[co-authors: Elizabeth Dillon, Partner, Lathrop Gray Plant Mooty; Hannah Fotsch, Associate, Lathrop Gray Plant Mooty; and Samuel Butler, Associate, Lathrop Gray Plant Mooty]
2020 has been an incredibly tough year for many businesses, with companies big and small shuttering at a record pace due to COVID-19 restrictions and significant reductions in customer travel and spending. But there is one surprising business type that many people seem to want to continue to invest in despite the pandemic: the franchise business model.
For example, both the U.S. Chamber of Commerce and Business.com recently highlighted franchise-model businesses that were not only surviving the pandemic and associated lockdowns, but thriving. And in fact, one of those thriving franchise business types called out by the authors was franchise consulting businesses (consultants that help match aspiring franchise owners with franchise opportunities). Apparently, the pandemic has actually increased investment interest in franchise opportunities.
There may be a few different reasons why people are looking to the franchise business model during an economic downturn. Many franchise businesses have the benefit of a widely known name brand and market presence. Many have the benefit of leveraging a fully baked business model – one that has presumably already been proven successful. Many also have more support than solo businesses in a variety of key business development areas, including marketing, advertising, and training. In short, the franchise business model may have more appeal during this economic upheaval than a solo business model because people trust the support it can provide in times of economic trouble.
However, there are still several common pitfalls that can drag profits down and slow economic growth, leaving the franchise model just as exposed to failure as a solo business model in this time of economic uncertainty. One of those pitfalls is litigation and internal investigations, and the resulting ediscovery challenges those two can raise. Not only do businesses operating within a franchise model face the same types of litigation and employee workplace issues that all other businesses face – they may also have to deal with added litigation that is unique to the franchisor-franchisee relationship. All of this means increased cost and overhead, especially when it comes to preserving, collecting, reviewing, and producing the required data during the discovery phase.
In this article, we discuss the legal ediscovery challenges and the primary legal issues that we see affecting franchise businesses, large and small. We’ll also provide best-practice tips that can help keep ediscovery costs down and enable franchise businesses to utilize their advantage and continue to survive and thrive during this trying time.
Legal eDiscovery Challenges
There are four main challenges we see affecting franchise businesses currently: (1) the explosion of data sources; (2) the increased frequency of internal investigations and compliance matters; (3) the lack of a playbook to ensure discovery is managed in a low risk, low-cost manner; and (4) big data challenges.
Explosion of Data Sources
Walk through any franchise store, restaurant, or facility today and you will be amazed at the number of devices and systems that must be contemplated in discovery.
- Fixed systems on property: Video security, card key access, time clock, email, and desktop computers
- Cloud-based systems: Many of the above systems can also be found in the Cloud along with M365 and Google Suite of business documents, email, collaboration tools, and backups
- Employee sources: Personal email, cell phones (video, app chat, texts), iPads, and tablets
- Corporate maintained systems: Marketing documents, HR systems, Material Safety Data Sheets (MSDSs), proprietary training, and competitive analysis documentation
Moreover, employees at different franchise businesses may often choose to communicate on different platforms, which can exponentially diversify data sources. This amount and variety of sources can pose a myriad of challenges from an ediscovery perspective.
The duty to preserve data begins as soon as litigation is “reasonably foreseeable.” Thus, once an allegation that may lead to litigation surfaces, the clock begins ticking, not only to effectively respond to the allegation but also to ensure that evidentiary data at issue is preserved. And once discovery begins, that preserved data will need to be collected. All of this can present challenges for the ill-prepared: How do you collect data from employees’ personal devices? What are the local state and federal rules regarding the privacy of personal devices? How does collecting the data differ from Apple device vs Android devices? The need to be aware of platforms that create data and the possibilities for collecting that data from them must be addressed before litigation begins, or businesses risk losing data that could be essential to litigation.
Key takeaway: Know your data sources as a standard course of business. Make sure that you know where data resides, how it can be accessed, and what can and cannot be collected from data sources.
