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Friday
Apr282017

Not Your Neighborhood Tesla Dealer; and Special Delivery

Franchise 101 News

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April 2017

 

Franchise Lawyers

Capitol Times

The International Franchise Association will host its 50th Annual Legal Symposium in early May - Barry Kurtz, Tal Grinblat, David Gurnick and Matthew Soroky will all attend, representing Lewitt Hackman in Washington D.C. The conference brings together franchise owners, operators, executives and attorneys to discuss current laws and regulatory environments.

 

FRANCHISOR 101:
Not Your Neighborhood Tesla Dealer

Among the many differences between Tesla and traditional automakers, Tesla does not sell or service its electric cars through franchised dealers; it sells direct to consumers. Recent legal challenges to Tesla's direct-to-consumer sales model highlight an auto maker's hurdles in selling through its own subsidiaries.

The Utah Supreme Court upheld an agency ruling that Utah's Motor Vehicle Business Regulation Act (the "Licensing Act") and New Automobile Franchise Act (the "Franchise Act") combined to prohibit a Tesla subsidiary from selling new Teslas in Utah showrooms. The relationship between Tesla and its subsidiary was found to be a "franchise" under both statutes, and was barred by the Franchise Act's prohibition against subsidiary relationships.

At first, the subsidiary applied for a required new car dealer license to sell Tesla vehicles at a Salt Lake City showroom. Its application was denied for not having a "franchise" to sell the vehicles, as required by the Licensing Act. The subsidiary responded by entering into a "dealer agreement" with Tesla and reapplying for the dealer license.

The dealer agreement sought to create the required "franchise" relationship needed to satisfy the Licensing Act. Unfortunately for Tesla, the Franchise Act prohibits a franchisor from owning an interest in a new car dealer. Therefore, to avoid creating a "franchise" relationship of the kind that would be subject to the Franchise Act, the agreement prohibited the subsidiary from using the Tesla name.

The court noted the subsidiary was caught "between the rock of the Licensing Act and the hard place of the Franchise Act." Either it lacked the franchise with Tesla required by the Licensing Act, or it was a franchise in conflict with the Franchise Act's prohibition against owning an interest in a new car dealer.

A "franchise" under the Licensing Act is simply "a contract or agreement between a dealer and a manufacturer . . . by which the dealer is authorized to sell any specified make or makes of new motor vehicles." The court ruled that the subsidiary had such a contract.

The Franchise Act was more complex. The first element of a "franchise" is a "license to use a trade name, trademark, service mark, or related characteristic." This requirement was satisfied by the subsidiary's use of Tesla's trademarks. The dealer agreement's disclaimer of a franchise relationship could not be reconciled with the "reality of the relationship" between Tesla and its subsidiary. The second element of a franchise -- a "community of interest" in marketing new cars, was also present because Tesla and its subsidiary had a unity of interest in selling Teslas.

The court said it issued a "narrow, legal decision" that did not rule on "broad policy questions" about how cars should be sold. The Court stopped short of deciding whether Tesla itself was barred from obtaining its own dealer license. A car maker could presumably do so, but the practical and legal effects of Tesla selling direct to customers without the protection of using a subsidiary are likely to leave Tesla between the proverbial rock and hard place.

Read: Tesla Motors UT, Inc. v. Utah Tax Commission

FRANCHISEE 101:
Special Delivery

For a relationship to meet the legal definition of a "franchise" in some jurisdictions, the franchisor must give significant assistance to, or have significant control over, the franchisee's business. A franchisor's prescribed marketing plan can be enough to meet this requirement.

The "marketing plan" element is multifaceted and imprecise. A distributor's marketing plan may be based on a contract, course of dealing or industry customs. A marketing plan need not be mandatory. And a plan need not include traditional advertising or marketing. It is enough for a franchisor to give franchisees instructions or advice on operating techniques or skill training, so that independent franchisees appear to consumers as if they are centrally managed and follow uniform standards.

In Neubauer v. FedEx, a former delivery contractor claimed FedEx violated the North Dakota Franchise Investment Law (NDFIL) when it offered and sold him an unregistered franchise. A federal appeals court in St. Louis found an absence of any appearance of central management in this delivery context, and affirmed a lower court decision to dismiss the contractor's claim.

The court noted FedEx's business is direct-to-customer package delivery. The delivery contractor picked up and delivered packages, but did not claim a right to offer, sell or distribute services to individual customers.

The contract with FedEx said he was an independent contractor who provided transportation services to FedEx, and received payments from FedEx - not from customers - through a weekly settlement check. Noting that the NDFIL's definition of "marketing plan" was nearly identical to the definition in California's Franchise Investment Law, the Court cited a California decision in which a similar delivery contractor failed to prove the existence of a franchise relationship.

In the California case, because there was no allegation that the delivery contractor cultivated customer relationships, the court found the contractor did not offer and distribute goods and services to customers within the meaning of the franchise law.

The "marketing plan" element required to establish a franchise relationship may be satisfied in various ways. A delivery contractor that can allege sufficient encounters with individual customers has a better chance to establish the existence of a marketing plan, but should bear in mind each component of the marketing plan element and the subtle variations to assert a plausible franchise claim.

