San Fernando Valley Los Angeles Attorneys
Navigation Two
Phone Number

Entries in franchise agreement (8)

Tuesday
Dec202016

Are Franchisees Your Employees?; and Locked In to One Approved Vendor

Franchise 101 News

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

 

 

December 2016

 

Certified Franchise Executives

Barry Kurtz, Tal Grinblat and David Gurnick completed the experience, education and participation requirements to become Certified Franchise Executives under the auspices of the International Franchise Association (all three are already State Bar of California Certified Specialists). This distinction will be conferred on Barry, Tal and David at a ceremony at the International Franchise Association's annual convention in January, 2017. 

FRANCHISOR 101:
Are Franchisees Your Employees?

Prudent franchisors have been reducing their apparent control over franchisees' employees to reduce the risk of becoming joint employers of those employees. But could a franchisor's control over the franchisees themselves be used to prove that franchisees are the franchisor's employees?

In Matter of Baez, the Unemployment Insurance Appeal Board determined that franchisees of Jan-Pro Cleaning Systems, a janitorial franchisor, were Jan-Pro's employees. The Board held Jan-Pro liable as an employer to pay unemployment insurance contributions on payments it made to franchisees.

A New York appeals court said the Board may find an employment relationship if "substantial evidence" shows that an alleged employer "exercises control over the results produced or the means used to achieve the results," and said that control over the means is the more important factor. The court found there was sufficient evidence that Jan-Pro exercised such control over franchisees.

This was because Jan-Pro:

(i) Assigned geographic territories to franchisees;

(ii) Required franchisees to be trained, which Jan-Pro paid for;

(iii) Required franchisees to operate according to Jan-Pro's procedures and standards, including using only pre-approved equipment and supplies;

(iv) Could claim ownership of concepts or techniques created by franchisees;

(v) Had a contractual non-compete provision against franchisees for 1 year after termination;

(vi) Helped resolve complaints between franchisees and their clients;

(vii) Had the right to discontinue franchisees' services to any of their clients;

(viii) Provided franchisees with a starter set of business cards bearing Jan-Pro's logo, and had to approve any franchisee-designed business cards before use; and

(ix) Had the sole right to bill and collect payments from franchisees' clients.

As a result, the court upheld the Board's ruling against Jan-Pro.

Experienced franchisors will recognize much of the court's assembled "evidence of control" as common features of franchise systems. But franchisors may distinguish themselves from Jan-Pro, and hopefully avoid the same fate, by:

A) avoiding, to the extent possible, inserting themselves between franchisees and their customers as Jan-Pro did in points (vi) through (ix) above; and

B) charging franchisees a distinct "initial training fee," instead of offering training "for free" as Jan-Pro did (point (ii) above).

The latter may be potent counter-evidence against a finding of employment because employees rarely pay their employers for the right to be trained.

See In the Matter of Baez, N.Y. Sup. Ct., App. Div., ¶15,878

 

FRANCHISEE 101:
Locked In to One Approved Vendor

Franchisors often require franchisees to purchase supplies, materials, or inventory only from suppliers the franchisor approved. But where franchisors see benefits of consolidating by requiring franchisees to participate in volume purchases and ensuring product quality and consistency, franchisees see potential conflicts of interest.

In Window World of Baton Rouge v. Window World, a vinyl window sales and installation franchise, the franchisees agreed to: "sell and install only and exclusively those products, goods, equipment, and parts from vendors approved by [Window World]." The agreements added that Window World would try to get the lowest possible wholesale pricing for franchisees. Window World did not collect royalties from franchisees. Instead it collected from vendors a percentage of the sales price of items sold to franchisees.

In 2007, Window World announced that Associated Materials (AM) would be the only approved supplier of windows. Franchisees sued under antitrust law, claiming Window World and AM had an illegal conspiracy to "lock them in", forcing them to buy inventory at higher prices than they could get from other suppliers or even than they could get from AM if they weren't franchisees. The alleged price inflation increased AM's profits and Window World's royalty collections.

The North Carolina court concluded the franchisees could pursue their antitrust claim if Window World conspired to manipulate the "market" so that franchisees were forced to pay artificially high prices. But in this case Window World was able to require franchisees to buy windows solely from AM not because of power over the market, but because the license agreements gave the franchisor the right to approve even only one supplier if it wished.

The agreements were clear, so when franchisees signed they had fair warning of the risks of buying a Window World franchise. Franchisees effectively purchased windows in a free market; before signing, they had freedom in the "market" to buy a different franchise in which the franchisor didn't have the right to designate a sole supplier. The court dismissed the claim.

