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Tuesday
Nov292016

Franchise 101: Recent "Franchisor as Joint Employer" Developments

Franchise 101 News

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

 

 

November 2016

 

Franchise Lawyers

David Gurnick Quoted in Franchise Lawyer

"Everybody is aware how divided the Supreme Court is, with all sorts of 4-5 or now 4-4 decisions. This was a 9 to 0 decision that a forum selection clause in an agreement is enforceable." Click to read: Ten Cases Rise to Top for Two Attorneys 

 

FRANCHISOR 101:
Recent “Franchisor as Joint Employer” Developments

 

In the last month, McDonald's settled a class action with employees of a franchisee, and a new President of the United States was elected. These two events have something in common with regard to franchising: they are significant developments concerning the issues of franchisor liability for actions of franchisees, and joint franchisor-franchisee employment of workers at franchised locations.

The settlement was in the case of Ochoa v. McDonalds. A U.S. District Court in California certified a class of more than 800 current and former workers of a multi-unit McDonald's franchisee in the San Francisco Area. They claimed damages for unpaid wages, unpaid overtime and time spent maintaining work uniforms. They sued their direct employer and also McDonald's Corporation, claiming the franchisor was also their employer. The court ultimately ruled against McDonald's in part, saying the claims might be valid if the workers truly thought they worked for McDonald's Corporation. The workers alleged they applied for their jobs on McDonald's website, wore McDonald's uniforms, served McDonald's food, worked at restaurants named McDonald's and the McDonald's name was on their paychecks.

Private claims like this received a boost in 2014 when the National Labor Relations Board (NLRB) alleged McDonald's was a joint employer with its franchisees. In 2015 and 2016 numerous actions were brought in various franchise systems, claiming that franchisors, along with their franchisees, were joint employers of the workers. These claims were made in wide ranging industries, among them restaurants, lodging, convenience stores and fitness.

In the Ochoa case, rather than risk liability to the workers, McDonald's settled for 3.75 million. In 2015, 7-Eleven similarly settled a joint employer liability claim brought by a 19-year sales associate of a New York 7-Eleven franchisee, although that settlement was for only $5,000, including attorneys' fees. A U.S. District Court in New York approved the 7-Eleven settlement.

The NLRB claims against McDonald's in 2014 were the result of the Board adopting a new definition of "joint employer," after President Obama appointed a majority of the Board's members. Under the prior standard, which had been in effect for over thirty years, joint employer status existed where two separate entities shared or co-determined matters governing the essential terms and conditions of employment. For a franchisor (or anyone) to be a joint employer, they had to exert "direct and immediate" control over employment actions like hiring, firing, discipline, supervision, and direction. The new standard is wider, broader and vaguer, assessing whether a claimed employer has sufficient control over employees' essential terms and conditions of employment to permit meaningful bargaining. Words and phrases like "sufficient control," allow this condition to be met by direct, indirect (through an intermediary) or even a reserved right of control, even if not actually exercised.

However, relief for franchisors may be coming. By law, the NLRB is headed by a five member board, appointed by the President. Currently the Board has two vacancies. It is possible the filling of vacancies by President Trump may change the political and philosophic makeup of the board, resulting in a return to the prior joint employer definition or something closer to it.

Regardless of the particular formulation of the joint employer standard, and other standards creating potential liability for acts of franchisees (actual agency, apparent agency, direct negligence, co-venture or joint venture liability and others), there are many steps franchise companies can take to reduce the risk of being held liable for acts or omissions of their franchisees. Earlier this year, we presented an extensive list of ways franchisors and franchisees should consider to prevent or reduce risk of co-employer liability claims. Given the recent developments, please revisit: 68 Steps to Reduce Risk of Joint Employer Liability.

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 2016. All Rights Reserved.

Wednesday
Nov022016

Franchise 101: Protecting Ops Manuals; & Business Relationship Laws

Franchise 101 News

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

 

October 2016

 

Franchise Lawyers

On the way to the Forum

Barry Kurtz, David Gurnick, Tal Grinblat, Samuel C. Wolf and Gabriel A. Wintner will all attend the ABA's 39th annual Forum on Franchising in Miami next week. David will co-present the annual Judicial Update, providing a recap of key court decisions involving franchise litigation.

David Gurnick Selected

Congratulations to David Gurnick, one of only a handful of franchise attorneys to be named in the Los Angeles edition of Best Lawyers Magazine for 2017.

Barry Kurtz in Valley Lawyer

"...Clients need to be realistic about the costs of becoming a franchise..."

