The Impact Data Privacy Laws Will Have On Franchising

Data privacy is a pressing concern for businesses worldwide, and the franchising sector is no exception. With the increasing number of state and international laws governing data privacy, franchises must navigate a complex legal landscape to ensure compliance and protect customer data. 

Understanding Data Privacy Laws

Data privacy laws vary significantly across jurisdictions, but they generally fall into several categories: consumer privacy, biometric laws, sector-specific privacy laws, deceptive practices laws and laws related to recording or eavesdropping.

“Currently, comprehensive consumer privacy laws are in effect in California, Colorado, Connecticut, Virginia and Utah, with more states like Florida, Montana, Oregon and Texas joining soon,” said Renato Smith, a partner at Barclay Damon LLP. “These laws require businesses to post privacy notices at the points of personal information collection and provide details on data usage and consumer rights.”

One of the most stringent and oft-cited laws is the California Consumer Privacy Act (CCPA), which sets a high bar for compliance. “Under the law, businesses must navigate whether they control the franchisee and whether they share common branding. If not, sharing data with franchisees could be considered a ‘sale’ under CCPA,” said Tedrick Housh, a partner at Lathrop GPM LLP. This distinction is crucial, as non-compliance can lead to significant liabilities.

Challenges for Franchises

Franchises face unique challenges in managing data privacy. The franchisor-franchisee relationship complicates data management, as both parties often share and collect customer data. Housh emphasizes the importance of understanding data flows, for example: “Be aware of your data flows. Knowing what data you collect and how it’s used is crucial for protection.”

Biometric data presents additional complexities. Laws in states like Illinois (BIPA) and Texas (CUBI) require businesses to obtain prior consent for collecting biometric information. According to Smith, “These laws generally require businesses to obtain prior consent, provide opt-out opportunities and post data retention policies.”

Legal and Operational Impacts

Data privacy laws can also impact daily operations significantly. Franchises must invest time and resources in due diligence, risk assessments and legal consultations to comply with various regulations. 

“Performing due diligence and configuring solutions to align with privacy laws requires significant time and labor,” said Smith. “It can be challenging for franchisees to manage this while keeping up with business operations.”

Moreover, non-compliance can have severe repercussions. “Franchisees face substantial risks of privacy violations,” said Housh. “A prominent fast-food chain faced potential damages of over $17 billion for violating Illinois’ BIPA.” 

Such risks also extend to reputational damage and legal liabilities, affecting both franchisees and franchisors.

The Role of Technology and Vendor Management

Technology also plays a crucial role in managing data privacy, but it introduces new challenges as well. “Be very observant with what your marketing team is doing and where they are getting their data,” said Housh. “Ensure you have consent for data collection, especially for emails and texts.”

Franchises must also carefully vet technology vendors. Ensuring that vendors comply with privacy laws and align with the franchise’s data protection policies is critical. “These agreements should include warranties, data security measures, cyber insurance and indemnification for data breaches,” said Smith. 

Best Practices for Compliance

To mitigate all of these risks, franchises should adopt best practices for data privacy compliance. 

“Have an incident response plan and practice simulations to prepare for data breaches,” said Housh. “Ensure all stakeholders — from the C-suite to IT — know their roles in such events.”

Smith advises franchises to consider hiring a Data Privacy Officer (DPO) and allocating resources for in-house technology experts and legal counsel. “Develop and implement a Written Information Security Program (WISP) that addresses data security, incident response and risk assessment,” he said.

Additionally, both franchisors and franchisees should stay informed about evolving privacy laws and adjust their practices accordingly. Regularly updating privacy policies and ensuring transparent communication with customers about data collection and usage are essential steps.

By understanding the legal landscape, adopting best practices and staying vigilant about technological and vendor relationships, franchises can protect customer data and mitigate risks. As the regulatory environment continues to evolve, staying informed and proactive will be key to maintaining compliance and safeguarding brand reputation.

For more information on franchising legal matters, check out these related 1851 Franchise stories:

• Important Legal Considerations in Franchise Agreements
• Maintaining Legal and Ethical Standards in Your Franchise System
• Emerging Legal Challenges in Franchising