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Entries in food sourcing (2)

Friday
Sep012017

Franchise Litigation Rising Over Dietary Considerations

Chair, Franchise & Distribution Practice Group

by Barry Kurtz

818-907-3006

 

Rising concerns over food sourcing and preparation is leading to more and more litigation for restaurants and franchises.

Most of the lawsuits claim discrimination, which makes sense as many dietary strictures are rooted in religious tradition. Other restaurant lawsuits are based on disability discrimination, as some plaintiffs suffer physical hardships when their dietary needs are not met, or are blatantly ignored.

Then there are franchisor-franchisee lawsuits, generally over how restaurants are allowed or not allowed to market, and regarding suppliers of specialty foods.

Here’s a closer look at the litigation menu:

First Course, Gluten Free

Gluten-free Diner DiscriminationRecently, a living-history museum in Virginia forced a fifth grade student on a school field trip to eat his home-prepared gluten-free (GF) meal outside in the rain – the museum’s restaurant had a strict “no outside food” policy. The boy’s father tried to talk to the restaurant employee who was enforcing the rule and then to the manager, who steadfastly refused to make an exception.

The family’s GF discrimination lawsuit cites violations of Section 504 of the Rehabilitation Act of 1973, Title III of the Americans with Disabilities Act (ADA), and the Virginia Rights of Persons with Disabilities Act.

Here in California, a gluten-free class action lawsuit was recently dropped by the lead plaintiff. In this case, Anna Marie Phillips was contesting P.F. Chang’s $1 surcharge for GF menu items, pointing out that customers who asked for vegan substitutions, or peanut and peanut oil-free dishes, were not similarly charged. Phillips dropped her suit because of complaints from a group who advocates for celiac disease victims.

But even though the suit was dropped, a legal question looms: Is Celiac Disease considered a disability under the federal ADA or various state laws?

Restauranteurs wanting to avoid ADA suits may be best advised to accommodate GF diners whenever they can – without surcharges, unless the extra costs apply to all special requests. (We can hear the revamped Burger King commercial now: “Hold the pickles, hold the lettuce, special orders don’t upset us…if we can charge you just a dollar more…”)

On the other side of the healthy food coin, a customer in Massachusetts brought a class action lawsuit against 20 Dunkin’ Donuts stores last year. His complaint?  He asked for real butter on his bagel but was served a butter substitute instead. The point in this case, according to the plaintiff’s attorney, is the need for truthful representations.

Point taken. At the point of a butter knife.

Second Course: Religious Concerns

Food and Cultural ConcertsAlso of note recently are the lawsuits initiated by those concerned with kashrut (kosher) or halal diets. Though pork is forbidden in both of these, the lists of allowed and forbidden foods diversify a bit for Jews and Muslims.

A Muslim customer in Michigan sued Little Caesars for $100 million last May, alleging he accidentally ate pepperoni, which is strictly prohibited by Islamic law because it is composed of pork. The plaintiff specifically ordered halal pizzas, and though the boxes were labeled halal, they were topped with regular, non-halal pepperoni.

On the other hand, many Hindus believe in non-violence, including non-violence toward animals. Thus, many practitioners are vegetarian, or lacto-vegetarian, if not fully vegan. Some Hindus will eat meat, but draw the line at beef.

Remember the lawsuit over french fries? McDonald’s labeled their fries vegetarian, but litigation ensued when customers realized the fries and hash browns were cooked in a vegetable oil containing “the essence of beef” to enhance flavor. The franchisor paid over $10 million to settle the complaints.

It’s important for franchisors, franchisees, distributors or suppliers, and employees to know the differences between halal, kosher, Hindu, vegetarian and vegan diets. Wait staff, food expediters and kitchen staff should be especially aware of legal consequences when making a simple mistake, like putting meat-filled samosas in a vegetarian-labeled container.

Even if such mistakes don’t lead to lawsuits, they definitely lead to customer mistrust and injured reputations for the restaurant.

Third Course: Franchise Agreements and Policies That Just Won’t Fly

Unauthorized products, particularly in the food industry, can cause system-wide problems. One of the primary purposes of franchisors approving suppliers is so that the corporate office can trace problems in food quality or sanitation. Outbreaks of food poisoning, a discovery that a unit’s fries are cooked in oils containing animal byproducts, or that a hot dog isn’t really kosher all lead to an injured reputation for the unit as well as the franchise system.

Further, consistently ignoring the franchisors requirements regarding ingredient sourcing can lead to an agreement termination, and possibly, litigation.

But here’s another twist on the food supply problem:

KFC Franchisee Halal Chicken

The KFC Corporation (franchisor of Kentucky Fried Chicken restaurants, or “KFC”) was recently accused of enforcing an allegedly unknown policy that prohibits religious claims regarding KFC products.

The plaintiff, a multi-unit franchisee owner, alleges he has sold halal chicken for 14 years with KFC’s help; the religious claims prohibition is not part of the franchise agreement or disclosure statement; and at no time since opening his first restaurant did the franchisor ever mention the prohibition. The franchisee claims he was first made aware of the provision in December 2016, and that KFC’s policy violates the Illinois Halal Food Act. He expects to lose $1 million in revenue annually.

Boxing It All Up

It’s easy to sum up the lessons – be respectful, be aware, and be proactive.

To avoid potential litigation, restaurant operators should ensure all employees handling food are well trained. It may be difficult to instill knowledge about every ingredient in every menu item, but at least train workers to ask management or kitchen staff when they don’t know the answers to customer food questions. Front of the house staff should never tell the customer what s/he thinks the customer wants to hear, or provide the easy answer when busy.

