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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.

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.

Friday
Jan292016

DOL on Joint Employer Liability; and CA Expands Franchisee Protections

Franchise 101 News

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

January 2016

 

Franchise Lawyers

Barry Kurtz, David Gurnick & Tal Grinblat: Super Lawyers 2016

Three of our franchise law attorneys were selected as 2016 Super Lawyers, in the Franchise/Dealership category. Only 11 attorneys in all of Southern California were so named. Among them, Barry Kurtz, David Gurnick and Tal Grinblat have a combined 23 years of Super Lawyer recognitions. All three attorneys are also Certified Specialists in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization. 

Tal Grinblat Co-Authors Legislation

As Co-Chair of the Franchise Law Committee, Tal Grinblat wrote an Affirmative Legislative Proposal (ALP) to enable franchisors wishing to test California markets to exhibit at trade shows without first registering as franchises. The ALP was approved by the Trustees of the California Bar and will now be introduced as a bill in Sacramento by Assembly Judiciary Committee Member Brian Maienschein. Click: BLS-2016-01 for further information. 

San Fernando Valley Business Journal Quotes David Gurnick re PizzaRev

"It's important for a franchiser to develop critical mass in a particular market before expanding into neighboring regions..." Read: Chain Offers Slice for further details.

Barry Kurtz Presentation at Southwestern University

Barry Kurtz co-presented a seminar regarding business law at his alma mater, Southwestern University. The one hour presentation, "Transactional Law in Practice" was geared towards law students and graduates of the school. Mr. Kurtz is an active member of the Alumni Association Board of Directors, which co-sponsored the event.

David Gurnick Speaks at San Fernando Valley Bar Association

David Gurnick participated in the San Fernando Valley Bar's MCLE Marathon, giving a 90 minute presentation entitled "Online Negativity: How to Fight Back." The marathon is held each year, and provides an opportunity for area lawyers to earn continuing education credits.

FRANCHISOR 101:
Department of Labor Weighs in on Joint Employer Liability

 

Recently, some plaintiffs - employees of franchisees - have tried to hold franchisors responsible for unpaid overtime and other claimed violations by franchisees they work for. They use the theory that franchisors are their joint employer, along with the franchisee who hires, pays and directs them.

In the latest development of the changing standard for joint employer liability, the U.S. Department of Labor (DOL) issued an Administrator's Interpretation ("AI") stating the analysis the DOL plans to apply in these cases.

The AI first distinguishes "horizontal" and "vertical" joint employment. Horizontal is where an employee works at the same time for two separate but related or overlapping employers. Vertical means the work an employee does for one direct or "intermediary employer" also benefits another company, the "potential joint employer." The benefit exists because the direct or intermediary employer provides services benefitting another company that may include labor and some employer functions, like hiring and payroll. The DOL believes a franchise is vertical, in which the franchisee is an intermediary employer that makes the franchisor a potential joint employer. In the DOL's view, a franchisee provides a labor force that benefits the franchisor by getting the franchisor's product, whether foods or merchandise or services, to consumers.

The AI says that a vertical joint employment analysis "must be an economic realities analysis and cannot focus only on control." It provides seven factors to be considered in determining if an employee "is economically dependent on the potential joint employer." The factors suggesting economic dependence, and joint employment, are:

1. The employee's work is directed, controlled, or supervised by the potential joint employer.

2. The potential joint employer may hire, fire, or modify the employee's employment conditions.

3. The employee's work that benefits the potential joint employer is full-time, of long duration, or permanent.

4. The employee's work is repetitive or rote, requiring little skill or training.

5. The employee's work is an integral part of the potential joint employer's business.

6. The employee works on premises owned or controlled by the potential joint employer.

7. The potential joint employer performs administrative functions for the employee that would typically be performed by an employer, like handling payroll or providing transportation.

