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Entries in franchise liability (4)

Thursday
May282015

Freshii Not Joint Employer; 7-Eleven to Disclose Metadata

Franchise 101 News

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

May 2015

 

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

David Gurnick Presents to ABA

David Gurnick, Certified Specialist in Franchise and Distribution Law, business litigation attorney and author, was invited by the American Bar Association to co-present a seminar for members attending the 38th Annual Forum on Franchising in New Orleans. The seminar topic is entitled Finders Keepers Losers Weepers: Opportunities, Risks and Considerations in Using Intellectual Property Created by Others. The event takes place in October.

Tal Grinblat published in Business Law News Annual Review

Tal Grinblat co-authored an article highlighting recent case law regarding franchising and legislation passed affecting both franchisors and franchisees in California. The article appeared in the State Bar of California's Business Law News, which publishes an update every spring. Click: Selected Developments in Franchise Law to read the article.

Are You Ready?

Upcoming state and federal laws go into effect soon. Click the links for more information:

 

FRANCHISOR 101: Freshii Not Joint Employer 


Joint Employer Liability

The National Labor Relations Board ("NLRB") recently published a memo finding that Canadian fast-casual restaurant franchisor Freshii is not a joint employer of its franchisee's employees. The ruling concerns unfair labor claims made by an employee against a Chicago franchisee.

The ruling is important in light of another initiative at the NLRB, claiming McDonald's Corporation is a joint employer of franchisees' employees at many McDonald's locations.

In the Freshii case, a franchise owner fired employees who tried to organize a union. A regional NLRB branch requested advice from NLRB's general counsel whether to treat the franchisor as a joint employer, rendering the franchisor potentially responsible with the franchisee if the firings were found unlawful.

Under Freshii's franchise agreement, system standards do not include personnel policies or procedures. Even if Freshii shared policies with franchisees, each franchisee decided if it wished to use the policies in its own restaurant. The franchisees were solely responsible for setting wages, raises and benefits for employees. Freshii provided its franchisees with a sample employee handbook, but did not require the franchisees to use it. Potential candidates could apply for jobs with franchisees through the franchisor's website, but Freshii did not screen resumes or do anything more than forward them to its franchisees. Franchisees made their own hiring decisions. Freshii only passively monitored sales and costs, and the franchisor and any software it provided were not involved in scheduling workers.

In a key finding, NLRB's General Counsel noted Freshii stayed silent after the franchisee sought advice on how to resolve the union issue. After the union started to organize at the franchisee's restaurant, the franchise owner informed Freshii's development agent, but neither the franchisor nor the development agent advised the franchisee on how to respond.

Under the NLRB's current standard, joint employer status over franchisees' employees may exist if a franchisor "meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction." Freshii was found not to have a meaningful impact over the franchisee's hiring, compensation, scheduling, discipline, or ongoing supervision.

A broader standard proposed in several cases against McDonald's indicates the NLRB may look at "totality of the circumstances," including how the separate entities structure their commercial relationship, to decide if a franchisor influences working conditions of a franchisee's employees to the extent that collective bargaining cannot occur without the franchisor's involvement.

This so-called "industrial realities" test does not distinguish between direct, indirect, or potential control over franchisees' working conditions. Its broader scope would make more companies joint employers. In the Freshii case, the NLRB Memo said that even under the broader standard, there was no "joint employer: "Freshii does not directly or indirectly control or otherwise restrict the employees' core terms and conditions of employment." Therefore "meaningful collective bargaining could occur in Freshii's absence."

The NLRB's Freshii memo is good news for franchisors and provides guidance on steps franchisors can take to reduce the risk of being deemed a "joint employer" whether for matters concerning labor practices, or other vicarious liability matters.

To read the entire NLRB memo, click: Advice Memorandum re Nutritionality, Inc. d/b/a Freshii.

 

FRANCHISEE 101: 7-Eleven Ordered to Disclose Metadata

 

Litigation and Metadata

A federal court has ordered 7-Eleven to disclose its metadata in three franchisees' claims that they were targeted for termination for financial, political and racially discriminatory reasons. Metadata is deep down "data about data" in computer files. It is created when documents are created, collected and processed to be produced in discovery.

The franchisees sought metadata of documents 7-Eleven filed in litigation, including dates of creation, authors, custodians, dates of each modification, author of each modification, and data showing who documents were electronically sent to. The Court found the franchisees showed that many paper documents exchanged in discovery were missing source, date, and other key background. The Court rejected 7-Eleven's claim of hardship or undue expense to produce the metadata.

Read the Opinion and Order: Younes v. 7-Eleven, Inc. (D.N.J. 2015) 2015 WL 1268313.

 

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.

 

 

 

 

 

Tuesday
Dec162014

Mixed Results in Delivery Driver Cases

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
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.

 

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.

 

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