Before buying a franchise, a potential franchisee should be sure to understand the scope of the franchisor's right to designate approved vendors. Ask other franchisees in the system if they get competitive prices from vendors. Check the franchise agreement for terms that may limit this freedom in the future. Make sure to understand how the franchisor gets its revenue. It may be illogical to expect to pay rock bottom prices for supplies if what the vendor charges must be enough to also provide revenue to the franchisor.

But don't automatically reject a franchise just because there is a single source of supply. A franchise brand's concentration and volume purchasing from a chosen supplier may have offsetting benefits that contribute to the success of the system and its franchisees.

See Window World of Baton Rouge v. Window World, N.C. Super. Ct., ¶15,880

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.

Wednesday
May252016

States Protect Against Joint Employer Liability; and Combatting Franchisor's Harmful New Policies

Franchise 101 News

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

 

May 2016

 

Franchise Lawyers

Barry Kurtz in The Business Journals

 

"...Is the business sustainable in the marketplace? To be sustainable, the business concept should be unique enough to withstand competition, and also...”

Click to read: Guidelines When Considering Buying a Franchise

IFA Legal Symposium

 

Barry Kurtz, David Gurnick and Tal Grinblat attended the International Franchise Association's 49th Annual Legal Symposium in Washington D.C. The conference provides an opportunity to gain insights into many of the legal challenges faced by franchisors around the world. This year's symposium featured Philip Miscimarra of the National Labor Relations Board, who spoke on the NLRB's recent decisions regarding joint employer liability.

 

FRANCHISOR 101:
State Bills re Franchisor Joint Employer Liability

With franchisors deeply concerned about joint liability for franchisee employees, more states are passing laws trying to prevent that from happening. Here are some states and measures that have passed:

Texas enacted Senate Bill 652, providing that: "[A] franchisor is not considered to be an employer of: (1) a franchisee; or (2) a franchisee's employees." 

Michigan passed House Bills 5070 - 5073, stating: "[A]s between a franchisee and franchisor, the franchisee is considered the sole employer of workers for whom the franchisee provides a benefit plan or pays wages." 

Utah passed House Bill 116, stating, "[A] franchisor is not considered to be an employer of: (i) a franchisee; or (ii) a franchisee's employee."  

Wisconsin enacted Act 203 stating: "[A] franchisor ... is not considered to be an employer of a franchisee ... or of an employee of a franchisee."

Indiana approved House Bill 1218, which provides: "a franchisor ... is not considered to be an employer or co-employer of: (1) a franchisee ... or (2) an employee of a franchisee." 

Georgia enacted Senate Bill 277, providing: "[N]either a franchisee nor a franchisee's employee shall be deemed to be an employee of the franchisor for any purpose."

The Virginia legislature attempted to pass House Bill 18, stating that "[N]either a franchisee nor a franchisee's employee shall be deemed to be an employee of the franchisee's franchisor." But, the governor vetoed the bill.

These state laws will not protect franchisors from all claims. For example, various claims based on federal law may not be affected. But passage shows which states are friendlier to franchises and want to retain and grow their franchise industries.

 

FRANCHISEE 101:
What to Do About Franchisor’s Harmful New Policies

Franchisees aren't always excited when their franchisor introduces a new policy. But if a new policy overreaches and might doom a franchisee's business, can it be stopped before it starts?

Automotive Technologies, Inc. ("ATI") is the franchisor of "Wireless Zone" stores. These stores sell Verizon Wireless cell phone products and services. The franchisor, ATI, received sales commissions from Verizon that it passed on to franchisees who made the sales. ATI also paid performance incentive payments ("PIPs") to franchisees when they sold certain phones. When ATI announced it would stop paying the PIPs or start taking a 5% royalty from commissions before passing them on, a group of franchisees sued. They claimed the new policy was a breach of contract, unjust enrichment, and unfair practice, and asked the court for a preliminary injunction to stop the new policy.

The court ruled that to immediately stop ATI from applying its plan, the franchisees had to show they would be irreparably harmed - that is, they would lose "substantially all of their businesses." Based on financial information from the franchisees, the court found they could suffer no more than a 2% loss of revenue from ATI's new policy, and were not at risk of losing their businesses. The court denied the preliminary injunction.

Franchisors and franchisees may disagree on what is best for a franchise system, and the wisdom of a particular course may be known only in time. The case shows that franchisees must meet a high bar before a court will cut off a proposed new policy implemented by the franchisor in good faith.

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.

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.
Page 1 2
LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120