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Thursday
Nov022017

Franchise 101: Arbitr-"all"; and 31 Flavors of Fees (or just one)

  

Franchise 101 News

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



OCTOBER 2017

 

Franchise Distribution Attorneys

40th Annual ABA Forum on Franchising

 

Our Franchise & Distribution Practice Group, including three California Bar Certified Specialists (Barry Kurtz, Tal Grinblat and David Gurnick), three associates (Samuel C. Wolf, Matthew J. Soroky and Katherine L. Wallman), and four paralegals (Caitlyn Dillon, Marianne Toghia, Kelly D'Angelo and Peggy Karavanich [not depicted below]) attended the American Bar Association's Forum on Franchising in California's Palm Desert. This three day conference consists of educational programs and networking events designed to keep legal professionals up to date on the latest transaction and litigation concerns affecting both franchisor and franchisee clients.

David Gurnick in Corporate Counsel

When Uber acquired Otto, the autonomous vehicle program headed up by former Google engineer Anthony Levandowski, eyebrows were raised and a lawsuit was filed. Now, more questions come to the fore, this time regarding due diligence by Uber's chief legal officer. Read David Gurnick's quotes on this topic in:


Should Uber’s Salle Yoo Have Taken Earlier Look at Critical Due Diligence Report?

FRANCHISOR 101: Arbitr-“all”

 Conflicting Arbitration Clauses
A federal court in New Jersey granted a franchisor's motion to compel arbitration of disputes involving seven frozen yogurt franchises, even though the claims were subject to different arbitration provisions in different agreements, providing for different arbitral organizations and procedures.

An insolvent franchisee sought to liquidate assets. Each franchise agreement included arbitration and mediation clauses. The franchisee brought a claim against its franchisor for fraud, breach of contract, unjust enrichment and violation of the New Jersey franchise law. The franchisee argued the court should not compel arbitration because the various agreements' arbitration provisions had different language, were in conflict, and did not specify a uniform method of arbitration.

Two franchise agreements provided for arbitration according to rules of the American Arbitration Association. The other agreements called for arbitration with any reputable arbitration services, specifically noting CPR and JAMS.

The court found the various clauses did not require separate arbitrations. The court concluded that while the provisions differed on rules governing arbitration, the differences were minor and did not preclude compelling arbitration. The court also found that the parties could comply with all the provisions by, for example, retaining as arbitrator a neutral, former judge who was willing to proceed according to American Arbitration Association rules.

While speed, cost, and privacy may no longer be persuasive grounds to support inclusion of arbitration provisions in franchise agreements, arbitration often provides control over the location of the dispute, lowers the damages that can be recovered by franchisees, and limits the number of parties to the action. Franchisors often have a tactical advantage if the franchise agreement contains an arbitration provision, particularly in disputes against multi-unit franchisees that own units spread across different jurisdictions.

The nature and extent of these characteristics of arbitration usually advance the business and legal interests of the franchisor.

See Mitnick v. Yogurtland Franchising, Inc., 2017 WL 3503324 (D.N.J. Aug. 16, 2017).

FRANCHISEE 101:
Thirty-one Flavors of Fees (Or Just One)

Baskin-Robbins charges a dairy supplier a so-called "commercial factor" fee for the right to make and sell Baskin-Robbins proprietary ice cream to franchisees. The supplier's pricing to franchisees includes an amount equal to this fee. In Association of Independent BR Franchise Owners v. Baskin-Robbins Franchising, LLC, a franchisee association asked a federal court to rule this price component was an unauthorized fee. But the court ruled for Baskin-Robbins, holding that the charge to franchisees was permissible.

The court found that Baskin-Robbins franchisees pay a "price" for products they buy, not a "fee." Relying on dictionary definitions of "fee" and "price," and noting that Baskin-Robbins franchisees pay a single amount to the supplier for products, the court found that while the commercial factor was a fee the franchisor charged its supplier for the privilege of selling ice cream under Baskin-Robbins's name, the supplier simply charged franchisees for the products and that was not a fee.

The court also considered whether Baskin's franchise agreement prohibited the supplier from charging a pass-through cost to franchisees. The court found that the relevant provisions in the franchise agreement required franchisees to buy products from Baskin-Robbins' designated supplier, at the supplier's price. The court noted that pass-through costs and charges along the supply chain are standard industry practice. The court added that even if it found ambiguity in the franchise agreement, the parties' course of dealing showed that a supplier passing along its cost to franchisees was not prohibited. The franchisees paid for many years without objection and Baskin-Robbins disclosure document noted that the franchisor received revenue from franchisees' purchases of products from designated suppliers.

Some franchisors are creative in finding ways to collect monies from franchisees beyond straight royalties and advertising fees. Prospective franchisees should carefully review the disclosure document, talk with other franchisees and learn about practices in their system, to be informed about each source of revenue, and both direct and indirect charges, their franchisor imposes.

Read: Association of Independent BR Franchise Owners v. Baskin-Robbins Franchising, LLC

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
Sep282017

Franchise 101: A Clean Sweep; and Upgrading Your Metal 

Franchise 101 News

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

 

SEPTEMBER 2017

 

Franchise Distribution Attorneys

Franchise Convention

Will you be attending Franchise Expo West at the Los Angeles Convention Center in early November? We'll be there, and we'll be happy to meet with you. Use one of the email addresses above to contact one of our attorneys directly, or send a message to our Franchise Practice Group mailbox. Someone will be in touch regarding potential meeting times.

