who will establish the prices and terms of purchase with the customer? What are the respective obligations of a franchise organization and franchisee to fulfill a customer order and provide future customer service? How will customers and the proceeds from their business be allocated? Who will own the accounts or customer lists that result from Internet sales? Who will handle billings and collections? And who will bear the risk of customer claims?

If the franchise company cannot or does not wish to control e-commerce methods itself, it may use a listing or linking approach. This method allows a customer visiting the site to select where to do business among listed or linked locations of franchisees.

Benefits
Benefits of online sales include increased awareness of a franchise system’s brand and higher-market saturation. Such sales often provide consumers with a more convenient way to purchase.

Some Legal Issues
There are legal issues involved in e-commerce. To avoid such issues, a franchise company should obtain appropriate authorizations and consents from its franchisees. These include privacy consents and warnings and disclaimers associated with online risk.  For example, a customer could suffer loss or injury by relying on information posted on a Web site. One way to limit such liability is to warn Web site users not to rely on the information posted.  This is often done through disclaimers in a Web site’s terms of use.
 
However, when e-commerce is involved, the terms of use will not be enough: the customers should be required to explicitly agree to a comprehensive agreement which includes purchase terms, delivery terms, taxes, returns, representations and warranties, dispute resolution and other relevant contractual terms.  The agreement should be displayed to the customer, and the customer should be required to click “I Agree” before the transaction proceeds.  The customer should also be shown a summary of his or her order, and be given an opportunity to correct any mistakes or to cancel.
 
Franchise companies should also be aware of consumer protection requirements of various geographic areas. More specifically, they should be cognizant of Internet agreement requirements and delivery, cancellation and refund provisions.  In Canada, for example, the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Nova Scotia have all enacted Internet sales legislation.

Developing Area
E-commerce can prove effective and lucrative when conducted properly.  It is an area where franchise systems need to pay ongoing attention, as developing trends may provide them with an edge in the electronic marketplace.

John Rogers is a partner of Davis LLP’s Toronto office and chairs its Franchise & Distribution Group.  Chris Bennett is a partner of the firm’s Vancouver office and is a member of its Franchise and Distribution and Intellectual Property Law Groups. Sony Grewal is an associate of the firm’s Toronto office. Rogers can be reached at jrogers@davis.ca, Bennett at cbennett@davis.ca and Grewal at sgrewal@davis.ca.