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Wednesday
Nov192014

Avoid Liability for Acts & Incidents at Franchisee Locations

Franchise 101

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

November 2014

 

Risky Business: Franchising Too Early

Barry Kurtz was quoted in the Los Angeles Business Journal regarding the dangers of selling franchises based on the success of only one or two company stores. Click here to read the entire article: Solo Shops Buy Into Franchises.

 

Common Ground: Craft Brews

The laws governing the distribution of beer are very similar to the laws governing the franchise and distribution of other products or services. Get the details in Barry Kurtz and Bryan H. Clements' recent publication in the Orange County Lawyer here: Comparing Franchise and Beer Distribution Relationships.

 

 

FRANCHISOR 101:
Avoid Liability for Acts and Incidents at Franchisees' Locations

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

There has been a lot of news lately about risks of franchisors being liable for acts and incidents at franchised locations. The National Labor Relations Board's general counsel recently announced he intends to claim McDonald's Corporation is liable for labor violations concerning employees of franchised locations who protested for higher wages.

In California, an appellate court ruled Domino's Pizza could be liable for sexual harassment alleged against the manager of a franchised location. The State Supreme Court reversed and ruled that Domino's Pizza is not liable.

Three main legal theories are used to claim franchisors should be liable for what happens at franchised locations.

  1. Someone may claim a franchisor exerted so much control over details of the franchise relationship that courts should find the franchisee is not truly independent, but due to the controls, has become an extension of the franchisor itself - an agent or employee.

  2. Some people claim the franchisee identified itself so completely with the franchisor, without any indication of being independent, that the person making the claim thought the franchised location was just a branch of the franchisor, not an independently owned and operated business.

  3. Or the claim is sometimes made that the franchisor is directly responsible for an injury at a franchised location. One common example is the claim that the franchisor selected equipment negligently.

Rather than fight liability through litigation, franchisors can take pro-active steps to reduce the risks of being sued, or held liable, for incidents at franchised locations. Here are a few steps that can be taken:

  1. Allow franchisees as much freedom as possible when it does not jeopardize the brand. Stated differently: don't over-control franchisees. They should hire and fire their own personnel, set compensation, and make all the other decisions that business owners make. The franchisor should only implement those controls that are needed to protect the franchisor's brand. For example, control over decor, good customer service, quality product or service, and cleanliness. Matters that are not necessary to protect the brand should be left to the franchisee to control.

  2. Let the public, suppliers and others know that the franchise is independently owned and operated. Notice of independent ownership can be on signs, store placards, advertising, business cards, stationery, checks, lists of locations, the franchisee's fictitious business name filing and the franchisee's form of job application. The franchisor can tell the public in its advertising and on the Internet that its locations are independently owned and operated.

  3. Operate the business and recruit and train franchisees with care. A good way to avoid liability is to not have an injury or other incident to begin with. Recruit and award franchises only to those who will follow the system and act properly toward personnel, customers and others. Require franchisees to be trained in safety and good customer service and conduct their businesses honestly and in good faith. Use care in designating construction standards and equipment. If an inspection discloses a health or safety hazard, follow up with the franchisee to ensure the hazard is eliminated. (See Franchisee 101 below). These steps can mean fewer accidents and injuries. Fewer of these mean less risk of claims against anyone, including the franchisor.

  4. Maintain insurance and require franchisees to maintain insurance naming the franchisor as an additional insured. Broad liability insurance with endorsements for all possible risks can mean that if a claim is made, the insurance company for the franchisor or the franchisee will provide the defense, work to get the case settled, and pay if there is any liability. Consider requiring your franchisees to obtain and maintain employment practices liability insurance with a co-defendant endorsement for your benefit.

  5. Similarly, the franchise agreement and other agreements should provide for indemnification from the franchisee. This can be accompanied by a personal indemnification and guaranty from individual owners of the franchise. When individual franchise owners have their assets at risk, their promise to indemnify and guaranty leads to more careful operation and reduces the risk and the franchisor's ultimate exposure to claims and liabilities.

By following these steps, a franchisor can reduce the risks of claims and liabilities for acts and incidents arising from its franchisees' operations.

 

FRANCHISEE 101:
Avoid Acts & Omissions That Expose Your Franchisor to Potential Liability

A West Virginia Court refused to dismiss an action brought under its state workers' compensation law. That law permits an employee to recover greater damages when deliberate intent exists.

An employee of a Hardee's franchised restaurant suffered first and second degree burns from spilled hot grease while manually cleaning a fryer box. The employee brought an action against the restaurant franchisee, as well as the franchisor. He claimed the franchisor should be liable based on allegedly having actual knowledge of unsafe working conditions at the restaurant, providing the equipment and setting the safety procedures.

