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Tuesday
Aug292017

Franchise 101: Selective Enforcement; and Squeezed at the Pump

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com


 

AUGUST 2017

 

Franchise Distribution Attorneys

David Gurnick in Corporate Counsel

When Uber acquired Otto, the self-driving automobile tech company fronted by former Waymo executives, Google filed a lawsuit alleging misappropriation of trade secrets, among other claims. Corporate Counsel magazine interviewed David Gurnick for his take.

Read more: Was Uber’s Deal With Otto Out of the Ordinary?

Welcome Katherine L. Wallman!

We are very pleased to announce the arrival of our newest associate, Kate Wallman. Ms. Wallman earned her law degree from the Catholic University of America, Columbus School of Law, where she graduated cum laude. She's worked as a franchise attorney for various firms in Washington D.C. and most recently served as in-house senior counsel at DineEquity, parent company of Applebees and IHOP.

Learn more about: Katherine L. Wallman

FRANCHISOR 101:
Selective Enforcement of Franchise Agreement Provisions

 

A franchisor's ability to set renewal terms can bind franchisees to terms in a later franchise agreement before the renewal agreement even exists. In a recent case, a franchisor could enforce a hypothetical non-compete restriction in a renewal agreement, even though it waived the restriction in the currently-effective franchise agreement.

James Robinson, a veterinary hospital franchisee, also ran other veterinary clinics not affiliated with the franchise. The franchise agreement's non-compete provision would have prohibited operating the independent locations. But the franchisor chose not to enforce it. On expiration of the franchise agreement, the franchisor notified the franchisee of its intent to enforce the covenant in the renewal agreement.

The franchisee refused to divest the independent locations. No renewal agreement was signed. The franchisee sued for breach of the franchise agreement, covenant of good faith and fair dealing, and interference with economic relations - all based on the absence of any renewal.

A federal district court dismissed the complaint, and the Ninth Circuit affirmed. The courts said plain language of the franchise agreement's renewal provision allowed the franchisor to condition renewal on compliance with a different non-compete provision than the current agreement.

One may ask - how could a franchisee be bound by a future non-compete provision, in a future agreement, when the covenant in the present contract was not enforced? The courts were satisfied that the existing agreement's renewal provision explicitly said the renewal agreement would be "substantially similar to the then-current form of the franchise agreement." The Ninth Circuit ruled, based on this clause, that the renewal agreement would have a similar non-compete provision.

The courts ruled that the franchisor's waiver of the non-compete provision in the franchise agreement did not extend to the renewal agreement, nor was there a promise to never enforce a non-compete provision in the future. Dismissal of the interference claim was upheld because conduct between business competitors is proper if it is to further the defendant's own business interests. The franchisee alleged only that the franchisor's act of not renewing him was "done to make a profit," which was not wrongful.

See: Robinson v. Charter Practices International

FRANCHISEE 101:
Squeezed at the Pump

Most dealership and franchise agreements require the franchisor's prior written consent to the transfer of a business from one franchisee to another. The new franchisee is often required to sign the franchisor's then-current agreement as a condition to getting the franchisor's consent to the transfer.

Can a franchisor unreasonably withhold consent, or can an incoming franchisee or dealer be coerced to sign up with a franchisor? A California appellate court has said no and upheld a lower court's ruling that a petroleum products distributor and franchisor of "76" brand gas stations unreasonably tried to coerce a purchaser to sign a new franchise agreement. The franchisor was found to have breached the seller's franchise agreement, which excused further performance by the seller and purchaser.

The seller asked several times for the franchisor's consent and for the original branded reseller agreement. But the franchisor never obliged or responded to the purchaser's transfer application, short of telling the seller they were "working on it."

After nearly a month with no response, escrow closed without an assignment of the original reseller agreement. The seller continued to buy gasoline for the purchaser, who paid the seller for the gasoline shipments until the franchisor stopped delivering gasoline.

The franchisor then told the parties it was considering other potential purchasers and never took the purchaser's application seriously. The franchisor refused to make further gasoline deliveries to the station unless the purchaser signed a 64-page franchise agreement on the spot. The franchisor refused the purchaser's request for time to review the agreement, and rejected its offer to pay in advance for gasoline deliveries made before finalizing the agreement. The franchisor threatened to sue the purchaser and put it out of business unless it signed "then and there."