State Bar Appointment

David Gurnick joins Barry Kurtz on the State Bar of California's Franchise and Distribution Law Advisory Commission. Members of the Commission serve a three year term, and are tasked with reviewing application packages of California attorneys who sat for and passed the Franchise and Distribution Certified Specialist exam, and providing recommendations to the California Board of Legal Specialization as to awarding the credential. Currently there are less than 60 Certified Specialists in Franchise and Distribution Law in the state of California, three of whom include our own Barry Kurtz, Tal Grinblat, and David Gurnick.

 

FRANCHISOR 101: A Clean Sweep

Jan-Pro Joint Employer Litigation 

A federal court recently held that under California law, cleaning services franchisor Jan-Pro Franchising International (Jan-Pro) was not the employer of its unit franchisees. The franchisee plaintiffs failed to show that Jan-Pro exercised sufficient control over day-to-day employment activities or reserved the right to exercise such control.

Jan-Pro operates a three-tier franchising structure. Jan-Pro grants the right to use its trademark "Jan-Pro" to a regional master franchisee for a specific geographic area. The master franchisee is responsible to sell Jan-Pro franchises in that area. The master franchisee sells unit franchises, giving franchisees the right to service accounts provided by the master franchisee. Each unit franchise operates pursuant to a franchise agreement. Franchise agreements are between the master franchisee and unit franchisee, but Jan-Pro is not a party.

The unit franchisees sued Jan-Pro seeking minimum wage and overtime premiums, claiming they were improperly classified as independent contractors when they were really Jan-Pro's employees. The court evaluated the claims under California's three alternative definitions of an employer/employee relationship: (i) exercise of control over wages, hours, or working conditions; (ii) to suffer or permit to work; or (iii) to engage, thereby creating a common law employment relationship. A common-law employment relationship requires evidence of the right to control day-to-day activities.

The unit franchisees argued that Jan-Pro met the first and third definitions because Jan-Pro's contracts with its master franchisees gave it the absolute right to control policies and procedures of any master franchisee as well as any unit franchisee. The court disagreed. It found the right to control policies and procedures were set forth only in Jan-Pro's contracts with its master franchisees, not in contracts with unit franchisees. The court determined that unit franchisees' franchise agreements with master franchisees did not set out any rights for Jan-Pro or otherwise indicate that Jan-Pro would be a third-party beneficiary. The court concluded that the unit franchise agreements did not create rights between Jan-Pro and the unit franchisees.

Next, the court rejected the unit franchisees' argument that Jan-Pro had authority to stop them from working under the second definition of an employer/employee relationship. The court stated that Jan-Pro's agreements with regional master franchisees purported to confer that authority, but the unit franchisees' agreements with master franchisees did not extend Jan-Pro's authority to the unit franchisees.

Finally, the court rejected an ostensible agency theory raised by the unit franchisees because they failed to offer evidence that they believed the master franchisees were agents of Jan-Pro.

The court's analysis focused on features that are unique to subfranchise systems, specifically the lack of a direct contractual relationship between the franchisor and unit franchisees. A franchisor considering a subfranchise system should pay particular attention to the contractual rights it can enforce directly against unit franchisees. If a franchisor determines that it wants to have some direct contractual rights then it should be careful not to exert direct or indirect control over a unit franchisee's employment conditions in a way that would make it a joint employer.

Read: Roman v. Jan-Pro Franchising International, Inc., N.D. Cal.

FRANCHISEE 101: Upgrade Your Metal

Metal Supermarket Software Litigation

A federal court in New York denied a franchisee's motion for preliminary injunction that would have prevented its franchisor Metal Supermarkets Franchising America (MSFA) from installing technology upgrades in its stores.

MSFA is the franchisor of a metal parts business. JDS Group (JDS), a Washington corporation, owned two MSFA franchises. For ten years as an MSFA franchisee, JDS used a software system called "Metal Magic" that MSFA supplied. In 2012, MSFA determined that Metal Magic was outdated and below an appropriate measure of MSFA's standards. It developed a new software system, called "MetalTech," which took three years to develop and cost over $1 million. MSFA began installing MetalTech at franchisee locations. But JDS continued to use the Metal Magic system and refused to switch its stores to MetalTech, claiming it was unreliable and did not perform as required. JDS sued MSFA for violation of the Washington State Franchise Investment Protection Act (FIPA) and for breach of the implied covenant of good faith and fair dealing, and asked the court for a preliminary injunction to prevent MSFA from installing MetalTech in its stores.

JDS claimed MetalTech was unreliable and inefficient and submitted declarations of six MSFA franchisees, all alleging that they had serious problems using MetalTech that hurt their business operations. The court found that express terms of the franchise agreements permitted MSFA to develop or designate computer software programs and required JDS to use them. The court noted that federal courts have repeatedly held that it is permissible for a franchisor to require franchisees to use its proprietary computer systems. The court found no evidence of bad faith by MSFA and concluded it was unlikely that JDS would be successful on the merits of its FIPA claim.

The court also held that JDS failed to show it was likely to suffer irreparable harm if MetalTech were installed in its stores. MSFA showed that 78 out of 86 stores were using MetalTech and on average those stores saw sales increases after the conversion. The court found that any impediment imposed by MetalTech was not so great as to impair JDS's ability to continue operating its business. Accordingly, the court found an injunction was not warranted and denied JDS's motion.

An important aspect of operating a franchise that may be overlooked by potential franchisees is the possibility of changing or upgrading technology at the franchisor's request. Franchisors typically reserve the right to require franchisees to upgrade computer and technology systems. Prospective franchisees should understand before they enter into a franchise agreement that technology upgrades are likely to occur during the life of their franchised business.

More Info: JDS Group Ltd. v. Metal Supermarkets Franchising, W.D.N.Y.

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
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.

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