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Thursday
Nov302017

Franchise 101: Injunction Bottleneck; and All in the Family

Franchise 101 News

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



NOVEMBER 2017

 

Franchise Distribution Attorneys

Matthew J. Soroky in Franchise Law Committee e-Bulletin

”...the U.S. House of Representatives approved by a vote of 282 to 181 the Save Local Business Act, a bill that would amend the National Labor Relations Act and the Fair Labor Standards Act to limit joint employer liability." How could this bill affect franchisors? Read Matt's summary in the State Bar of California Business Law Section's Franchise Law Committee e-Bulletin: U.S. House of Representatives Passes Save Local Business Act

Katherine L. Wallman in Valley Lawyer

"Although the advantages of social media and the digital age are vast, the ever-changing cyber world raises ethical questions attorneys must address before reaping its benefits." For more, read Kate's MCLE article: Social Media and Common Ethical Problems

 

FRANCHISOR 101:
Injunction Bottleneck

A restaurant franchisor, World of Beer Franchising ("WOB"), recently lost an appeal to enforce a post-termination restriction against a franchisee launching a competing business. Both the trial and appellate court ruled against WOB.

WOB lost because it ignored the franchise agreement requirement to submit the dispute to mediation at the same time as it sought injunctive relief.

WOB and Evan Matz were parties to three franchise agreements to operate World of Beer restaurants. After mutual termination of the agreements, Matz reopened the former franchised locations as competing restaurants. WOB sought to enjoin Matz from using its marks, confidential information, and trade dress and from violating the post-termination non-compete covenant.

A federal district court denied WOB's request on the basis that the franchise agreements required the parties to first mediate their dispute. WOB appealed, arguing that the district court misinterpreted the agreements' dispute resolution provisions.

The dispute resolution clauses each said that a preliminary injunction may be sought, as long as the dispute was submitted for arbitration at the same time. But the agreements required nonbinding mediation before bringing arbitration. Another provision said that all disputes, except those concerning the marks, had to be arbitrated. Harmonizing these provisions, the district court ruled that the franchisor was required to submit its grievance with Matz to mediation and arbitration, at the same time as its motion for an injunction.

The Court of Appeals agreed that the provisions required the parties to mediate first, regardless of whether the dispute was arbitrable. The provisions could be reasonably read as requiring contemporaneous submission of the injunction request to both arbitration and mediation, followed by arbitration under the agreements' injunction clause, if mediation did not resolve the dispute.

The franchisor argued that the dispute was not subject to arbitration, and therefore was also exempt from mediation, because the claim concerned the marks. The courts disagreed, finding that the franchisor's claims extended beyond the marks. The franchisor alleged infringement, but also claimed violation of the non-compete covenant and use of confidential information and trade dress. The court was likewise unmoved by the franchisor's attempts to initiate mediation under the dispute resolution clauses.

WOB contended Matz ignored inquiries about whether he preferred mediating through the American Arbitration Association or a private mediator. The franchise agreement expressly required mediation under AAA Commercial Mediation Rules, which permitted the franchisor to submit the dispute to AAA mediation unilaterally, without Matz's cooperation.

Post-termination covenants are often the franchisor's last remnant of control over former franchisees. It is preferable for a franchise agreement's dispute resolution clause to provide a clear path to enforcing the post-termination covenants.

Read: World of Beer Franchising, Inc. v. MWB Development I, LLC

 

FRANCHISEE 101:
All in the Family

Some creativity can help in passing a former franchised business to the next generation, particularly if the franchisor has no part in the franchisee's succession plan.

A federal court in Nebraska preliminarily enjoined two former franchisees of The Maids International, a home-cleaning business, and also the franchisees' daughters and the competing home-cleaning company the daughters established, from continuing to violate post-termination non-compete and non-solicitation provisions of the franchise agreements.

One might think, as the defendants argued, that the daughters and their business could not be enjoined because they didn't sign the franchise agreements and were part of a separate business entity. According to the franchisees, their daughters' business - "Two Sisters" - had a new website, new uniforms, and new phone numbers. But under case law in some states, those acting in concert or privity with signatory franchisees may be bound by an injunction for actions that violate franchise agreements, even if they did not sign the agreements.

The court found several indicators that the former franchisees were in privity with their daughters' home-cleaning business.

The new business operated from the same locations as the former franchise locations. It offered the same services. It kept the franchisor's logo. It used the same email address. It used two of the same vehicles. And one of the former franchisees was listed as the registrant for the website of his daughters' business.

Most tellingly, in the court's view, was that the franchisee's "retirement letter" to customers made clear that the daughters were "ready to take over," that "most everything will remain the same," and that the daughters would continue the franchisees' business, using the same employees (their daughters), cleaning schedule, cleaning products and insurance. The court added that the defendants failed to comply with other post-termination obligations, such as the return of all confidential and marketing material and stopping use of customer lists, proprietary methods and trade secrets.

Family successors to a formerly franchised business should clearly understand what the franchisor has the power to enforce against them, and franchisees should factor the non-compete provisions of a franchise agreement into their succession plans.

Read: The Maids Int'l, Inc. v. Maids on Call, 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 2017. All Rights Reserved.

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
msoroky@lewitthackman.com
kwallman@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.

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