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Entries in franchise litigation (10)

Thursday
Sep282017

Franchise 101: A Clean Sweep; and Upgrading Your Metal 

Franchise 101 News

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

 

SEPTEMBER 2017

 

Franchise Distribution Attorneys

Franchise Convention

Will you be attending Franchise Expo West at the Los Angeles Convention Center in early November? We'll be there, and we'll be happy to meet with you. Use one of the email addresses above to contact one of our attorneys directly, or send a message to our Franchise Practice Group mailbox. Someone will be in touch regarding potential meeting times.

State Bar Appointment

David Gurnick joins Barry Kurtz on the State Bar of California's Franchise and Distribution Law Advisory Commission. Members of the Commission serve a three year term, and are tasked with reviewing application packages of California attorneys who sat for and passed the Franchise and Distribution Certified Specialist exam, and providing recommendations to the California Board of Legal Specialization as to awarding the credential. Currently there are less than 60 Certified Specialists in Franchise and Distribution Law in the state of California, three of whom include our own Barry Kurtz, Tal Grinblat, and David Gurnick.

 

FRANCHISOR 101: A Clean Sweep

Jan-Pro Joint Employer Litigation 

A federal court recently held that under California law, cleaning services franchisor Jan-Pro Franchising International (Jan-Pro) was not the employer of its unit franchisees. The franchisee plaintiffs failed to show that Jan-Pro exercised sufficient control over day-to-day employment activities or reserved the right to exercise such control.

Jan-Pro operates a three-tier franchising structure. Jan-Pro grants the right to use its trademark "Jan-Pro" to a regional master franchisee for a specific geographic area. The master franchisee is responsible to sell Jan-Pro franchises in that area. The master franchisee sells unit franchises, giving franchisees the right to service accounts provided by the master franchisee. Each unit franchise operates pursuant to a franchise agreement. Franchise agreements are between the master franchisee and unit franchisee, but Jan-Pro is not a party.

The unit franchisees sued Jan-Pro seeking minimum wage and overtime premiums, claiming they were improperly classified as independent contractors when they were really Jan-Pro's employees. The court evaluated the claims under California's three alternative definitions of an employer/employee relationship: (i) exercise of control over wages, hours, or working conditions; (ii) to suffer or permit to work; or (iii) to engage, thereby creating a common law employment relationship. A common-law employment relationship requires evidence of the right to control day-to-day activities.

The unit franchisees argued that Jan-Pro met the first and third definitions because Jan-Pro's contracts with its master franchisees gave it the absolute right to control policies and procedures of any master franchisee as well as any unit franchisee. The court disagreed. It found the right to control policies and procedures were set forth only in Jan-Pro's contracts with its master franchisees, not in contracts with unit franchisees. The court determined that unit franchisees' franchise agreements with master franchisees did not set out any rights for Jan-Pro or otherwise indicate that Jan-Pro would be a third-party beneficiary. The court concluded that the unit franchise agreements did not create rights between Jan-Pro and the unit franchisees.

Next, the court rejected the unit franchisees' argument that Jan-Pro had authority to stop them from working under the second definition of an employer/employee relationship. The court stated that Jan-Pro's agreements with regional master franchisees purported to confer that authority, but the unit franchisees' agreements with master franchisees did not extend Jan-Pro's authority to the unit franchisees.

Finally, the court rejected an ostensible agency theory raised by the unit franchisees because they failed to offer evidence that they believed the master franchisees were agents of Jan-Pro.

The court's analysis focused on features that are unique to subfranchise systems, specifically the lack of a direct contractual relationship between the franchisor and unit franchisees. A franchisor considering a subfranchise system should pay particular attention to the contractual rights it can enforce directly against unit franchisees. If a franchisor determines that it wants to have some direct contractual rights then it should be careful not to exert direct or indirect control over a unit franchisee's employment conditions in a way that would make it a joint employer.

Read: Roman v. Jan-Pro Franchising International, Inc., N.D. Cal.

