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Entries in CA franchise laws (4)

Wednesday
May302018

Franchise 101: Pain at the Pump; and Pizza Franchisor Gets Burned

Franchise 101 News

Best Lawyers 2018 BadgeSouthern California Tier 3 Best Lawyers in Franchise Law 2018 bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com
tvernon@lewitthackman.com



 

 

May 2018

  

International Franchise Association’s Legal Symposium

Barry Kurtz, Tal Grinblat and David Gurnick attended the 51st Annual IFA Legal Symposium this month. The symposium addresses current laws, regulations and business challenges impacting franchise systems throughout the world.

We are Growing!

Taylor M. Vernon joined our Franchise & Distribution Practice Group as an Associate. Taylor earned his JD at the UCLA School of Law in 2011 and a B.A. in History from the University of Texas at Austin. Taylor's practice focuses primarily on franchise, distribution, licensing and corporate transactions. With seven attorneys, we now have one of the largest franchise & distribution practice groups in the western United States.

FRANCHISOR 101:
Pain at the Pump

Pumped Up Franchisor

In Curry v. Equilon Enterprises LLC, a California court ruled, and the Court of Appeal affirmed, that a class-action wage and hour lawsuit against Shell Oil could not go forward because the service station manager bringing the suit was not an employee of Shell. The manager was employed by the company that contracted with Shell to operate the station.

Franchise Distribution Attorneys

Shell granted leases and operating agreements giving operators a rental interest in service station convenience stores and carwashes. Operators kept all profits from the convenience stores and carwashes. Shell paid the operators to run the station fuel facilities.

ARS had a contract with Shell to operate multiple stations. The plaintiff managed two locations. She was hired by an ARS employee, trained by ARS employees, reported to ARS employees, and supervised ARS employees. ARS designated the plaintiff as an exempt employee and set her salary.

The plaintiff brought a class-action suit against ARS and Shell, claiming she and other managers were misclassified as exempt employees, were denied overtime pay and were denied meal and rest breaks. The plaintiff also claimed that ARS and Shell were joint employers.

Definition of Employer

The appellate court noted three alternative definitions of what it means to employ someone:

  • To exercise control over wages, hours or working conditions;

  • To suffer or permit to work;

  • To engage.

The court said the first definition did not apply because Shell did not control the plaintiff's wages, hours or working conditions. ARS was responsible for training the plaintiff. ARS alone determined that she would be exempt from overtime requirements, where and when she would work, and her compensation and health benefits. And ARS controlled what the plaintiff did on a daily basis. The second definition did not apply because Shell had no authority to hire or fire the plaintiff.

As to the third definition, the court said "to engage" referred to the multifactor test used to determine if a worker is an employee or independent contractor. Under this test as well, the plaintiff was not employed by Shell. She was engaged in a distinct occupation. She was not supervised by Shell. Shell did not require a particular skill set for individuals hired by ARS. And Shell did not control her length of employment or compensation.

Read: Curry v. Equilon Enterprises LLC

Soon after this case was decided, the California Supreme Court, in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, announced a new three-part test for determining if an individual is an employee or independent contractor for claims under California's Wage Orders. To show that a worker is an independent contractor, a business must establish each of three factors: (A) the worker is free from control and direction of the hiring entity in performing the work, under the contract for the work and in fact; (B) the work is outside the usual course of the hiring entity's business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business. Failure to establish any one of these factors means a worker will be classified as an employee.

The Supreme Court's decision will impact how many industries do business, and many businesses will need to re-examine their use of independent contractors, and their current agreements, to determine if re-classification is needed.

FRANCHISEE 101:
Pizza Franchisor Gets Burnt

Pizza Oven

A recent case from Indiana demonstrates consequences to a franchisor that deviates from the contractually agreed audit method. In Noble Roman's Inc. v. Hattenhauer Distributing Co., an Indiana federal court granted a pizza franchisee (Hattenhauer) summary judgment on its franchisor's underreporting claim.

In 2014, Noble Roman's audited non-traditional franchisees who paid royalties based on reported sales. These audits included two of Hattenhauer's locations. The audits relied on a review of Hattenhauer's purchases from its distributor and estimates of Hattenhauer's rate of waste, product mix, and pricing to estimate gross sales. Noble Roman's did not review Hattenhauer's books and records or verify the information in the distributor reports.

Based on the audits, Noble Roman's concluded that Hattenhauer's locations underpaid royalties. Without giving prior notice, Noble Roman's tried to electronically withdraw funds from Hattenhauer's bank account to cover the unpaid royalties. Hattenhauer's bank rejected the attempted transfers. Noble Roman's then made more attempts to withdraw the money, without providing Hattenhauer notice.

Noble Roman's sued Hattenhauer, claiming it breached the Franchise Agreements by underreporting sales and failing to pay proper royalties. Noble Roman's argued its audits were authorized under the Franchise Agreements. Hattenhauer counterclaimed, alleging that Noble Roman's breached the Franchise Agreements by improper calculation of gross sales and unauthorized attempts to withdraw money. Hattenhauer argued that, pursuant to the Franchise Agreements, it was required to pay royalties on actual gross sales, not on sales that Noble Roman's believed it should have achieved.