Internal Investigations & Compliance Matters
There has been a drastic increase in internal investigations and compliance matters with franchise clients recently. Hotline and compliance phone line tips, allegations around employee theft, and suspected fraud are on the rise. The key to resolving these types of investigations quickly and cost efficiently is speed. Attorneys and company executives need to know as soon as possible: is there truly an issue, how far does it go, how long has it been happening, how many employees does this effect, and what is the exposure (financially, socially). It is important to develop workflows and tools to help decision-makers and their legal experts sift through the mountains of data quickly.
To understand the importance of this, consider this example. A company sales representative leaves the business and does not disclose their next line of work. A tip line reveals they the representative may have left for a competitor. Shortly thereafter, business deals that were executed and even ones in the pipeline suddenly disappear to a competitor. The former employer quickly conducts a forensic investigation on the representative’s laptop computer. Despite their attempt to hide their activity, the investigation reveals that the representative had downloaded proprietary customer lists, price sheets, and other valuable IP during their last week of employment and had also moved large chunks of confidential information from the company’s servers to thumb drives and utilized their personal email to store work communications. Without a strategic plan in place laying out how to quickly execute a forensic internal investigation in this type of situation, the company would have lost substantial revenue to a competitor.
Companies that are particularly concerned about former employees stealing proprietary information can even go further than creating an effective investigatory and remediation strategy – putting a departing employee forensic monitoring program in place can prevent this time of abuse from happening in the first place.
Key takeaway: Have a program in place to certify that departing employees leave with only their personal belongings and not proprietary company information.
Lack of an eDiscovery Playbook
Playbooks come in many forms today: user manuals, company directives, cooking instructions, and recipe guides. A successful playbook for the legal department will establish a practical process to follow should a legal or compliance issue arise. Playbooks, like a checklist for a pilot about to fly a plane, ensure that everyone is following a solid process to avoid risk. These documents also prevent rogue players from recreating the wheel and going down potentially expensive rabbit holes.
Repetitive litigation situations are particularly well suited for acting according to playbooks, and standardizing the response to these situations helps to ensure the predictability of both outcomes and expenses. For example, these documents can be as granular as necessary but typically include a few key topics such as:
- The process for responding to a 3rd party subpoena, service, or allegation of wrongdoing
- The company’s systems that are typically subject to discovery
- IT contacts that can help gather the information/data
- A list of service providers/trusted partners to assist
- Standard data processing and production specifications (i.e. time zone, global deduplication, single-page TIFF images 400 dpi, text, and metadata fields)
- Preferred technologies to search, review, and produce documents (i.e. Relativity)
Key takeaway: Playbooks can shave days off of the engagement process with outside counsel and data management companies. Having a repeatable process and plan on day one will save time and money as well as reduce risk.
Big Data Challenges
Franchisors face issues in litigation that are unique to the industry, from vicarious liability claims involving the actions of franchisees or their employees to the sheer unpredictability that comes from extensive business relationships involving franchisees of a breathtaking range of sophistication. An increase in litigation leads to an increase in data. Even a run-of-the-mill dispute can lead to the need to gather (and potentially review) more than 100,000 documents. Add one or two more small disputes, and the amount of data quickly becomes unmanageable (and expensive).
Fortunately, there have been impressive advances in the field of advanced legal analytical and artificial intelligence (AI). These innovative ediscovery tools can help legal professionals analyze data to quickly identify documents that are not important to the litigation or investigation (thereby eliminating the need to review them), as well find the “story” within a data set. For example, some analytical tools can help identify code words that an employee might have used to cover up nefarious actions, or analyze communications patterns that allow attorneys to identify the bad actors in a given situation. Other tools now have the capability of analyzing all of the company’s previously collected and attorney-reviewed data, which substantially reduces the need for attorney review in the current matter.
All of these tools work to reduce data burden, which in turn reduces costs and increases efficiency.
Key takeaway: Take the time to learn what ediscovery solutions are available on the market today and how you can leverage them before you are faced with a need to use them.