FRANCHISEE 101: Upgrade Your Metal

Metal Supermarket Software Litigation

A federal court in New York denied a franchisee's motion for preliminary injunction that would have prevented its franchisor Metal Supermarkets Franchising America (MSFA) from installing technology upgrades in its stores.

MSFA is the franchisor of a metal parts business. JDS Group (JDS), a Washington corporation, owned two MSFA franchises. For ten years as an MSFA franchisee, JDS used a software system called "Metal Magic" that MSFA supplied. In 2012, MSFA determined that Metal Magic was outdated and below an appropriate measure of MSFA's standards. It developed a new software system, called "MetalTech," which took three years to develop and cost over $1 million. MSFA began installing MetalTech at franchisee locations. But JDS continued to use the Metal Magic system and refused to switch its stores to MetalTech, claiming it was unreliable and did not perform as required. JDS sued MSFA for violation of the Washington State Franchise Investment Protection Act (FIPA) and for breach of the implied covenant of good faith and fair dealing, and asked the court for a preliminary injunction to prevent MSFA from installing MetalTech in its stores.

JDS claimed MetalTech was unreliable and inefficient and submitted declarations of six MSFA franchisees, all alleging that they had serious problems using MetalTech that hurt their business operations. The court found that express terms of the franchise agreements permitted MSFA to develop or designate computer software programs and required JDS to use them. The court noted that federal courts have repeatedly held that it is permissible for a franchisor to require franchisees to use its proprietary computer systems. The court found no evidence of bad faith by MSFA and concluded it was unlikely that JDS would be successful on the merits of its FIPA claim.

The court also held that JDS failed to show it was likely to suffer irreparable harm if MetalTech were installed in its stores. MSFA showed that 78 out of 86 stores were using MetalTech and on average those stores saw sales increases after the conversion. The court found that any impediment imposed by MetalTech was not so great as to impair JDS's ability to continue operating its business. Accordingly, the court found an injunction was not warranted and denied JDS's motion.

An important aspect of operating a franchise that may be overlooked by potential franchisees is the possibility of changing or upgrading technology at the franchisor's request. Franchisors typically reserve the right to require franchisees to upgrade computer and technology systems. Prospective franchisees should understand before they enter into a franchise agreement that technology upgrades are likely to occur during the life of their franchised business.

More Info: JDS Group Ltd. v. Metal Supermarkets Franchising, W.D.N.Y.

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

Wednesday
Sep302015

Franchise Systems Can Fight Online Negativity; Bankruptcy Discharges Franchise Law Claims

Franchise 101 News

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

September 2015

 

ABA Forum: David Gurnick Presenting

David Gurnick will co-present: Finders, Keepers, Losers, Weepers: Opportunities, Risks & Considerations in Using Intellectual Property Created by Others, at the ABA's 38th Annual Forum on Franchising, held in New Orleans October 13-17th. Finders, Keepers is scheduled for 10:15 a.m. on Thursday, 10/15, and 11:15 a.m. on Friday, 10/16. 

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

FRANCHISOR 101:
Franchise Systems Can Fight Online Negativity


 

One of today's challenges faced by franchisors and franchise systems is negative remarks posted online by a customer, ex-employee, or even a dissatisfied franchisee. Negative comments appear in sites created specifically to criticize; on social media like Facebook or Tweets, blogs, personal sites and review sites like Yelp. These posts can reach unlimited numbers of people and hurt a brand's reputation.

Posts, positive or negative, may have First Amendment protection. Website hosts have immunity under the federal Communications Decency Act, for content posted by others on their sites. But companies are learning of ways to fight back. Here are some choices from which franchisors can assemble a strategy against negative online comments.

Proactive Efforts: A proactive way to reduce negative comments is using care to provide quality products, good customer experience and treating franchisees and employees well. Satisfied people are less likely to complain. Dissatisfied people - more likely. As a timely example, consider Volkswagen. Apparently, dishonesty was built into VW's products, and the company's misguided intent to fool the public is generating massive online negative comments that will be around for years to come. Honesty and good product quality would have avoided most of that negativity.