The court rejected Noble Roman's argument, noting that royalties Noble Roman's sought to collect were not properly calculated and therefore were not owed-and that nothing in the Franchise Agreements gave Noble Roman's the right to collect unpaid royalties calculated based on an audit, by means of electronic withdrawals without Hattenhauer's consent.

Franchisors should pay particular attention to the contractual rights they can enforce against franchisees and not exceed those rights in the process of collection efforts.

Read: Noble Roman's Inc. v. Hattenhauer Distributing Co.

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 2018. All Rights Reserved.
Thursday
Mar292018

Franchise 101: Liability as Certain as Death & Taxes; and To First Refuse, or Not to Refuse

Franchise 101 News

Best Lawyers 2018 BadgeSouthern California Tier 3 Best Lawyers in Franchise Law 2018 bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



 

March 2018

 

 

Franchise Distribution Attorneys

FRANCHISOR 101:
Liability as Certain as Death & Taxes

Structuring a franchise to reduce risk of joint employment and vicarious liability means limiting a franchisor's control over franchisees. This is a challenge in a professional services franchise, where the brand is intertwined with the franchisee's personnel and the end product.

A California federal court held that a franchisee's former customer sufficiently alleged claims that tax preparation franchisor Jackson Hewitt exercised sufficient control over processing of tax returns to be vicariously liable for fraudulent conduct of a franchisee's rogue employee. The franchisor must also face claims of making fraudulent statements about accuracy of its tax preparation services.

The customer claimed the franchisee manipulated his tax returns to get a larger refund, and kept part of the refund as fees, without the customer's knowledge. In a prior ruling, the Court found the franchisor's controls were typical of a franchise relationship, and that control over certain aspects of a franchisee's operations was insufficient to create vicarious liability. This time, the customer alleged that Jackson Hewitt controlled the instrumentality of the harm by hiring and training tax preparers, and reviewing, approving and submitting tax returns to the IRS through the franchisor's proprietary and mandatory computer system. The Court was persuaded by allegations that the franchisor's "Code of Conduct" referred to the reader as an "employee" of Jackson Hewitt (not of the specific franchisee), mandated background checks and training programs to prevent preparation of fraudulent returns, and set parameters for termination of franchisee employees for failure to comply with system requirements.

Jackson Hewitt was also alleged to have made fraudulent ads touting 100% accurate returns, comparison to mom and pop tax preparers, and the "Preparer's Pledge" to handle a customer's tax return like their own. The Court said the purpose of the ads was to engender trust in potential customers, so they would hire Jackson Hewitt and its franchisees to prepare their taxes.

A professional services franchisor should be cautious in preparing training materials and manuals to delineate no more supervision than needed over franchisee personnel, to protect the franchisor's brand and intellectual property while trying to reduce the risk of vicarious liability for acts of a franchisee's employees.

Read: Lomeli v. Jackson Hewitt, Inc.

 

FRANCHISEE 101:
To First Refuse, or Not to Refuse

A franchisee looking to transfer assets of a franchised business may be subject to the franchisor's right of first refusal, the franchisor's option to purchase the business, or both, depending on the language of a franchise or dealer agreement.

In a federal court in Pennsylvania, a franchisee of seven car dealerships prevailed against Audi of America, the franchisor of one of the dealerships. Audi claimed the franchisee breached Audi's dealership agreement and violated state dealer law when, subject to the franchisor's right of first refusal, the franchisee did not provide pricing and other terms to transfer an Audi dealership.

The dealership agreement and Pennsylvania dealer law granted Audi a right of first refusal if the franchisee attempted to sell its majority ownership interest in the Audi dealership. The franchisee found a buyer and entered into an asset purchase agreement which packaged all seven dealerships as an "auto multiplex" for $17 million. The agreement did not separately price the Audi dealership. Believing the franchisee was acting in bad faith in valuing the Audi dealership at $8 million, Audi sued to block the transaction. A court granted a preliminary injunction.

After Audi filed the lawsuit, the franchisee and buyer signed two addenda to the purchase agreement, seeking to remove the Audi dealership from the sale. The franchisee contended that Audi's right of first refusal ended because it was no longer selling the Audi dealership. The trial court sided with the franchisee, finding there was no breach of the dealership agreement because the second addendum removed the Audi dealership, and the terms of the dealership agreement permitted the franchisee to withdraw the proposed sale after Audi elected its purchase right.

The Court also rejected Audi's claim that the first refusal right ripened into an irrevocable option to buy the dealership. It was only a general right of first refusal, which Audi failed to exercise before the franchisee withdrew the Audi dealership.

While Audi claimed it was unable to exercise its right due lack of a good faith price breakdown, the dealer was free to withdraw the asset from the sale. Accordingly, the franchisor received the full benefit of its right of first refusal, and was not entitled to further rights after failing to accept the right of first refusal prior to the withdrawal.

Read: Audi of America, Inc. v. Bronsberg & Hughes Pontiac, 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 2018. 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.

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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