The trial court came down hard on the franchisor, finding the franchisor was unreasonable in failing to respond to the seller's request to assign the original agreement and in its actions and threat toward the purchaser. The appellate court agreed, affirming that the franchisor breached the original reseller agreement because it gave no notice to the seller or purchaser before placing a hold on the purchaser's gasoline orders. The purchaser also received an attorneys' fees award based on the agreement, even though it never entered into any contract with the franchisor.

While franchisors often reserve the right to impose conditions on assignment of a franchise, a franchisor cannot unreasonably withhold consent to impede a transfer.

See: Westco Petroleum Distributors v. Huntington Beach Industrial

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Friday
Jul282017

Franchise 101: Hilton's Manual Overload; and Pabst's Cold Brew Remedy

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com
msoroky@lewitthackman.com

 

JULY 2017

 

Franchise Lawyers

Barry Kurtz in Los Angeles Daily Journal

"Franchisors will need to adjust their methods when accounting for franchise fees either this year or next, depending on whether the system is publicly owned or not . . ." (Co-written with Christopher L. Passmore, CPA)

Read: New Accounting Rule May Lower Perceived Value of Franchisors

Tal Grinblat in Valley Lawyer

"An applicant that receives an objection claiming that the mark is confusingly similar to another party's trademark has several options..."

Read: Confusing Trademarks | The Next Course of Action

FRANCHISOR 101: Manual Overload

 

A franchisor's investment in brand standards, protection and control often comes at a cost when a consumer believing or claiming to believe the franchisor and franchisee are the same, seeks to hold a franchisor liable for a franchisee's conduct.

A New Jersey federal court has ruled that hotel franchisor Hilton Worldwide must answer for a guest's claim that a franchised Hilton hotel failed to stop over $80,000 in unauthorized charges by a disgruntled ex-employee. The ex-employee extended a 5-night stay on the corporate account by several months. The court found Hilton could be vicariously liable for the franchisee's oversight, based on control it exercised, and reserved, over the franchisee.

A staffing agency ("eTeam") authorized its employee to stay at the Hilton Garden Inn in San Francisco. The hotel had authorization from eTeam's headquarters to charge eTeam's corporate credit account for the employee's five-night stay. After five days passed, the employee remained at the hotel, charging eTeam's account, although she no longer worked for the company. The ex-employee's stay resulted in over $80,000 of unauthorized charges. eTeam sought the money back from Hilton even though it was Hilton's franchisee that ran the hotel and charged eTeam.

The court looked beyond the franchise agreement's disclaimer of an agency relationship and focused on the parties' course of conduct - finding that Hilton had control over the franchisee's personnel decisions, training of employees and day-to-day operations like room cleaning and food service.

Hilton's contractual right to control was also significant. The franchise agreement incorporated Hilton's operations manual. The manual included pre-approval for management hires, and even dictated china, glassware, silverware, and the exact type and number of coffee packets to place in each room. The court found that Hilton had direct control over reservation processing and payment at the franchisee's location. Finding Hilton's control over the franchisee's operations extended far beyond what is necessary to protect the Hilton brand, the court denied Hilton's request to be dismissed on summary judgment.

When a court is asked to find an agency relationship, a franchisor cannot rely on a disclaimer in the franchise agreement. The existence of an agency relationship is fact-specific.

Franchisors should consider this when reserving strong rights of control and incorporating operation manuals by reference into franchise agreements. The franchisor's appearance of unnecessary control over personnel, employee training, or franchisee policies can turn the franchisor-franchisee arrangement into a principal-agency relationship subjecting the franchisor to liability.

See: eTeam, Inc. v. Hilton Worldwide Holdings, Inc., D. N.J., 15,988

FRANCHISEE 101: Cold Brew Remedy

Beer Distribution

Beer distributors can be on common footing with their franchisee counterparts in bargaining with brewers or suppliers. Depending on the jurisdiction, distributors may have protection through beer distribution statutes patterned after relationship statutes adopted in many states to protect franchisees from their franchisors.

