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Aug152014

NLRB McDonald's Ruling May Put Crimp on Franchising

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

AUGUST 2014

 

Los Angeles Franchise Panel Discussion

Barry Kurtz will participate in a panel discussion and Q&A for potential franchisors, franchisees, business attorneys and accountants in Southern California, regarding the A-Zs of franchising a business, buying a franchise, accessing capital, and other topics. The breakfast event will be hosted by The Los Angeles Business Journal on October 3rd in Los Angeles. Click to email Chris Podbielski for further details about the event.

 

Franchise Distribution Lawyers*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal Specialization

California Supreme Court Cites Law Review Article by David Gurnick

In Patterson v. Domino's Pizza LLC (see Franchisor 101 for details below), the Supreme Court cited an article co-authored by David Gurnick, entitled: Minimizing Vicarious Liability of Franchisors for Acts of Their Franchisees. Mr. Gurnick's 1987 article was published in the ABA Franchise Law Journal.

 

Tal Grinblat Appointed as Co-Chair, Franchise Law Committee

The Business Law Section of the State Bar of California appointed Tal Grinblat as Co-Chair of the Franchise Law Committee for the 2014-2015 term. Mr. Grinblat's term began at the end of the State Bar's annual meeting in San Diego on September 14th. The Franchise Law Committee (with franchisee and franchisor constituencies) works with the Department of Business Oversight and the State Bar in sponsoring legislation involving franchising in California.

 

Barry Kurtz and David Gurnick published in Los Angeles Business Journal

What should franchisors look for in potential franchisees? How should investors choose a franchise system? Read: What to Look for in a Franchisee or Franchisor for insights. 

 

FRANCHISOR 101:
California Supreme Court Overturns 2012 Domino's Decision

 

On August 28, 2014, the California Supreme Court reversed a 2012 Court of Appeal decision in Patterson v. Domino's Pizza, LLC. The lower court held that franchise operating systems, like Domino's, deprive franchisees of the ability to control the manner and means of their business operations, thus making the franchisee's employees the franchisor's employees for vicarious liability purposes.

Ms. Patterson, an employee of a Domino's Pizza franchisee, alleged she was sexually assaulted by the store manager. Patterson sued the franchisee, as well as the franchisor, Domino's Pizza, claiming Domino's was vicariously liable for the assault. Domino's argued that it was not Ms. Patterson's employer because the franchise agreement stated that the franchisee was an independent contractor and that Domino's was not involved in the "training, supervision or hiring of [the franchisee's] employees."

The Court of Appeal reversed, holding the case could proceed to trial since reasonable inferences could be drawn from the franchise agreement and Domino's' management guidelines that the franchisee lacked managerial independence and that evidence existed that a Domino's area representative had interfered with the franchisee's employment decisions by suggesting the franchisee should fire the store manager.

Recognizing that system-wide controls in the traditional franchising context, which are designed to protect a franchisor's trademarks, trade name and goodwill, do not necessarily deprive franchisees of day-to-day operational control of their businesses or employment practices, the Supreme Court overturned the Court of Appeal's decision. It held:

The "means and manner" test generally used by the Courts of Appeal cannot stand for the proposition that a comprehensive operating system alone constitutes the "control" needed to support vicarious liability claims like those raised here.

The court instituted a new test for determining whether a franchisee's employees may be deemed employees of the franchisor, holding:

A franchisor becomes potentially liable for actions of the franchisee's employees only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees.

The Supreme Court found Domino's had not retained or assumed a general right of control over the hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees since Domino's had no right or duty to control employment or personnel matters (including sexual harassment training), and did not do so.
To read the entire case, click: Taylor Patterson v. Domino's Pizza, LLC.

 

FRANCHISEE 101:
Forum Selection Clauses May Be Enforceable

A recent decision in Allegra Holdings, LLC v. Davis demonstrates that courts are enforcing forum selection clauses in favor of out-of-state franchisors and against in-state franchisees, notwithstanding franchise anti-waiver protections.

In 2003, Allegra Holdings, LLC, a Michigan LLC, as franchisor, entered into a franchise agreement with Fox Tracks, Inc., a Minnesota corporation, as franchisee, for an Allegra Print and Imaging Center in Burnsville, Minnesota.

The franchise agreement provided that all actions arising under the franchise agreement must be brought in Troy, Michigan. But, the Minnesota Franchise Act (MFA) prohibited franchisors such as Allegra, except in certain specified cases, from requiring litigation to be conducted outside of Minnesota. Allegra filed suit in a U.S. District Court in Michigan for trademark infringement and breach of franchise agreement. Fox filed a motion to transfer the case to Minnesota, arguing that the Franchise Agreement and the MFA required Allegra to litigate its claims against Fox in Minnesota.

The district court began its analysis by citing Atlantic Marine Const. Co., Inc. v. U.S. District Court for the Western District of Texas, in which the U.S. Supreme Court ruled that in all but the most unusual of cases, the "interests of justice" are served by enforcing valid forum selection clauses in contracts, including franchise agreements. However, the court rejected Fox's argument that Allegra's suit in Michigan was tantamount to requiring Fox to litigate outside of Minnesota in violation of the MFA, opining that nothing in the contractual language limited Fox from selecting a Minnesota court should Fox choose to file suit against Allegra. Further, the court noted that nothing in the referenced Minnesota statutes or rules precluded parties to a franchise agreement from agreeing on a forum selection. The court held, "A choice of forum is not tantamount to a choice of law." Here, it concluded, "Nothing in [this] choice of forum provision in any way diminishes [Fox's] right to avail [itself] of Minnesota laws."

Similarly, courts have refused to apply a provision of the California Franchise Investment Law (CFIL) that voids any provision in a franchise agreement that restricts venue to a forum outside California when franchisors have sued California franchisees outside of California. In TGI Friday's Inc. v. Great Nw. Rests. Inc., a U.S. district court in Texas enforced a franchise agreement setting venue in Texas, noting that:

Defendants do not explain...why this court should apply California law to void a franchise agreement that provides that Texas law applies to all matters relating to the agreement, and that Texas is the forum for any disputes relating to the agreement.

In contrast, in Frango Grille USA Inc. v. Pepe's Franchising Ltd., a California district court recently refused to enforce an agreement setting venue in London, England, stating that the Atlantic Marine precedent enforces valid agreements on venue selection, but the application of the CFIL rendered the contractual forum selection provision invalid.

Click here to read the opinion for Allegra Holdings LLC v. Fox Tracks, Inc.

 

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 2014. All Rights Reserved.

 

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