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THE "ICED ECSTASYJ" OF FRANCHISING


- A Lawless Legal Adventure
(& A Corplaw Commentary)

by Barry J. Lipson
A Lawless excursion into the franchising of Iced Ecstasy, John Lawless that is! This
Corplaw Commentaries Column explores the basic considerations necessary for a successful
franchising operation. You can determine for yourself whether Iced Ecstasy has yet found its way
into the marketplace. We will meet Colonel Lawless again in the next column The Value of Legal
Coaching.
John Lawless, a composite of several real people, visited my office one day and expressed a
desire to be "coached" on the legal aspects of the franchise business. At that time, I explained to him
that franchising was but one of a number of distributions methods, and that it carried with it certain legal
risks and obligations not present with other methods of distribution.
I further explained that franchising was popular with entrepreneurs as it permitted them to
capitalize on their know-how and experience without having to invest in retail outlets, and it was popular
with persons desiring to be their own boss as it permitted them to enter into new and unfamiliar
businesses as if they had years of experience. I then explained that entrepreneurs particularly liked the
idea that instead of having to make a capital outlay for each retail outlet, they had the opportunity of
earning a substantial initial franchise fee even before the ground was broken for the retail outlet,
followed by a potential steady stream of royalty income.
Mr. Lawless, a native born Kentuckian and real "Kentucky Colonel," who is also known as
"Colonel Candy," informed me that his Executive Committee, comprised of himself, his only son and his
daughter-in-law, and known affectionately "home on the bluegrass range" as the "Lawless Bunch," had a

"sugar plum" of an idea. They were eager to franchise "the Colonel's Kentucky Fried Chiclets," the
"unique chick-shaped pressure fried confection that can be sucked, chewed, blown and swallowed, and
does not 'lose its flavor on the bedpost overnight.'"
His "boy" had thought of it, and the Colonel was real proud, even though he acknowledged
begrudgingly that his marketing people had problems with the culinary aesthetics of the product, the
actual potential market penetration and volumes that could be expected, and the competing products.
We then discussed the copyright questions raised by the "bedpost" slogan, and the resistance that could
be expected from the owners of the "Chiclets", "Colonel Saunders" and "Kentucky Fried Chicken"
trademarks. After much soul searching, he decided to indefinitely "stick it on the bedpost." While this
product presented a number of interesting legal problems, as well as marketing problems, we both agreed
that the object was not to keep the lawyers busy, but to develop and implement a viable franchising
package, while minimizing such problems.
At this time, I also pointed out that franchisors are required to comply with the Federal Trade
Commission's "Disclosure Requirements and Prohibitions Concerning Franchising and Business
Opportunity Ventures." Under these Rules, franchisors are required to provide to potential franchisees,
beforehand, Offering Circulars or Disclosure Statements which reveal considerable financial
information, and in which the franchisors back up their sales pitch and "puffery" with hard facts.
Moreover, I advised that various States have their own requirements, and some of them like California,
Illinois and New York even require your Offering Circular to be registered and approved by that State
before you can offer a franchise for sale in that State.
Undaunted, Lawless suggested that we explore his other ideas and product lines.
The next hour or so was spent examining the various product lines of Colonel Candy's
Confectionery Company (also known as "4C"). It was concluded that peanuts and jelly beans were
pass; that we could not get similar presidential identification with candied broccoli; that it would be
inopportune at this time to franchise a line of Mid-Eastern confectioneries; and that the success of

"Spuds McKenzie," "Mr. Potato Head" and the "Couch Potato" did not justify franchising a line of
potato-shaped candies, unless, perhaps, "4C" could license one or more of those trademarks for this
purpose. Nothing seemed to be especially suitable for franchising.
We were just about to dismiss his ice cream line because of the perceived saturation of the
market by Baskin Robbins, Carvel, Dairy Queen, Tastee Freeze, and the like, when he mentioned the
virtually no-calorie ice cream-type product "4C" had just recently developed and tested, but was holding
back as his "4C" Executive Committee felt it would cut too deeply into "4C's" regular and "lite" ice
cream sales. At my suggestion, he made a few telephone calls and found out from the R & D and
Marketing Departments that this new product had 99% fewer calories than regular ice cream, had zero
fat and cholesterol, was made of all natural ingredients and, according to consumer taste tests, was
preferred four to one over regular and six to one over "lite" ice cream. Upon reflection, the Colonel
could not understand how the "4C" Executive Committee had failed to "foresee" the potential of this
product, as his Marketing and R & D personnel had.
The first question we explored was how to legally protect this product so that imitators would not
be springing up shortly after its introduction. The Colonel's concern was that if competitors knew from
the patents, which had not yet been applied for, how the product was made and exactly what went into it,
they could design around these patents. Therefore, as this was looked upon as a very long-term venture
(which would extend well beyond the 17 year life of a patent), as the key ingredients could be processed
at a central plant for distribution nationally and even internationally, as the processing methodology was
unique, and as chemical changes occurred during processing so that the exact make-up and proportions
of the constituents of the product were not discernible from chemical or spectroscopic analysis, it was
decided not to seek patents but, like Classic Coca-Cola, to take the necessary steps to protect the
formulation and method of manufacture as trade secrets.