A Tacoma, Washington federal court has granted protection to distributors under the Washington Wholesale Supplier and Distributor Act (the "Act"), finding the Act does not authorize a beer supplier to terminate a distributor without cause, and finding that a terminated distributor is not limited to just the remedies in the Act.

Pabst Brewing Co. terminated its agreement with a distributor and arranged for someone else to service the former distributor's territories. The terminated distributor sued Pabst for its investment and lost profits, claiming the termination lacked cause and failure to give 60 days' written notice.

Pabst moved to dismiss, arguing that the Act's only remedy was compensation from the successor distributor for "laid-in cost of inventory" and "fair market value of the terminated distribution rights."

The court agreed with the terminated distributor, finding that both statutory and common law remedies can coexist. Thus, compensation to the terminated distributor did not have to come only from the successor distributor. The Act's purpose was not to create immunity for the supplier for its wrongdoing, or to pass off its liabilities to a successor. Pabst's motion to dismiss was denied.

See: Marine View Beverage, Inc. v. Pabst Brewing Co., LLC, W.D. Wash., 15,984

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Thursday
Jun292017

Donut Holes in Franchise Relationship; and McDonald's Shakes Damages re OT Policy

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com
msoroky@lewitthackman.com

 

JUNE 2017

 

Franchise Lawyers

Sam Wolf Selected

Congratulations to Samuel C. Wolf, one of two attorneys in Southern California designated a "Rising Star" in Franchise Law, by Super Lawyers Magazine. Sam was nominated by attorney peers and passed the independent research process patented by the magazine.

For details, click: 2017 Up-and-Coming Southern California Attorneys and Rising Stars

Joint Employer Liability – A Recent Wave of Reprieves

"While joint employer liability remains a looming, omnipresent facet of the franchise industry, franchisors have enjoyed a recent wave of reprieves. . ."
- by Matthew J. Soroky

Read: State Bar of California Business Law Section, Franchise Law Committee E-Bulletin

 

FRANCHISOR 101:

Donut Franchise Relationship Dissected by Court

 

The parent of Dunkin' Donuts was named along with Starbucks and about 80 other coffee sellers, distributors and retailers in a 2010 lawsuit alleging violations of California's Proposition 65 and Safe Drinking Water and Toxic Enforcement Act. Dunkin Brands, Inc. ("DBI") claimed it doesn't itself buy, sell, roast, distribute or even possess coffee in California, and therefore should not have to put warnings on its coffee. But its argument failed on summary judgment, and DBI will go to trial with its co-defendants in August.

Businesses with 10 or more employees are required to place warnings on products containing chemicals that may cause cancer. Plaintiff, the non-profit watchdog group Council for Education and Research on Toxics ("CERT"), wanted defendants to add warnings to coffees that contain the carcinogen acrylamide.

DBI contended it had franchised all coffee operations to subsidiaries, while it just oversaw its corporate organization, and did not control or produce coffee. CERT pointed to the franchisee subsidiaries' reliance on DBI to operate, arguing that DBI "directs its employees to do all of the acts for all of the subsidiary companies." It claimed that DBI's subsidiaries "intentionally have no employees" to avoid the minimum-employee threshold and that actions by employees at DBI's direction expose Californians to acrylamide in Dunkin' Donuts coffee.

The Court agreed with CERT's argument, determined DBI's "franchise" structure to be "smoke and mirrors," found that selling coffee is not required for liability, ruled the law is to be construed broadly to protect public health, and found DBI's control over its subsidiary franchisees necessarily gave DBI control over product warnings. DBI's list of day-to-day aspects of its franchisees that it did not control - which did not include "product labeling" - only raised an inference that control over subsidiaries could be used to prevent them from selling coffee in violation of Prop 65.

Dunkin' Donuts' loss on summary judgment shows how courts and government may subordinate the protections provided by franchise relationships to perceived public health or other public interest concerns.

Council for Education and Research on Toxics v. Starbucks Corp., et al., BC435759 (L.A. Super. Ct., filed Apr. 13, 2010)

FRANCHISEE 101:
McDonald's Shaking Damages for OT Policy

In Los Angeles Superior Court, McDonald's claimed victory when 6,600 workers seeking $41 million in back pay and penalties came away with less than 2% of the amount sought in a claim that the fast-food giant cheated them out of overtime at almost 120 company restaurants. While the workers are sure to appeal the judge's calculation method, the ruling provides franchisors and franchisees a roadmap for minimizing penalties under California's Private Attorney General Act ("PAGA"). The Act deputizes workers as private attorneys general to pursue state labor code violations.