Some of these factors resemble the relationship between a franchisor and employees of its franchisees. But in a set of frequently asked questions accompanying the AI the DOL states that "the existence of a franchise relationship, in and of itself, does not create joint employment." Which franchise relationships do create joint employment will be developed in future guidance and decisions. 

Read: U.S. Department of Labor Administrator's Interpretation No. 2016-1

FRANCHISEE 101:
California Expands Protections for Franchisees

California Assembly Bill 525, passed into law in 2015 applies to franchise agreements entered into or renewed on or after January 1, 2016. It expands and provides new protections for franchisees. Franchisees subject to California now benefit from the following provisions:

1. A franchisor may not terminate a franchise agreement for minor infractions; but may terminate only if the franchisee failed to substantially comply with lawful requirements imposed on the franchisee by the franchise agreement. The franchisor must give notice and at least 60 days opportunity to cure the default.

Exceptions: in certain severe events, such as franchisee bankruptcy or abandonment of the franchise business, a franchisor may give notice of immediate termination without an opportunity to cure.

2. On termination or non-renewal of a franchise, the franchisor must buy from the franchisee all inventory, supplies, equipment, fixtures, and furnishing purchased or paid for by the franchisee under the terms of the franchise agreement. The franchisor must pay for the items at the price paid, minus depreciation, and must buy any items the franchisee purchased from the franchisor or its approved suppliers and sources.

Exceptions: The franchisor need not buy items that were personalized, or that the franchisee was not contractually required to purchase. The franchisor need not purchase anything in certain situations, such as where a) termination or non-renewal is mutually agreed with the franchisee, b) the franchisor allows the franchisee to remain in the principal place of the franchise business, or c) termination or non-renewal is due to the franchisor's "nondiscriminatory decision" to completely withdraw from all franchise activity in the relevant geographic market area where the franchise is located.

3. A franchisor may not prevent a franchisee from selling or transferring the franchise to someone else, so long as that party would qualify under the franchisor's then-existing standards for the approval of new or renewing franchisees.

Exceptions: A franchisor may refuse to consent to a transfer or sale if the franchisee and buyer, transferee, or assignee do not comply with the transfer conditions specified in the franchise agreement. Also, the franchisor may still have a contractual right of first refusal, allowing it to purchase the franchise itself before allowing it to be transferred or sold to an outside party.

With these new laws in effect, added onto already existing protections for franchisees in the context of termination and nonrenewal, California is among the nation's most franchisee-friendly states.

Source: California Assembly Bill 525

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.

Monday
Feb232015

DBO Automatic Effectiveness Date Extension; and Quasi-Franchise Business Models

Franchise 101

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

February 2015

 

Franchise Times Legal Eagles 2015

Tal Grinblat, Certified Specialist in Franchise and Distribution Law and Chair of the Franchise Law Committee of the Business Law Section of the State Bar of California, has once again been selected as one of the best attorneys in franchising by the Franchise Times. The full list of honorees will be published in the magazine's April edition.

IFA 2015

Barry Kurtz, David Gurnick and Tal Grinblat attended the International Franchise Association's annual convention, held in Las Vegas. The event provided an opportunity to participate in roundtable discussions and learn about the latest business and operational challenges franchisors and franchisees face in today's ever-evolving market.

E-Filing Gaining Momentum

As of January 1, 2015, the Department of Business Oversight (DBO) is authorized to accept multiple types of electronic filings under several laws it administers. The Commissioner may now prescribe circumstances under which the DBO accepts electronic records or electronic signatures. This progression suggests that California may be inching closer toward a universal electronic filing system.

 

FRANCHISOR 101: California Increases Time for Automatic Effectiveness from 15 to 30 Business Days


Automatic Franchise Effectiveness Date 

A new California law has given the California Department of Business Oversight, the State's regulator of franchises, more time to review franchise registration and renewal applications, with the result that franchisors, their accountants and their attorneys must work harder and faster to update their franchise disclosure documents, prepare their year-end audited financial statements and submit their applications to renew and maintain their franchise registrations.