The employee alleged the frying machine's pump and filter were broken for a long time, requiring manual cleaning which led to his injuries. The Court noted the franchisor presumably had actual knowledge of the long-standing unsafe working conditions because the franchisor provided training, supervision, inspections, equipment, cooking supplies and procedures for operation of the restaurant. The franchisor argued it did not control daily operations and therefore had no legal duty to the employee. But the court disagreed and held it was reasonable to infer the franchisor had control over the equipment and procedures that contributed to the injury. As a result, the franchisor owed the employee a legal duty to use reasonable care and the franchisor's conduct created a risk of physical harm.

The lawsuit and resulting ill-will between the franchisor and franchisee could have been avoided had the franchisee repaired the defective equipment when notified by the franchisor to do so.

For details about the case, read: Estate of Nathaniel Hamrick v. Restaurant Management Group, LLC.

 

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.

 

Tuesday
Sep162014

California Supreme Court Overturns 2012 Domino's Decision

Franchise 101

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

September 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. 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

 

Supreme Court Decision Dominos Patterson 

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 Allegra Holdings LLC v. Fox Tracks, Inc. to read the opinion.

 

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
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.

 

Tuesday
Jun242014

Pumped Up and Suing in Seattle

Franchise 101

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

June 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

Barry Kurtz quoted by the Los Angeles Times

Franchisees allege 7-Eleven targets the more profitable stores, accuses the owners of skimming from the till, and then pressures them to give up their businesses so the franchisor can offer them to new investors. How common is "churning" in the franchise industry?

Click Franchisees Allege Hardball Tactics, Store Seizures by 7-Eleven, to read the article.

 

Barry Kurtz and Bryan H. Clements in
The Practical Lawyer

"Prior to 1919 and the passage of the 18th Amendment, brewers and producers of alcoholic beverages sold their products directly to retailers, which led to anti-competitive business practices and unscrupulous marketing..."

Continue reading: The Yin and Yang of Beer Distribution Law and Franchising.

 

FRANCHISOR 101: 
IFA Files Lawsuit Against Seattle

On June 11, 2014, the International Franchise Association (IFA), a Washington, D.C.-based trade group, and five franchisees sued in U.S. District Court in Seattle to block Seattle's recently enacted increase of the minimum wage in the city to $15 per-hour.

The law requires large businesses, defined as those with more than 500 employees, to raise the minimum wage they pay employees to $15-an-hour over three years. Small businesses have seven years to phase in the wage increase. Under the law, a franchisee with five employees or more is considered a large employer and must begin raising its wage base next April if the franchise system has more than 500 employees nationwide.

Minimum Wage Hike Litigation

On the other hand, an independent, non-franchise company with 499 employees or less will be considered a small employer and will have additional time to comply with the law. IFA wants an injunction to prevent the new law from taking effect on April 1, 2015. The complaint alleges the law illegally discriminates against franchisees, improperly treating them not as small, locally-owned businesses, but as large, national companies, because they operate in a franchise network; and claims the law violates the Equal Protection Clause of the U.S. Constitution and the Washington State Constitution by arbitrarily discriminating against small businesses simply because they are franchises. IFA also launched SeattleFranchiseFairness.com, a website to encourage business owners to amend or overturn the law.

Read the article: Trade Group, Franchisees Sue to Block Seattle Minimum Wage Hike.  

 

FRANCHISEE 101:
Unsigned Franchise Agreement Binds Franchisee's Shareholder

A Texas Appeals Court recently held in Pritchett v. Gold's Gym Franchising, LLC that a Texas forum-selection clause in a Franchise Agreement was incorporated by reference into a personal guaranty agreement and was binding on a franchisee's out-of-state shareholder who did not sign the Franchise Agreement.

Gold's Gym and its franchisee, Bodies in Balance, entered into a Franchise Agreement in 2008. Each of Bodies in Balance's three shareholders signed a Guaranty, agreeing to be "personally bound by each and every provision in the Franchise Agreement."

The Franchise Agreement contained a "Consent to Jurisdiction" provision saying Bodies in Balance and its shareholders agreed the courts in Dallas County had exclusive jurisdiction over all disputes. The Guaranty did not have a "Consent to Jurisdiction" provision. Pritchett, a 50 percent shareholder, argued that, despite the Consent to Jurisdiction provision in the Franchise Agreement, he could not be forced to litigate claims in Texas because he had not signed the Franchise Agreement.

The court ruled that to uphold terms incorporated by reference in an agreement, "it must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms." Since the Guaranty said "Guarantors do hereby agree to be personally bound by...each and every provision in the [2008 Franchise] Agreement...," the Court concluded that the parties to the Guaranty intended the entire Franchise Agreement, including its forum-selection clause, to be part of the Guaranty.

According to the Court, if Pritchett signed the guaranty, he was subject to the forum-selection clause in the Franchise Agreement and waived any jurisdictional objection to being sued in Dallas County.

Prospective franchisees should be cautious about, and fully understand the effects of, incorporation by reference clauses in their Franchisee Agreements.

Read the court opinion: Tim Pritchett, Appellant, v. Gold's Gym Franchising, LLC, Appellee.

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.
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