Also, be very wary of triggering discrimination complaints like the ones mentioned in the gluten-free lawsuits cited earlier. There shouldn’t be one set of rules for GF requests, another for people with allergy concerns, and others for halal or kosher diets. If imposing surcharges for one type of food modification, impose the same surcharges for all. (Though it’s probably best not to initiate extra charges at all.)

Franchisors, ensure franchisees are using approved suppliers only. If making policy changes about food supply or anything else, first consider whether or not those changes are going to cause economic hardships for the franchisees, and whether or not the changes are contractually enforceable.

Franchisees, don’t go off menu with ingredients. The suppliers pre-approved by the franchisor are generally well-vetted. Their ingredients may cost a little more, but you can probably assume the higher costs are due to better quality, legitimate certifications, and the like.

Barry Kurtz is a California Bar Certified Specialist in Franchise & Distribution Law.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Monday
Jun052017

Franchisors, Got Claims? Don't Let Them Spoil Like Bad Cheese

Franchise LawyerChair, Franchise & Distribution Practice Group

by Barry Kurtz

818-907-3006

 

This is the tale of two restaurants, each facing trademark infringement claims under the Lanham Act brought by two, separate franchisors. The franchisees’ restaurants had three things in common: First, cheese is a key ingredient in their respective menus (which detail is only critical to cheese-lovers, but we like lists of three). Second and more importantly, time was a key ingredient in their respective defenses.

The third common element is that both defendants won. Here's why:

Both restaurateurs employed a laches defense. The Laches Doctrine is an old but often used defense employed when an unreasonable amount of time has passed between a supposed transgression by the defendant and a legal complaint is made by the plaintiff. Here are the details:

Delays May Cause Grouchy-ness

In Groucho's Franchise Systems, LLC v. Grouchy's Deli, Inc. (d/b/a  Grouchy's New York Deli and Bagels and referred to as "Deli" to avoid confusion), an 11th Circuit Court of Appeal upheld the trial court's ruling that the franchisor's (Groucho's) claim was barred by laches.

To sum up, Groucho's has been doing business in South Carolina since 1941, opened 20 additional locations over time, and finally registered its trade name in 1997. The Deli opened its restaurant in 2000 in Georgia.

In 2004, Groucho's sent the Deli a letter alleging the Deli was infringing on the franchisor’s registered mark. The letter further stated the franchisor planned to open a location in Atlanta sometime in the future, and that upon that occasion, would take legal action to stop the Deli's infringement. The Deli registered its own mark in 2005 and opened a second location. Thereafter, both concepts expanded their operations.

In 2013, Groucho's sent the Deli another letter, asking the Deli to change its name because of the risk of confusion between Groucho's and Grouchy's.  The Deli did not respond, and Groucho's franchisor followed up with a warning about a lawsuit. This time the Deli replied that there was no likelihood of confusion. Groucho's finally filed a lawsuit in 2014.

Among other allegations, Groucho's claimed trademark and service mark infringement in violation of the Lanham Act, unfair competition, unjust enrichment, and that the Deli's name would cause market confusion. The district court granted summary judgment for the Deli.

The 11th Circuit Court stated that a laches defense requires proof of three elements:

1. There must be a delay in asserting a claim;

2. The delay must not be excusable; and

3. The delay must cause the defendant undue prejudice.

The Court further opined that during the decade in which Groucho's waited to challenge the Deli's service mark; the Deli built business value around its own mark; registered its mark without opposition; and opened another restaurant which it later sold, licensing the buyer at the time to use the Deli's recipes and proprietary property. In short, the Deli "rel[ied] to its detriment" on Groucho's silence. The Court also characterized Groucho's behavior as "tortoise-like", and upheld the district court's decision.

If Groucho's wanted a successful shot at protecting its name, the franchisor should have taken legal action in 2004.

Franchisor Cheesed Off…Eventually

In Noble Roman's Inc. v. Hattenhauer Distributing Company, time plays a role again.

Noble Roman's of Indiana franchises pizza outlets and submarine sandwiches. Hattenhauer owns convenience stores and gas stations in Washington and Oregon. In 2006, the parties entered into franchise agreements to sell pizza and sandwiches at Hattenhauer locations – Hattenhauer agreed to only use ingredients that conform to the franchisor's specifications.

During an audit in 2014, Noble Roman's discovered Hattenhauer underreported sales. The franchisee disputed the claims and refused to pay royalty fees. Noble Roman's also claimed the franchisee was using inferior cheese rather than the franchisor's proprietary cheese, since 2011. In its 2014 lawsuit, Noble Roman's added unfair competition and breach of contract to its other claims.

Let's allow the cheese claim to stand alone:

Noble Roman's alleged the franchisee's use of subpar cheese violated the Lanham Act "because it deceived customers into paying full price" for a product that was not, in essence, a Noble Roman's product. The franchisor also claimed injury because it lost control of products sold under its trademark.

Hattenhauer on the other hand, claimed the franchisor knew about the cheese switch since 2010, because the franchisor received monthly reports from the approved supply distributor indicating that Hattenhauer was not buying its cheese.

In considering the facts, the court determined that the harm was not to customers who ate bad cheese, but to the franchisor, who may have been perceived by those customers to be serving bad cheese, which the court characterized as a claim for injury to personal property.

That being the case, the court then pointed out that the statute of limitations for personal property was two years in Indiana and found that Noble Roman's four year delay on its cheese claim was unreasonable, and that Hattenhauer was prejudiced by this delay. The court granted summary judgment for Hattenhauer regarding the trademark infringement claim.

Both cases reveal the harm caused to a plaintiff by sitting on its claims.

Barry Kurtz is a State Bar of California Certified Specialist in Franchise & Distribution Law.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

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