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Entries in fast food franchise (8)

Friday
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.

 

Thursday
Mar202014

Franchisee Not Bound by Arbitration Provision

Franchise 101

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

March 2014

 

Tal Grinblat Selected to 2014 Legal Eagles

 

Tal Grinblat was named a Franchise Times' 2014 Legal Eagle. Nominated by peers, Tal was then chosen for the distinction by the publication's editorial board. The list of 2014 Legal Eagles will be published in April.

 

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

Barry Kurtz, David Gurnick & Tal Grinblat Honored as 2014 Southern California Super Lawyers

 

Barry Kurtz, David Gurnick and Tal Grinblat have each been selected as a 2014 Super Lawyer in their specialty of Franchise & Distribution Law. This honor is bestowed by the Journal of Law and Politics, in conjunction with Los Angeles Magazine. The Super Lawyer designation is the result of peer evaluation. Nominations are received from thousands of lawyers throughout the state. According to the Journal of Law and Politics, this honor is reserved for the top five percent of the lawyers in each practice area.

 

David Gurnick in Los Angeles Lawyer Re Cooperatives

 

How are cooperatives organized and regulated? David Gurnick's article, Cooperative Conditions: California Law Allows for Flexible Application of the Operative Principles of Cooperatives takes an in-depth look at these enterprises. Click: Cooperative Conditions to read the full article.

 

 

FRANCHISOR 101:
Franchisee Not Bound by Arbitration Provision

 

 

In March 2013, Edison Subs, LLC, a Subway franchisee/transferee, filed a complaint in New Jersey against Subway and Aliya Patel (the original franchisee/transferor) and Subway's affiliate for breach of contract, fraud, violations of the New Jersey Consumer Fraud Act, negligent misrepresentation and violations of the covenant of good faith and fair dealing. Edison alleged that it entered into an oral franchise agreement with Subway that Patel induced Edison to accept through misrepresentations and omissions and that Subway and Patel breached the oral agreement by ejecting Edison from the premises after Edison had operated the Subway restaurant for two years.

The Subway Franchise Agreement required all claims to be arbitrated in Connecticut, so Subway brought an action to compel arbitration of Edison's claims. The U.S. District Court in Connecticut observed that it was undisputed that Edison did not sign, and denied ever receiving, a copy of the Franchise Agreement.

Subway argued that Edison could be bound by the terms of the Franchise Agreement under common law principles of contract and agency, including estoppel. Despite the fact that Edison never signed the Franchise Agreement, the court noted that a signatory may be able to compel a non-signatory to comply with certain terms of an agreement when the non-signatory directly benefits from the agreement.

To rely on this theory and enforce arbitration, Subway had to prove that Edison received notice of the Franchise Agreement and the arbitration provision and knowingly accepted the Franchise Agreement's benefits. The court found there was no evidence offered that Edison had notice of Subway's written Franchise Agreement or that Edison knowingly exploited the Franchise Agreement. Therefore the court denied Subway's plea for an injunction to compel arbitration.

Franchisors should maintain a signed and dated copy of each Franchise Agreement for each franchised business and a signed and dated FDD receipt that predates the Franchise Agreement and any payments made to the franchisor under the Franchise Agreement by at least 14 days. Click: Subway Franchise Arbitration Ruling to see the ruling.

 

FRANCHISEE 101:
Franchisor May Be Joint Employer Under Federal Law

 

Franchise AttorneyA U.S. District Court in New York found that the plaintiffs, current and former employees of a Domino's Pizza franchisee, sufficiently alleged multiple violations of federal and state labor laws against their franchisee-employer to add the franchisor, Domino's, as a "joint-employer" defendant under the federal Fair Labor Standards Act (FLSA) and New York labor laws and to survive a motion to dismiss their case.

The franchisee's employees alleged that Domino's:

(1) dictated compensation policies that were implemented in the franchisees' stores; required a system of tracking hours and wages; and required franchisees retain payroll records that were submitted to Domino's for review,

(2) created management and operations policies and practices that were implemented at the franchisees' stores by providing materials for use in training store managers and employees, posters with directions on how employees were to perform tasks, and monitored employee performance through required computer hardware and software,

(3) developed and implemented hiring systems for screening, interviewing, and assessing applicants for employment at all franchised stores, and

(4) had the right to inspect franchisees' stores to ensure compliance with the franchisor's policies, including those related to day-to-day conditions of the employees.

The court found that, taken together, these facts were enough to establish Domino's as a joint employer for the purpose of a motion to amend, notwithstanding the fact that other courts in the U.S. have generally concluded that franchisors are not employers within the meaning of the FLSA. Click: Domino's Challenges Joint Employer Liability for more 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 2014. All Rights Reserved.
Friday
Feb212014

Franchisor Successfully Fends Off Fraud Claims

Franchise 101

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

February 2014

 

Kurtz Law Group Joins Lewitt Hackman Franchise Practice Group

 

On February 1, 2014, the Kurtz Law Group joined Lewitt Hackman. Known for their "Focus on Franchise Law," Barry Kurtz and his team have been one of the premier franchise law practices in California. Barry will chair the Franchise Practice Group, which now includes Barry, David Gurnick, Tal Grinblat, Candice Lee, Bryan Clements and two franchise law paralegals. Together, we have more than 85 years of experience representing franchisors, licensors, manufacturers, franchisees, licensees and distributors and are one of the largest, most experienced franchise law practice groups.