Click to read: How to Lead Your Clients to the Purchase of a Franchise

 

FRANCHISOR 101:
Original Content Needed to Protect Ops Manuals

 

An important part of the franchise system is the confidential operating manual. Many franchisors claim protection of operating manuals under the law of trade secrets and copyright.

Keeping the contents confidential is an important step in claiming trade secret rights. It is a good idea to include a confidentiality notice on the cover, near the front, and in a header or footer of each page, to keep track of each printed copy and restrict access to printed and online copies.

Copyright law protects original creative expression. A recent court decision demonstrated some limits of copyright protection. Civility Experts is in the business of teaching civility, etiquette and good manners, to children and others. It brought a lawsuit claiming contents of its manuals had been copied by Molly Manners, a Colorado company in the same business. The parties had previously settled a similar claim.

In the new lawsuit the court performed a meticulous comparison of the two companies' manuals, finding numerous places where Molly Manners copied from Civility Experts. But in every instance, the court ruled the copied material was so basic, or was the only way of saying something, that the original content that had been copied, was not protectable under copyright law. The court found copying but still rejected Civility Experts' claim.

In the earlier litigation Molly Manners had entered into a settlement agreement, promising not to copy Civility Experts material. Based on the earlier agreement, the court said Civility Experts might have a claim for breach of contract. In view of this potential claim, the later dispute was also settled.

The Civility Experts case presents a valuable lesson for franchisors. Try to develop creative, original content in the operating manual, instruction manuals and other materials, so that these will be protectable under copyright law as well as trade secret law.

One further caveat. To register a copyright, a work must be filed with the U.S. Copyright Office. That makes the work public, which prevents trade secret protection. To protect a confidential manual, it is essential to use the Copyright Office's special handling procedure, which allows the applicant to file and obtain a registration, while preserving the claim of confidentiality and trade secrecy for a manual.

Civility Experts Worldwide v. Molly Manners, LLC, 167 F.Supp.3d 1179 (D. Col. Mar. 7, 2016)

 

FRANCHISEE 101:
Is It a Franchise? Yes and No

A federal court in Indiana made an interesting decision on whether a business relationship was a franchise. Wabash National Corp. is a famous maker of semitrailers. Wabash notified a dealer in Texas that its dealership was going to be terminated. The dealer sued in Indiana where Wabash is based, claiming protection under Indiana's Franchise Investment Act, which requires a franchisor to have good cause to terminate a franchisee, and under Indiana's motor vehicle franchise law, which prohibits unfair practices.

The two Indiana statutes define "franchise" differently. Under the motor vehicle statute, a relationship is a franchise if the manufacturer and dealer have a "community of interest." The court ruled there was a community of interest because the dealer had a large investment in and a large portion of its revenues came from selling Wabash semitrailers. The court allowed the dealer's claim under the motor vehicle statute to proceed. But the Indiana Franchise Act defines a franchise as a relationship involving a marketing plan, brand name and franchise fee. Because the Dealer Agreement said the dealer controls its business and decision making, the court ruled there was no marketing plan provided by Wabash, and therefore no "franchise" under the Act. So this part of the lawsuit was dismissed.

It is often said that the law can be counterintuitive. The Wabash case is an example, because the dealer was found to be a franchisee under one state law, and not a franchisee under a different law. This case shows the importance of understanding how franchise and dealer relationships align with the specific laws that apply in a particular state.

Ervin Equipment, Inc. v. Wabash National Corp. No. 4:15-CV-104-PPS-PRC, 2016 WL 2892132 (N.D. Ind. May 17, 2016).

 

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 2016. All Rights Reserved.

Tuesday
Sep132016

Franchise 101 Spotlight: The International Franchise Association

Franchise 101 News

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

 

Special Edition

 

Franchise Lawyers

President of International Franchise Association (IFA) Visits Lewitt Hackman

 

For more than 55 years, the International Franchise Association has been committed to improving methods and business practices for all participants in franchising - whether working with the Federal Trade Commission, lobbying on legislation; or collaborating with franchisors and franchisees to improve relationships. The Lewitt Hackman firm has been a strong supporter of IFA, participating in the Association's annual conventions and often speaking at the annual IFA legal symposium.

In recent years, IFA has faced an important threat to franchisors and franchisees - the changing standard on "joint employers" and increasing risks of "joint employer liability." To increase awareness about this issue, receive ideas about IFA member preferences, and meet and greet the many franchise clients of the Lewitt Hackman firm, IFA President and Chief Executive Officer Robert Cresanti traveled from Washington D.C. to visit Lewitt Hackman. President Cresanti spoke with several of our franchisor and franchisee clients and firm attorneys about the joint employer liability problem, other work of the IFA, and developments in franchising.