Earlier, McDonald's Restaurants of California, Inc. ("McDonald's") was found liable for shorting overnight workers on overtime pay. McDonald's timekeeping policy assigned all hours in a shift to the day the shift started. Overnight workers whose shift started on Day 1 and who then started another shift sometime on Day 2 often worked over eight hours in a 24-hour period but did not get overtime pay.

Several factors contributed to McDonald's success at the damage phase of trial. The judge was persuaded by McDonald's expert, while finding the workers' expert unreliable for excluding certain time records from his analysis. McDonald's also persuaded the court its violation was not willful; McDonald's believed its policy was a fair and legal way to compute overtime and there had been no complaints prior to the suit. McDonald's successfully avoided draconian fines and PAGA penalties, but it did not escape all liability. The workers were awarded $775,000.

Franchisor and franchisee operators of 24/7 locations in California, of any brand, should use care to comply with wage and hour laws, especially given the uptick in California of PAGA claims against employers. McDonald's has shown that experienced franchise and employment counsel can help treat workers fairly and limit exposure both in and out of the courtroom.

Sanchez et al. v. McDonald's Restaurants of California Inc. et al., BC499888 (L.A. Super. Ct., filed Jan. 24, 2013)

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Tuesday
May232017

Franchise 101: State Taxes on Franchise Fees; and Breach of Contract Claims

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com
msoroky@lewitthackman.com

 

May 2017

 

Franchise Lawyers

New Rules re Financial Performance Representations

Tal Grinblat, a member of the Executive Committee of the Business Law Section of the State Bar of California, co-wrote a notice distributed to state bar members regarding new guidelines franchisors must follow when using financial performance representations (FPRs). The new guidelines impact all franchisors in the U.S. and its territories. The e-bulletin alerts those in the industry about the North American Securities Administrators Association's (NASAA) adoption of financial performance guidelines which require a number of new disclosures and a certain admonition. The guidelines also set requirements for franchisors using "averages" or "medians" in their FPRs.

Read the e-Bulletin: NASAA Issues New Commentary on Financial Performance Representations in Franchise Disclosure Documents


FRANCHISOR 101:
State Taxes on Franchise Fees

Franchisors collect weekly or monthly "franchise fees." In many cases, fees are for particular services, such as marketing assistance or IT support. In franchising, the parties may be in any number of different states: for example, a franchisor may be headquartered in California, provide IT support from Texas to a franchisee in Florida, and receive payments at an office in Washington. Which states may tax the franchisor on franchise fees, and in what proportion?

In Upper Moreland Township. v. 7-Eleven, the convenience store franchisor provided advertising services (store signage development) and information technology services to franchisees. Advertising services were provided from Texas. Information technology services were provided from Massachusetts. Franchisees in Pennsylvania and New England sent their payments to a 7-Eleven regional office in a Pennsylvania town where 7-Eleven also had one corporate store and one franchisee-owned store.

The town imposed "Business Privilege Taxes" (BPTs) at a rate of 3.5 mills on gross receipts of "[e]very person engaging in a business ... in the Township." 7-Eleven paid the tax on activities of its corporate store in the town, but not on fees collected at that office from franchisees. After an audit, the town assessed 7-Eleven over a million dollars for unpaid BPTs, interest, and penalties.

7-Eleven challenged the constitutionality of the assessment. A Pennsylvania court relied on a 1970s- era U.S. Supreme Court decision, Complete Auto Transit, Inc. v. Brady (1977), to determine if a local tax on interstate commerce is constitutionally permissible. To be "fairly apportioned," as Brady requires, the local tax must be "externally consistent." To be externally consistent, a tax must apply to "only that 'portion of the revenues from the interstate activity which reasonably reflects the instate component of the activity being taxed.'" A tax does not meet this standard if the amount of income taxed is "disproportionate to the business transacted by the taxpayer in that municipality."