However, before this decision was finalized, labeling had to be developed which complied with
the Food and Drug Administration's requirements that the ingredients of food products be listed on their
labels in descending order of quantity present, but yet did not disclose critical "trade secret" information.
The next step was to develop an appropriate trademark for this product, which, under FDA
Rules, could not be called ice cream because of its lack of butter fat content; and which it did not seem
wise to market merely as an "imitation ice cream" or "ice cream substitute." The project working name
"Diet Freez," was promptly rejected as being in possible conflict with other trademarks, including
"Tastee Freeze", and also as being too "blah".
After considering many other alternatives, the trademark "Iced EcstasyJ" brand frozen diet
dessert was finally chosen as a name denoting a sensuous, light, quality diet dessert product, superior to
all competing products. (The Executive Committee also liked the idea that "Iced EcstasyJ" rhymed
with "4C".) From the onset, the symbol "TM" was used after the mark to claim it as the exclusive
common law trademark of Colonel Candy Confectionery Company, and as soon as a sale in interstate
commerce was made, federal registration of the mark was sought.
For obvious marketing reasons, and to lessen the likelihood of franchisee breach of contract,
fraud, misrepresentation and liability suits; consumer product liability suits; and/or the "nefarious" class
action suits by either group, this was followed by the tasks of developing a detailed marketing and
franchising plan, preparing operating and training manuals, and establishing a company store to test the
plan and manuals under field conditions, iron out the bugs, and have a going operation to show potential
franchisees.
Concurrently therewith, and well before "4C" was ready to grant any franchises, preparation of
the Offering Circular was begun pursuant to the FTC Disclosure Rules, and it was ready for distribution
when solicitation of potential franchisees commenced.

While the marketing plan called for first

establishing franchisees in states that did not have their own special franchise disclosure or registration
laws, it was decided to use the "state format" instead of the "federal format" in preparing the Offering

Circular, which is permitted under the FTC Rules, as the intention was to offer franchises in registration
states in Phase 2 of the marketing and franchising plan.
Pursuant to the mandate of the FTC Rules, the information disclosed to potential franchisees in
the Offering Circular included a detailed description of the franchise; franchisor's financial information;
business experience of franchisor and its officers and directors, including litigation and bankruptcy
history; financing arrangements; initial and recurring required franchisee payments; franchisee purchase
obligations; revenues to be received by franchisor; any restrictions on sale; information relating to past
and present franchises and company-owned outlets; termination, cancellation and renewal provisions and
experience; site selection requirements; and training program specifics, among other things.
In conjunction with the preparation of the Offering Circular, the franchise agreement, the
confidentiality agreement and other related agreements were also prepared and appended, as required, to
the Offering Circular. The required cover letter from the FTC alerting potential franchisees to their
rights, and also to where to complain if they felt their rights were violated, was then placed at the front of
the Offering Circular.
In non-registration states, once this documentation was prepared to the satisfaction of the
operating and legal personnel involved, potential franchisees were solicited and given copies of the
Offering Circular prior to any discussions of the details of the franchise, as is also required by the FTC
Rules. In registration states, the Offering Circular would first have had to be approved by the State, and
the advertisements used to attract potential franchisees reviewed, before any offers to sell franchises
could be made in that State.
Thereafter, confidentiality and franchise agreements were signed, up front franchise fees paid to
the franchisor, sites selected, retail outlets built and stocked at the franchisees' expense, personnel
selected and trained, multi-media introductory advertising and public relations campaigns arranged, the
grand openings held, and, to Colonel Candy's great joy, continuing royalties paid to the franchisor. As
summed up by the number two in command of the Executive Committee:

"Today, legendary is the foresight of '4C',


And legendary is the fame of 'Iced EcstasyJ'.
Due to us Lawless three, the Colonel, wifey and me,
Or so we would decree, if not a 'composite' be!"
Please address your comments, questions and suggestions for future columns on marketing and business
law subjects to the author at bjlipson@gmail.com.
Copyright8 1991-2011 by Barry J. Lipson