Franchising and Advances in Technology - The Good, The Bad and The Ugly

The advances in technology have undoubtedly opened opportunities for franchisors and franchisees to enhance their business, enhance productivity, improve sales. However, such opportunities carry additional burdens and are not free of risk. Two recent examples of franchisor's potential liability arising out of technological advances highlight the need to be vigilant.

Data Hacking

The Wi-Fi networks of over 100 Subway stores were the subject of a data-hacking scheme that resulted in $10M charged to customers' credit cards. [Reported on QSR Magazine (Dec. 12, 2012)]. Although it may not be possible to protect against every threat, the following can help minimize the risks:

  • frequently patch holes in store networks
  • limit access to in-store internet services (for example, create unique accounts and strong passwords)
  • consider encryption techniques to protect credit card data
  • seek expert advice on firewall service and security management
  • recommend that franchisees post a sign advising customers not to send confidential or sensitive data over the internet from the franchisee's premises

Even though the liability for credit card data theft may not result in an out of pocket loss to the customer, merchants are duty bound to protect the data, and a breach can create enormous ill-will.

Unsolicited Text Messages

Another example involved potential liability of Papa John's, as the franchisor, because a franchisee illegally sent out unsolicited text messages. [Maria Agne et al. v. Papa John's International et al, Case No. C10-1139-JCC (U.S. District Court for the Western District of Washington)]. Subject to certain minor exceptions, federal law prohibits making calls to any cellular telephone number using an automatic telephone dialing system. Several courts have found this applicable to text messages, which can be subject to $500 for each call. Although the responsibility of Papa John's for the actions of its franchisee has not yet been established, this case serves as a wake up call for franchisors to advise franchisees about the risks of sending unsolicited faxes and text messages.

Check Your Insurance

New insurance products (such as cyber insurance) and old standbys (such as personal and advertising injury insurance) may provide important protection, so it is important for franchisor and franchisees alike to frequently review their coverage with a knowledgeable agent to be sure that their policies are up to date and that they provide coverage for potential risks.