Terms and Conditions: Another proactive step is to have terms with customers, suppliers, franchisees and others, limiting posting of negative online comments

Seek Removal: A franchisor could consider contacting and asking the poster to remove or modify their statement. This course is especially useful if the negative comment is due to a misunderstanding or unique circumstance that is not likely to recur. An explanation to a franchisee, a franchisee's customer or ex-employee could address their concern. Sometimes an apology or other consideration may be needed. Some improper posts can be removed according to a site's terms of use. Many sites have terms for objecting and asking that posts be removed. For a particularly egregious or unlawful posting, a franchisor may find it useful to go beyond the site's stated procedure, and contact their management or attorney to request that the content be removed.

Post a Polite Response: Many sites provide the opportunity to post a reply. A respectful, even-tempered response explaining the circumstance, expressing regret for a poster's experience, and if appropriate noting what corrective action was or will be taken, can partially mitigate some ill effects of a negative online comment.

Cease and Desist Demand: Where justified, such as for comments that are false, exaggerated, or defamatory, a franchisor may choose to have counsel send the poster a strong demand to cease, desist and remove the posting. If the poster has made a threat, or disclosed secret information, civil or criminal implications may arise. Sometimes, people who post comments want this kind of attention, prompting concern that a cease and desist demand will not dissuade their conduct, but will generate more undesired comments.

Prudent Inaction: Because responses to negative online comments may generate more comments and undesired attention, another rational strategy - in the right circumstances - is to take no action. For example, a comment on an active Facebook or other page, whether negative or positive, if not responded to, may receive less attention and be pushed down by later posts on other subjects.

Get Other Posts: Similar to the above is to enlist other customers, friends and associates to post their own truthful, favorable comments. This method provides positive messages and sometimes causes negative reviews to be pushed down, where they get less and eventually no attention.

Digital Millennium Copyright Act Take Down Notice: Where a post includes content that infringes a copyright, federal law has a procedure for notifying and requiring the website to remove that content.

Seek Government Help: In some circumstances it is useful to ask for help from the government. The FTC, Attorney General and elected representatives are possible sources of assistance. For example, when a person posting negative or false comments is really a competitor, or ex-employee now working for a competitor, such agencies and officials may be willing to help.

Litigation: Due to expense, litigation is rarely anyone's first choice. But when someone breaks the law and won't stop, our system provides courts as forums for seeking relief. Courts can help identify anonymous perpetrators and award money damages for defamation, disparagement, false advertising and sometimes injunctive relief.

Sign-Up: It is distasteful but sometimes balancing cost and effect, a practical solution is to sign up with sites where this is known to result in removing or lowering the prominence of negative comments.

Many tools and strategies exist for responding and fighting back. It is not necessary to just accept the injury, harm to reputation and loss of business that come with being a target of negative comments on the internet.

 

FRANCHISEE 101:
Bankruptcy Discharges Franchise Law Claims

A recent Bankruptcy Appellate Panel decision is a reminder of both a benefit of bankruptcy, in appropriate circumstances, and the need to respect the bankruptcy discharge a party obtains in the process.

Mr. Lee was developing a sushi restaurant concept called Little Madfish. Mr. Im and his wife invested $200,000 and obtained stock and rights to open a Little Madfish restaurant. They also applied for a visa to work in the U.S. on the basis of having made a substantial investment in the business.

The restaurant failed. Lee filed for bankruptcy. After he obtained a discharge, Mr. Im sued in state court for franchise law violations, fraud and rescission of the stock purchase. Lee moved in state court to dismiss the claims based on his bankruptcy discharge. The state court dismissed some claims, but not all of them. At trial, a jury found Mr. Lee did not commit fraud and the court ruled that another claim was barred by the bankruptcy discharge.

Lee then asked the bankruptcy court to reopen his case so he could seek sanctions against Im for violating the discharge in bringing the state litigation. The bankruptcy court held Mr. Im in contempt, holding him liable for $50,000, for suing in state court after Mr. Lee obtained a discharge.