Mr. Cresanti provided a history of joint employer litigation. In an unprecedented move in 2014, the National Labor Relations Board's general counsel issued unfair labor practice complaints against McDonald's and several of its franchisees, seeking to hold the franchisor partially liable for alleged labor practices because the franchisor established general operating procedures. This is alarming to IFA because most franchisors establish general operating procedures.

In 2015 the NLRB decided a case involving waste disposal company Browning-Ferris. The Board changed decades of practice, deciding that direct and immediate control of an employee is no longer the standard for determining joint employer liability. Based on the Browning-Ferris precedent franchisors could be liable as joint employers by just having the right to indirectly control terms of employment, even if a franchisor never exercised that control. The decision blurred the lines, further threatening the franchise business model.

Mr. Cresanti described the numerous closed doors he and IFA encountered in trying to explain a franchisor's tenuous position in light of the NLRB's decisions. Despite obstacles, he vowed IFA will continue fighting to keep franchise business models thriving in the U.S.

Several Lewitt Hackman clients who attended indicated they wish to get more involved in IFA. Lewitt Hackman has signed up to host regular IFA networking events, and firm lawyers will continue to speak at IFA events. Lewitt Hackman thanks IFA CEO Robert Cresanti for visiting our firm and encourages franchisors and franchisees to thin about involvement in IFA. More information is at www.franchise.org.

 

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 2016. All Rights Reserved.

 

 

Tuesday
Aug302016

Franchise 101: Non-Compete Agreements & Projected Earnings

Franchise 101 News

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

 

August 2016

 

Franchise Lawyers

FRANCHISOR 101:
Non-Competes for Franchisees’ Employees

A "non-compete" provision limits the franchisee's ability, after the franchise agreement ends, to continue to work in a similar type of business to the franchise within a certain time period and geographic area. The purpose is to protect the franchise system for a time against a competitor who "knows the system from the inside." Non-compete provisions are often disfavored by courts. What about non-compete agreements for the employees of franchisees?

Until recently, Jimmy John's, a franchisor of sandwich shops, provided its franchisees with sample non-compete agreements for franchisees to use with their own employees, including order takers, sandwich makers, and delivery drivers. The agreements stated that, for two years after leaving employment, a former employee could not work at any business within a 2-mile radius of a Jimmy John's location if that business made more than 10 percent of its revenue from sandwiches.

However, last June Illinois Attorney General Lisa Madigan filed suit against Jimmy John's to stop this imposition of "unlawful" and "highly restrictive" non-compete agreements on its low-wage workers. Illinois requires that non-compete agreements be "premised on a legitimate business interest and narrowly tailored in terms of time, activity, and place." The complaint alleges the agreements lock these employees into their jobs and prevent them from seeking higher-paying jobs elsewhere, while giving their employers no reason to increase their wages or benefits.

Shortly thereafter, New York Attorney General Eric T. Schneiderman announced that his office reached a settlement with Jimmy John's regarding the agreements, stating that "Non-compete agreements for low-wage workers are unconscionable." Under the settlement, the franchisor will stop providing the sample agreements to its New York franchisees and will also inform those franchisees that the Attorney General considers such agreements unlawful and void.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.

FRANCHISEE 101:
How Far Do Earnings Projections Go?

A franchisor is allowed to make "financial performance representations" in its disclosure documents. These figures may project how much money a franchisee is likely to make and can play a critical part in the franchisor's sales process. But if the numbers are way off, what kind of legal recovery can the franchisee get?

In Legacy Academy, Inc. v. Doles-Smith Enterprises, Inc., a Legacy Academy ("Legacy") franchisee suffered losses during the first 3 years of operating its daycare franchise. The franchisee sued, claiming that Legacy had misrepresented the projected cash flow of its franchises in the Franchise Offering Circular they provided to the franchisee. At trial, the franchise owners showed that they paid $40,000 for the franchise and took out $200,000 in loans to cover start-up expenses before the daycare was operational. They also testified that they lost their life savings in order to keep the daycare operational while it lost money. The jury agreed and awarded the franchisee $390,000 in damages.

However, an appeals court found the franchise owners failed to present evidence of damages necessary to receive an award. The court explained that the owners certainly could not recover the difference between what their business made and what the Offering Circular projected because the figures given were only a projection - not a guarantee.