Read: Neubauer v. FedEx Corporation

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Tuesday
Dec162014

Mixed Results in Delivery Driver Cases

Franchise 101

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

December 2014

 

How to Steer Clear of Franchise Financial Disasters

David Gurnick was quoted by CNBC regarding the necessity of research before investing in a franchise. To read the article, click: How to Steer Clear of Franchise Financial Disasters.

Comparing Franchise Relationships and Beer Distribution Relationships

Barry Kurtz and Bryan H. Clements had an article published in Orange County Lawyer, regarding the similar laws governing beer distribution and franchising. Click: Comparing Franchise and Beer Distribution Relationships for more information.

CalCPA Presentation

Tal Grinblat and David Gurnick presented a franchise law seminar to accountants of the California Society of CPAs' Los Angeles chapter. The seminar focused on accountants' roles in helping clients launch or operate franchise systems or operate as franchisees.

We Are Growing

We are pleased to announce the addition of Samuel C. Wolf to our Franchise and Distribution Practice Group. Sam earned his juris doctor at Southwestern Law School, where he was also a Dean's Merit Scholar and the recipient of a CALI "Excellence for the Future" Award (Trial Advocacy).

Mixed Results in Delivery Driver Cases

Recent court decisions in two delivery driver cases yielded mixed results for the plaintiffs and defendants involved, but serve as helpful reminders to franchisors and franchisees of ways to protect themselves in their franchise relationships.


Franchise Employee Liability

FRANCHISOR 101:
Statutes of Limitation Message for Franchisors and Franchisees

 

Franchise 101 Attorneys*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal SpecializationIn Kroshnyi v. U.S. Pack Courier Services, Inc., a case pending for 13 years (and not over yet), numerous drivers claimed their package delivery franchisor violated New York's franchise law. From 1996 to 1998 the drivers entered into franchise agreements with U.S. Pack Services (USP), a New York franchisor. Drivers paid a $15,000 "subscription fee," training fees, beeper fees and other charges to receive delivery assignments from USP's central dispatch.

In 2001 the franchisees sued in federal court claiming violations of the New York Franchise Sales Act (NYFSA), for alleged misrepresentations in USP's Franchise Disclosure Document, and state labor laws. The court dismissed the labor claims. At trial a jury found the company liable to the drivers for franchise law violations.

However, an appeals court reversed the jury award. The NYFSA has a statute of limitations requiring any action to be brought "before the expiration of three years after the act or transaction constituting the violation."

The court agreed with the franchisor that the "act or transaction constituting the violation" occurred in 1998 and earlier when the franchises were sold. It ruled the claims were time barred because the lawsuit was not filed until 2001.

The franchisees argued that the statute of limitations started anew since they made payments to the franchisor over time and because their franchisor transferred the business to a new entity and provided them new "Rules and Regulations" that purported to be a new agreement. But the appellate court rejected their arguments that these acts created new franchise relationships.

The court opined that under New York law, "continuous violations do not toll the statute of limitations" and that the new Rules and Regulations expressly provided they did not alter the parties' original agreement. The court noted that the NYFSA requires disclosures and prohibits fraud in making an "offer" and "sale" of franchises, "but does not seek to regulate the ongoing operations of a franchise."

A few drivers bought their franchises after 1998. The appellate court ruled their claims were not barred. The company challenged the damages award to them, claiming the franchisees had profited so they could not have suffered damages. But the appellate court upheld money awards to the franchisees whose claims were timely, ruling that in view of the numerous expenses they incurred over the years, the jury could properly have found that they lost money.

The Appellate Court's decision underscores the importance to franchisees of bringing claims promptly, before statutes of limitations expire - and reminds franchisors of the benefit of these statutes in defending franchise law claims.

Click Kroshnyi v. U.S. Pack Courier Services, Inc. to read the Court's decision.

 

Franchsise Employer Liability

 

FRANCHISEE 101:
Independent Contractors or Employees?

 

In Ruiz v. Affinity Logistics Corporation, another recent delivery driver case that arose in California, Affinity Logistics' drivers claimed they were employees and had been misclassified as independent contractors. The trial court ruled that the drivers were independent contractors since each had its own business name, business license, commercial checking account, federal employer identification number, and could hire its own employees, if it wished.

But the Ninth Circuit Court of Appeals reversed, finding the drivers were all employees. The appellate court emphasized that Affinity Logistics had the right to control the details of the drivers' work.

Affinity Logistics controlled their rates, schedules and routes; provided the trucks the drivers drove; controlled the mobile phones they used; specified the uniforms the drivers had to wear; and closely monitored the drivers through morning meetings, setting start times, inspecting their appearance and loading of trucks, conducting follow-alongs and customer interviews and requiring drivers to call a company supervisor after every two or three stops.

The appellate court rejected the drivers' indicia of being independent (business names, tax ID numbers, etc.) as determinate factors because Affinity Logistics required the drivers to take these steps. For these reasons, the appellate court ruled the drivers were employees, not independent contractors.

Parties to franchise agreements should be mindful of the level of control the franchisor exercises over its franchisees to avoid jeopardizing the independent contractor relationships.

Click Ruiz v. Affinity Logistics Corporation to read the 9th Circuit Court decision.

 

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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