 

FRANCHISOR 101:
Franchisor Successfully Fends Off Fraud Claims

 

*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal SpecializationThere are circumstances when a fraud claim will not succeed against a franchisor. In Dunkin' Donuts Franchised Restaurants, LLC v. Claudia I, LLC, a franchisee alleged fraud by Dunkin' Donuts, but a US District Court in Pennsylvania rejected its hardest hitting claims.

Fast Food Franchises

A Dunkin' Donuts franchisee purchased a franchise and subleased a deteriorating store in Pennsylvania from Dunkin'. The franchisee's owners believed they were paying above-market rent, and the sublease also overstated the size of the premises, so they believed they were overpaying common area expenses. The donut store lost money, the franchisee asked Dunkin's consent to relocate, Dunkin' declined and the franchisee stopped paying rent. The franchisor terminated both the franchise agreement and sublease and obtained an injunction requiring the franchisee to leave the store. Then, after retaking possession of the store, Dunkin' moved the store to another location.

The franchisee claimed Dunkin misrepresented the store size and that it could renegotiate the sublease. The court ruled the franchisee could not prove fraud based on misrepresented square footage because the franchisee always suspected the stated square footage was wrong. Under the law, a person who believes a representation is false cannot claim to have relied on it and cannot prevail in a claim of fraud.

 The court also found that any statement by Dunkin' that the sublease could be renegotiated was also not actionable. A statement about what may happen in the future is not considered false, unless the speaker knowingly misstates his true state of mind. The court said renegotiation was a promise to do something in the future and noted that Dunkin' actually had offered the franchisee a new, more favorable sublease. Therefore any pre-agreement representations could not have been knowingly false.

The court ruled, however, that the franchisee might be able to show Dunkin breached an implied contractual duty to act in good faith and in a commercially reasonable manner since Dunkin' executives considered the store location to be bad, but had, nevertheless, sold the franchise and subleased the store to the franchisee and then, after taking back the store, relocated it itself, suggesting bad faith.

This case is a reminder to franchisors that appearances count. Here, refusing to consent to relocation, but then relocating a store after terminating the franchisee, gave the appearance of misconduct and was enough for the court to allow the franchisee's breach of contract claim to proceed. For franchisees, the case is a reminder that you cannot claim reliance and recover for fraud if you had doubts or were suspicious about what the franchisor told you, or if the claimed fraud was a franchisor's promise to do something in the future. To see the case, click Dunkin' Donuts v. Claudia I, LLC.

 

FRANCHISEE 101:
Brewer's Subsidiary Could Terminate Distributor

 

Craft Brew LawIn 2008, Heineken made an acquisition that included the Strongbow Hard Cider brand. Esber Beverage Company, founded in 1937, is one of the oldest, family-owned beverage wholesalers in Ohio, as well as the United States, and distributed Strongbow in Ohio. Until 2013, Strongbow was imported into the USA by an independent company, VHCC. In 2013 Heineken terminated VHCC and entered into an agreement with its own subsidiary, Heineken USA (HUSA), naming the subsidiary as its exclusive U.S. import agent for Strongbow Hard Cider.

Under Ohio law, when ownership of an alcoholic beverage brand changes, a new manufacturer is permitted to terminate any distributor without cause upon notice within 90 days of the acquisition, allowing the manufacturer to assemble its own team of distributors. The notice triggers a valuation of the franchise and the new manufacturer must compensate the terminated franchisee for the reduced value of the business that is related to the sale of the terminated brand, including the value of the assets used in selling the brand and the goodwill of the brand.

Heineken and HUSA terminated Esber and, after a trial court in Ohio ruled that only a new owner could terminate the franchise and that Heineken USA was not a new owner, Heineken appealed. In Heineken USA, Inc. v. Esber Beverage Co., the appellate court ruled that Heineken USA was a successor that could terminate the distributor.

The court found that following the 2008 acquisition, Strongbow was imported into the USA by VHCC and  VHCC supplied the Strongbow product to U.S. distributors, such as Esber. Heineken never owned any interest in VHCC. After Heineken terminated VHCC (and compensated VHCC as discussed above), Heineken no longer had an importer to supply Strongbow to U.S. distributors. It subsequently named HUSA as supplier of Strongbow, starting in January 2013. The appellate court ruled that VHCC had been the U.S. supplier of Strongbow, and VHCC, not Heineken, entered into contractual relationships with distributors, such as Esber. Once Heineken lawfully terminated its agreement with VHCC, Heineken acquired the right to decide who would import and supply Strongbow to distributors.

This decision indicates that in some states brewers may have additional flexibility to determine who will distribute their products domestically following an importer's acquisition of the brands. To see the case, click Heineken v. Esber.

 

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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