The owners may have been able to recover their costs to buy and start the business - the $40,000 franchise fee and $200,000 in loans - had they asked to "rescind" the franchise agreement: to be put back into the financial place they were before they signed the agreement. But instead, the owners asked for all of the damages they suffered as "consequences" that flowed as a result of the franchisor's misrepresentation. The court concluded that only the owners' ongoing losses due to operating the franchise qualified as such consequential damages. But testimony the franchise owners gave about those particular damages - the "loss of their life savings" - was so vague that a jury had to speculate what the fair recovery should be. Therefore, the appeals court reversed the jury verdict and found in favor of Legacy.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.

 

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 2016. All Rights Reserved.

Wednesday
Jul272016

Franchisor 101: DBO re Outdated FDDs & Unregistered Franchises; and Domino's Delivered NY Wage Theft Claims 

Franchise 101 News

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

 

July 2016

 

Franchise Lawyers

David Gurnick in The Franchise Lawyer

 

”Franchise systems can build anti-terrorism measures into their systems, in ways that make business sense and align with their legal and moral principles..."

Click to read: Franchise Systems’ Roles in Combatting Terrorism 

 

FRANCHISOR 101:
Outdated FDDs and Unregistered Franchises

The California Department of Business Oversight ("DBO") recently issued three Orders against franchisors for violating California's franchise laws.

 No Good Deed

 

#1: Senior's Choice provides companion care services to seniors. In 2013 Senior's Choice renewed their franchise registration and disclosed the initial franchise fee was $45,000. Then they provided a prospective franchisee an older Franchise Disclosure Document, stating an initial fee of $25,000 not $45,000.

The DBO found Senior’s Choice violated the law by:   

  • not providing the current FDD;

  • selling a franchise on terms that differ from the registered offer (by lowering the initial fee from $45,000 to $25,000); and

  • violating a prior Desist and Refrain order from 2007 for unlawfully selling franchises without registration.

The DBO ordered Senior Choice directors, officers and managers to attend training on franchise law compliance, pay a penalty of $7,500 and not further violate the Franchise Investment Law.

This case shows that the government objects even when franchisors act to benefit franchisees (by lowering fees) or accidentally provide the wrong FDD.

 

Brewer’s Remorse

 

#2: In the Great Khan case, the DBO found Great Khan and its principals sold unregistered franchises and issued an order prohibiting further violations. Great Khan obtained a franchise registration in 2001 but failed to renew the registration in 2002.

After expiration of the registration, Great Kahn sold five franchises to California residents. Each franchisee paid an initial fee of at least $25,000. Great Khan and its principals were ordered to Desist and Refrain from further offers or sales until their franchises were registered or exempt from the registration requirements.

#3: In a third case the DBO found World Coffee Kiosk (WCK) offered and sold franchises without registration. WCK sold a business in which the operator sold approved coffee drinks, food products and merchandise in an assigned territory from kiosks at malls. Additionally, the operator was required to use approved signage and advertising and operate under WCK's plan, manual, policies, standards and procedures. WCK could require an operator to relocate.

Operators paid an initial franchise fee of at least $25,000. The DBO found this was a franchise that was not registered or exempt. WCK was ordered to Desist and Refrain from further offers or sale of franchises until they registered or satisfied an exemption.

The Great Khan and World Coffee Kiosk cases show that failing to renew a registration or not registering at all can have serious consequences and penalties.

 

Domino’s Delivered NY Wage Theft Claims

 

In May, 2016, the New York Attorney General (AG) brought a claim against Domino's Pizza for labor code violations at three franchised locations.

The AG alleged failure to pay delivery workers the legal minimum wage and overtime, and failure to fully reimburse workers for delivery expenses - totaling over $567,000 in back wages and underpayments to workers, liquidated damages and interest.

The NY AG alleged Domino's is liable as a joint employer because it exercised a high level of control over employee conditions at franchised stores and had a significant role in causing wage violations; and that Domino's role was significant in hiring, firing, discipline, wage payments, and in oversight and supervision of work.

The franchisor allegedly caused many of the wage violations by encouraging franchisees to use a "Payroll Report" function in the software system Domino's specified for franchisees (called "PULSE"). The AG claimed Domino's knew, but failed to disclose, that PULSE's "Payroll Report" systematically under-calculated gross wages owed to workers.

The Domino's case shows that franchisors should be careful in exercising control over a franchisee's operations concerning hiring, firing and employee relations, and should carefully evaluate whether to assist with payroll software. These controls can lead to claims by the government and franchisees that the franchisor exercises control and is therefore liable for claims at franchised locations.

 

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 2016. All Rights Reserved.

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