A bankruptcy discharge protects against claims for violating franchise laws as well as other claims. (Though under one bankruptcy code exception, a discharge may not protect against securities law claims). A person who is sued for franchise law violations or most other claims, may be able to discharge them through bankruptcy and it is important for claimants to respect the bankruptcy discharge.

Read the entire decision: In re Lee 2015 WL 3960897 (9th Cir. Bankr. App. Panel)

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.

 

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.

 

 

 

 

 

Wednesday
Mar252015

Forum Selection & Automatic Termination Clauses

Franchise 101

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

Franchise 101 Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

March 2015

 

Barry Kurtz & Bryan H. Clements' Article in Business Law News, a publication of the State Bar of California

 

"The fact that states generally require brewers to provide distributors with exclusive territories in which no competitors may distribute the brewer's beer demonstrates the degree to which beer distributors enjoy greater territorial protections than do franchisees..."

Click to read: Traditional Franchise and Beer Distribution Relationships: A Legal Comparison

 

Samuel C. Wolf Article in Valley Lawyer, a publication of the San Fernando Valley Bar Association

 

"Franchise lawsuits and most business litigation are usually economic in nature, and application of the economic loss rule will often narrow the scope of the claims and damages available as a remedy..."

Read: Using the Economic Loss Rule to Your Client's Benefit

 

FRANCHISOR 101:
Forum Selection Clause Held Enforceable

 

Sushi Restaurant FranchiseA federal court in Sacramento recently upheld a franchisor's forum selection clause and transferred an action brought by an area representative to the federal district court in the Western District of Texas.

HDYR operated a sushi restaurant in Austin, and sought to franchise the concept under the name How Do You Roll? HDYR entered into an area representative service agreement with the plaintiffs under which the plaintiffs were to solicit franchisees to purchase How Do You Roll? restaurants in Northern California.

The agreement contained a forum selection clause providing for exclusive venue for disputes in the state or federal district courts in Texas.

In the Ninth Circuit, a forum selection clause is generally considered unenforceable only if it was the result of fraud, undue influence, or overwhelming bargaining power; if the selected forum was so inconvenient that forcing the plaintiffs to litigate there would essentially deny them their day in court; or if enforcement would contravene a strong public policy in the forum where the suit was brought.  

The court found that the plaintiffs presented no evidence that would void the forum selection clause. The court was not persuaded by the area representative's argument premised on the California Franchise Relations Act's (CFRA's) strong public policy against enforcing out-of-state forum selection clauses in franchise agreements, because the area representative agreement was not a franchise agreement. The court found that the area representative was retained to recruit franchisees, but was not a franchisee itself and was not the type of party that the CFRA was designed to protect.

The HDYR ruling is encouraging for franchisors since it illustrates the value of including well-conceived and well-drafted forum selection clauses in area representative agreements.

See: Estep v. Yuen Yung.

 

FRANCHISEE 101:
Nice Try Mr. Franchisee

In Fantastic Sam's Salons, Corp. v. Moassesfar, a federal court in Los Angeles denied a motion by former franchisees to dismiss Fantastic Sam's claims for breach of contract and trademark infringement based on the contractual limitations period in the parties' franchise agreements.

Hair Salon Franchise

The franchisees were required to pay a weekly franchise fee so long as the franchisee used the franchisor's system or marks, whether authorized or not. The franchise agreement stated the agreements terminated automatically, without notice from the franchisor, if the franchisees' bank failed or refused to honor any authorized bank draft for the payment of any weekly fees for two consecutive weeks.

The franchisees' checks to the franchisor were dishonored, first in January 2011 and again in February 2012. However, the franchisees continued to operate both locations as Fantastic Sam's salons until October 2014, when a stipulation to terminate the franchise agreements was entered into in the franchisor's termination action filed in August 2014.

The Moassesfars argued that the agreement had automatically terminated when two consecutive payments were missed, thus barring the franchisor's claims. The court rejected this theory, noting that the automatic termination clause without notice was contrary to California law and that the requirement of notice and an opportunity to cure prior to termination was intended to protect franchisees against arbitrary terminations.

See: Fantastic Sam's Salon Corp. v. Moassesfar.

 

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.

 

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.

 

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