Applying the Brady rule, the Pennsylvania court found the town's assessment was unconstitutional because it was not fairly apportioned to reflect the location of the various interstate activities that generated the 7-Eleven service charges. 7-Eleven just received payments in the town, but the rest of the activities occurred elsewhere. The court remanded the case to the town for a "constitutional recalculation of the assessment."

A franchisor may consider using constitutional limits on local tax powers to protest some municipal taxes. It may also be useful to identify as many components of its interstate commerce activity as it can in locales with lower tax rates.

Read: Upper Moreland Twp. v. 7 Eleven, Inc. 144 CD 2016, before the Pennsylvania Commonwealth Court


FRANCHISEE 101:
Contract Curveballs

In every Franchise Agreement, the franchisor and franchisee promise to fulfill obligations to the other. For some promises, whether or not they were performed can be a clear "yes" or "no." For example: either a franchisee paid the royalty to the franchisor on the specified date of the month, or it did not - there is usually no third option. However, other obligations - such as a franchisor's promise to provide the franchisee with "support" - may be vague. How much assistance and what kind of help a Franchisor must provide may not be clear. These are judgment calls that may ultimately be presented to a jury as questions to decide at trial.

In Anne Armstrong v. Curves International, Inc., franchisees owning 83 locations sued Curves International, the franchisor of 30-minute women's gyms, after suffering losses in their Curves businesses. The franchisees claimed their losses were due to Curves not giving them support promised in their franchise agreements. The agreements said Curves would "make available certain services," followed by a list of services that "may" be included, such as opening assistance, pre-opening training, periodic reviews of franchisee operations, periodic training, ongoing support, and advertising data and advice. The franchisees claimed they generally did not receive any of the promised assistance.

As evidence of their losses, the franchisees provided tax returns, and a statement by Curves' founder that Curves felt "a reasonable return on the franchise was probably $30,000 a year," though no level of profit was guaranteed by the agreements.

Curves moved to dismiss the claims, arguing that the agreements stated only that Curves "may" provide the listed services. Curves also argued that clauses allowing it to exercise "business judgment" gave it "unquestionable discretion" regarding support it provided, as long as its decisions were intended to or could benefit the entire Curves system. Curves presented evidence that it provided franchisees with local marketing materials, and informed franchisees of other advertising initiatives Curves was pursuing.

A jury found that Curves breached its contracts, and awarded the franchisees more than $1.5 million. This included individual plaintiff awards ranging from $0 to $143,928. Counsel for the franchisees stated that the franchisees were pleased with the award, which they calculated to have compensated them for approximately 80 percent of their losses. Curves stated that it strongly disagreed with the decision and plans to file post-trial motions and potentially appeal the verdict.

Had Curves been able to point to text in the agreements literally stating it had no obligation to provide certain services, or that it actually had "unquestionable discretion" to decide what support to provide to franchisees, the outcome may have been different. As it was, the jury had to decide if franchisees received the reasonable support they paid for.

Read: Armstrong v. Curves International, Inc. - 6:15-cv-00294-SDD, Order on Motion for Summary Judgment, in the United States District Court for the Western District of Texas

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Friday
Apr282017

Not Your Neighborhood Tesla Dealer; and Special Delivery

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com
msoroky@lewitthackman.com



April 2017

 

Franchise Lawyers

Capitol Times

The International Franchise Association will host its 50th Annual Legal Symposium in early May - Barry Kurtz, Tal Grinblat, David Gurnick and Matthew Soroky will all attend, representing Lewitt Hackman in Washington D.C. The conference brings together franchise owners, operators, executives and attorneys to discuss current laws and regulatory environments.

 

FRANCHISOR 101:
Not Your Neighborhood Tesla Dealer

Among the many differences between Tesla and traditional automakers, Tesla does not sell or service its electric cars through franchised dealers; it sells direct to consumers. Recent legal challenges to Tesla's direct-to-consumer sales model highlight an auto maker's hurdles in selling through its own subsidiaries.

The Utah Supreme Court upheld an agency ruling that Utah's Motor Vehicle Business Regulation Act (the "Licensing Act") and New Automobile Franchise Act (the "Franchise Act") combined to prohibit a Tesla subsidiary from selling new Teslas in Utah showrooms. The relationship between Tesla and its subsidiary was found to be a "franchise" under both statutes, and was barred by the Franchise Act's prohibition against subsidiary relationships.