The law amends the automatic effectiveness statutes in the Corporations Code (Sections 31116 and 31121) to increase, from 15 to 30 business days, the length of time that the Commissioner of Business Oversight has to review franchise applications and franchise renewals under the Franchise Investment Law. The revised statute provides that registration of an offer of franchises automatically becomes effective at 12 o'clock noon, California time, on the 30th business day after the filing of a complete application for registration.

A complete application is defined as one that includes the appropriate filing fee, Uniform Franchise Disclosure Document, and all additional exhibits, including audited financial statements for the franchisor's prior fiscal year, in conformity with regulations of the Commissioner.

Because most franchisors operate under a January to December fiscal year, franchisors and their accountants should keep the timing requirements of the new law in mind since they will have to file their complete applications early in March to take advantage of the automatic effectiveness statute.

 

FRANCHISEE 101: Is It a Franchise?


Accidental and Quasi-Franchises

Franchise 101 Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

For decades, non-franchise businesses have tried using a quasi-franchise business model (i.e., any business format license) to distinguish themselves from franchisors to avoid onerous franchise investment laws. A recent federal decision from California serves as an important reminder that it doesn't pay to skirt franchise registration requirements when a business arrangement meets the threshold requirements of a franchise.

In Chicago Male Medical Clinic v. Ultimate Management, Inc., a federal district court in Los Angeles ruled that a consulting agreement between a Chicago medical clinic and a management company amounted to the sale of a franchise under Illinois law.

The parties stipulated to the following facts: the clinic and the franchisor entered into a consulting agreement, giving the franchisee: 

  1. the right to use the National Male Medical Clinic trademark;

  2. a suggested marketing plan;

  3. access to the franchisor's expertise and knowledge in advertising and marketing certain medical services; and

  4. call center services.

Pursuant to the agreement, the franchisee paid an initial fee of $300,000, over $56,000 in royalties, and call center fees of over $45,000. The franchisee filed suit, alleging fraud for failure to follow disclosure requirements under the Illinois Franchise Disclosure Act ("IFDA").

Finding that the management company violated the IFDA by failing to register with the Illinois Attorney General's Office and failing to deliver a disclosure document, the court entered judgment in favor of the medical clinic, awarding the return of the initial $300,000 investment, and over $56,000 in royalties paid, plus costs and attorney fees.

Franchise laws are written in broad terms and are designed to protect franchisees. So licensors in business arrangements that fit the criteria of a franchise can wind up paying heavily on the back end if they dodge the franchise registration process.

Click: Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc. et al., DC Cal. for further information.
 
 

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 2015. All Rights Reserved.

Thursday
Jul242014

Location of Dispute Clauses Will Be Enforced

Franchise 101

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

July 2014

 

Top Ranked Law Firms 2014

Lewitt Hackman was named one of the Top Ranked Law Firms in California by Martindale-Hubbell for the third, consecutive year. The rankings are based on the size of the firm and the percentage of attorneys who have earned an AV Preeminent rating by Martindale-Hubbell. Lewitt Hackman well exceeds the selection criteria.

 

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

Heard in Sacramento…

Tal Grinblat, as Vice Chair of Legislation for the Franchise Law Committee of the State Bar of California, was invited to Sacramento by the Department of Business Oversight to discuss Assembly Bill 2289. The bill aims to change the automatic effectiveness statue of the California Franchise Investment law. The DBO agreed to hear the Committee's concerns regarding potential delays for franchisors applying to register or renew franchises in California.

 

David Gurnick and Tal Grinblat published inThe Franchise Lawyer

"Lawyers typically view the accountant's role in franchising to be mainly auditing the franchisor's financial statements and consenting to their use in the FDD. But accountants can play other valuable roles, from developing franchise programs to..."
Continue reading: Finding Value: The Roles of Accountants
in Franchising

 

FRANCHISOR 101:
Location of Dispute Clauses Will Be Enforced

Location of Dispute Clauses

A recent U.S. Supreme Court decision is having a big impact on the locations where franchisor-franchisee disputes are being resolved.