At first, the subsidiary applied for a required new car dealer license to sell Tesla vehicles at a Salt Lake City showroom. Its application was denied for not having a "franchise" to sell the vehicles, as required by the Licensing Act. The subsidiary responded by entering into a "dealer agreement" with Tesla and reapplying for the dealer license.

The dealer agreement sought to create the required "franchise" relationship needed to satisfy the Licensing Act. Unfortunately for Tesla, the Franchise Act prohibits a franchisor from owning an interest in a new car dealer. Therefore, to avoid creating a "franchise" relationship of the kind that would be subject to the Franchise Act, the agreement prohibited the subsidiary from using the Tesla name.

The court noted the subsidiary was caught "between the rock of the Licensing Act and the hard place of the Franchise Act." Either it lacked the franchise with Tesla required by the Licensing Act, or it was a franchise in conflict with the Franchise Act's prohibition against owning an interest in a new car dealer.

A "franchise" under the Licensing Act is simply "a contract or agreement between a dealer and a manufacturer . . . by which the dealer is authorized to sell any specified make or makes of new motor vehicles." The court ruled that the subsidiary had such a contract.

The Franchise Act was more complex. The first element of a "franchise" is a "license to use a trade name, trademark, service mark, or related characteristic." This requirement was satisfied by the subsidiary's use of Tesla's trademarks. The dealer agreement's disclaimer of a franchise relationship could not be reconciled with the "reality of the relationship" between Tesla and its subsidiary. The second element of a franchise -- a "community of interest" in marketing new cars, was also present because Tesla and its subsidiary had a unity of interest in selling Teslas.

The court said it issued a "narrow, legal decision" that did not rule on "broad policy questions" about how cars should be sold. The Court stopped short of deciding whether Tesla itself was barred from obtaining its own dealer license. A car maker could presumably do so, but the practical and legal effects of Tesla selling direct to customers without the protection of using a subsidiary are likely to leave Tesla between the proverbial rock and hard place.

Read: Tesla Motors UT, Inc. v. Utah Tax Commission

FRANCHISEE 101:
Special Delivery

For a relationship to meet the legal definition of a "franchise" in some jurisdictions, the franchisor must give significant assistance to, or have significant control over, the franchisee's business. A franchisor's prescribed marketing plan can be enough to meet this requirement.

The "marketing plan" element is multifaceted and imprecise. A distributor's marketing plan may be based on a contract, course of dealing or industry customs. A marketing plan need not be mandatory. And a plan need not include traditional advertising or marketing. It is enough for a franchisor to give franchisees instructions or advice on operating techniques or skill training, so that independent franchisees appear to consumers as if they are centrally managed and follow uniform standards.

In Neubauer v. FedEx, a former delivery contractor claimed FedEx violated the North Dakota Franchise Investment Law (NDFIL) when it offered and sold him an unregistered franchise. A federal appeals court in St. Louis found an absence of any appearance of central management in this delivery context, and affirmed a lower court decision to dismiss the contractor's claim.

The court noted FedEx's business is direct-to-customer package delivery. The delivery contractor picked up and delivered packages, but did not claim a right to offer, sell or distribute services to individual customers.

The contract with FedEx said he was an independent contractor who provided transportation services to FedEx, and received payments from FedEx - not from customers - through a weekly settlement check. Noting that the NDFIL's definition of "marketing plan" was nearly identical to the definition in California's Franchise Investment Law, the Court cited a California decision in which a similar delivery contractor failed to prove the existence of a franchise relationship.

In the California case, because there was no allegation that the delivery contractor cultivated customer relationships, the court found the contractor did not offer and distribute goods and services to customers within the meaning of the franchise law.

The "marketing plan" element required to establish a franchise relationship may be satisfied in various ways. A delivery contractor that can allege sufficient encounters with individual customers has a better chance to establish the existence of a marketing plan, but should bear in mind each component of the marketing plan element and the subtle variations to assert a plausible franchise claim.

Read: Neubauer v. FedEx Corporation

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

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