The Supreme Court's conservative-liberal divide is well known. Four of the Justices lean conservative: Chief Justice Roberts and Justices Thomas, Scalia and Alito. Four Justices tilt liberal in their rulings: Justices Ginsburg, Breyer, Sotomayoer and Kagan. Many outcomes hinge on the views of the remaining Justice, Kennedy.

But the recent landmark decision was unanimous! Despite their wide range of political leanings, all nine Supreme Court Justices agreed.

Franchise Agreements often specify the state, county or city where disputes will be litigated. The case of Atlantic Marine Construction Co. v. U.S. District Court concerned such a clause. A construction company, Atlantic Marine, entered into a contract with the Army to build a structure at Fort Hood in Texas, and a subcontract for a management company to work on the project. The subcontract said all disputes would be litigated in Virginia. But when a dispute arose, the management company sued in Texas.

It has been a longtime practice among many lawyers to start lawsuits or arbitrations locally, or in a court of choice, regardless of what the parties' agreement says. Courts and arbitrators applied a variety of legal theories to avoid the contractually agreed location. But in Atlantic Marine, the Supreme Court said an agreement on where disputes will be resolved "represents the parties' agreement as to the most proper forum;" and "enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system."

Therefore, "a valid forum-selection clause should be given controlling weight in all but the most exceptional cases."

The Atlantic Marine decision was announced just seven months ago, in December 2013. Already. It has dramatically affected many franchising cases.

In just the few months since it was decided, published decisions show that Burger King was able to get a franchisee lawsuit moved to Burger King's home court in Florida, and other franchisors such as Country Inn & Suites, Hawthorne Suites and Salad Works were able to defeat franchisee efforts to relocate cases away from franchisor home courts.

A message for franchisors and franchisees is to pay careful attention to the location-for-dispute clauses in franchise agreements and other agreements. As one court stated:

The decision in Atlantic Marine now provides the analytical framework a court should employ when a valid and enforceable forum selection clause exists between the parties.

This means those clauses in the franchise agreement are typically going to be enforced. Read the U.S. Supreme Court Opinion: Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas

 

FRANCHISEE 101:
Think Carefully About Agreeing to Arbitration

Franchise Arbitration Clauses

Another type of clause often appearing in Franchise Agreements (and other agreements) is an arbitration clause. Arbitration is a form of dispute resolution that is an alternative to going to court.

In court, a case follows the court's rules and decisions are made by the judge or jury. Arbitration can be less formal, and decisions are made by a mutually agreeable arbitrator.

Arbitration comes with a significant risk. Most arbitration decisions are not reviewable or appealable. Even if an arbitrator makes a mistake in deciding a case, generally it cannot be appealed.

Recently a franchisee of Wetzel's Pretzels arbitrated a dispute with the franchisor. The franchisee, dissatisfied with the outcome, asked a court to vacate the arbitrator's decision. The franchisee claimed:

The arbitrator exceeded his powers by enforcing certain provisions in the franchise agreement that required the [franchisee] to assign their lease and property interests to Wetzel's Pretzels after the franchise agreement was terminated.

The court would not consider the claim. Even if the arbitrator made a mistake, that would not be grounds. The court said:

In order for us to vacate the award on the ground that the arbitrator exceeded his powers.. the [Franchisees] would have to show that the award was "completely irrational, or exhibit[ed] a manifest disregard of law.

"Completely irrational" or "manifest disregard of the law" are very high, almost insurmountable standards to meet in trying to undo an arbitrator's decision.

A message from the recent Wetzel's Pretzel's decision is to think carefully before agreeing to arbitration of disputes. Many courts have noted that the arbitration process cannot be expected to be error free. Agreeing to arbitration means agreeing to and accepting the risk of errors as part of the decision-making outcome; error that cannot be corrected.

Read the opinion here: Wetzel's Pretzels, LLC v. Johnson

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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