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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.

Thursday
Jun292017

Donut Holes in Franchise Relationship; and McDonald's Shakes Damages re OT Policy

Franchise 101 News

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

 

JUNE 2017

 

Franchise Lawyers

Sam Wolf Selected

Congratulations to Samuel C. Wolf, one of two attorneys in Southern California designated a "Rising Star" in Franchise Law, by Super Lawyers Magazine. Sam was nominated by attorney peers and passed the independent research process patented by the magazine.

For details, click: 2017 Up-and-Coming Southern California Attorneys and Rising Stars

Joint Employer Liability – A Recent Wave of Reprieves

"While joint employer liability remains a looming, omnipresent facet of the franchise industry, franchisors have enjoyed a recent wave of reprieves. . ."
- by Matthew J. Soroky

Read: State Bar of California Business Law Section, Franchise Law Committee E-Bulletin

 

FRANCHISOR 101:

Donut Franchise Relationship Dissected by Court

 

The parent of Dunkin' Donuts was named along with Starbucks and about 80 other coffee sellers, distributors and retailers in a 2010 lawsuit alleging violations of California's Proposition 65 and Safe Drinking Water and Toxic Enforcement Act. Dunkin Brands, Inc. ("DBI") claimed it doesn't itself buy, sell, roast, distribute or even possess coffee in California, and therefore should not have to put warnings on its coffee. But its argument failed on summary judgment, and DBI will go to trial with its co-defendants in August.

Businesses with 10 or more employees are required to place warnings on products containing chemicals that may cause cancer. Plaintiff, the non-profit watchdog group Council for Education and Research on Toxics ("CERT"), wanted defendants to add warnings to coffees that contain the carcinogen acrylamide.

DBI contended it had franchised all coffee operations to subsidiaries, while it just oversaw its corporate organization, and did not control or produce coffee. CERT pointed to the franchisee subsidiaries' reliance on DBI to operate, arguing that DBI "directs its employees to do all of the acts for all of the subsidiary companies." It claimed that DBI's subsidiaries "intentionally have no employees" to avoid the minimum-employee threshold and that actions by employees at DBI's direction expose Californians to acrylamide in Dunkin' Donuts coffee.

The Court agreed with CERT's argument, determined DBI's "franchise" structure to be "smoke and mirrors," found that selling coffee is not required for liability, ruled the law is to be construed broadly to protect public health, and found DBI's control over its subsidiary franchisees necessarily gave DBI control over product warnings. DBI's list of day-to-day aspects of its franchisees that it did not control - which did not include "product labeling" - only raised an inference that control over subsidiaries could be used to prevent them from selling coffee in violation of Prop 65.

Dunkin' Donuts' loss on summary judgment shows how courts and government may subordinate the protections provided by franchise relationships to perceived public health or other public interest concerns.

Council for Education and Research on Toxics v. Starbucks Corp., et al., BC435759 (L.A. Super. Ct., filed Apr. 13, 2010)

FRANCHISEE 101:
McDonald's Shaking Damages for OT Policy

In Los Angeles Superior Court, McDonald's claimed victory when 6,600 workers seeking $41 million in back pay and penalties came away with less than 2% of the amount sought in a claim that the fast-food giant cheated them out of overtime at almost 120 company restaurants. While the workers are sure to appeal the judge's calculation method, the ruling provides franchisors and franchisees a roadmap for minimizing penalties under California's Private Attorney General Act ("PAGA"). The Act deputizes workers as private attorneys general to pursue state labor code violations.

Earlier, McDonald's Restaurants of California, Inc. ("McDonald's") was found liable for shorting overnight workers on overtime pay. McDonald's timekeeping policy assigned all hours in a shift to the day the shift started. Overnight workers whose shift started on Day 1 and who then started another shift sometime on Day 2 often worked over eight hours in a 24-hour period but did not get overtime pay.

Several factors contributed to McDonald's success at the damage phase of trial. The judge was persuaded by McDonald's expert, while finding the workers' expert unreliable for excluding certain time records from his analysis. McDonald's also persuaded the court its violation was not willful; McDonald's believed its policy was a fair and legal way to compute overtime and there had been no complaints prior to the suit. McDonald's successfully avoided draconian fines and PAGA penalties, but it did not escape all liability. The workers were awarded $775,000.

Franchisor and franchisee operators of 24/7 locations in California, of any brand, should use care to comply with wage and hour laws, especially given the uptick in California of PAGA claims against employers. McDonald's has shown that experienced franchise and employment counsel can help treat workers fairly and limit exposure both in and out of the courtroom.

Sanchez et al. v. McDonald's Restaurants of California Inc. et al., BC499888 (L.A. Super. Ct., filed Jan. 24, 2013)

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.

Friday
Mar242017

Franchisor 101: Ostensible Agency Victory; and Technical Disclosure Violations

Franchise 101 News

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



March 2017

 

Tal Grinblat Recognized

Once again, Tal Grinblat will be named a 2017 Legal Eagle in franchising, by Franchise Times Magazine. He has been designated as such by his professional peers and the editorial board of the publication each year since 2014. The magazine will publish the list in April.

 

FRANCHISOR 101:
Ostensible Agency Victory

 

Franchise Lawyers

A California federal judge dealt a major blow to employees of a Bay Area McDonald's in their effort to hold the franchisor responsible for its franchisee's alleged failure to pay wages and provide meal and rest breaks. The ruling shut the door on the plaintiffs' argument that franchisor McDonald's could be liable for its franchisees' labor code violations based on an "ostensible agency" relationship.

In Salazar v. McDonald's Corp., the court previously concluded the franchisor was not liable as a joint employer with the franchisee or as the franchisee's principal under an "actual agency" rationale, and that the crew workers' remaining theory that the fast-food giant "ostensibly" controlled their wages was not amenable to class treatment.

With the workers' remaining theory against McDonald's disposed, franchisors who do not directly hire, fire or pay franchisee workers, or control their hours or working conditions, can take a cue from McDonald's to defeat similar "ostensible agency" claims.

In "ostensible agency," the alleged agent "appears" to a reasonable observer to be acting on behalf of a principal. This appearance alone is enough to create liability for the principal party, assuming it bears some responsibility for allowing the appearance to exist. Previously, the crew workers declared that it appeared to them that they and the franchisee worked for McDonald's, with the franchisee acting as McDonald's agent to employ them.

Under California law, an "employer" is one who "directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person." The employees argued that the clause "through an agent" was sufficient to render even McDonald's, which only appeared to act as a principal through a franchisee agent, an "employer".

However, the court ruled that the phrase "employs or exercises control over" indicated that to be an employer under California law, there must be actual control, not just the appearance of it.

The crew workers also contended that California wage laws broadly favor workers and that it would advance these goals to adopt their ostensible agency interpretation. The court rejected this argument because it would amount to rewriting the law. Moreover, the argument presumed that McDonald's could remedy the alleged wage violations, a claim the court rejected.

A prudent franchisor facing claims that it shorted a franchisee's employees' pay, rest and meal breaks can look to McDonald's for guidance when the employee asserts a belief that he or she was working for the franchisor.

Read: Salazar v. McDonald's Corp.

FRANCHISEE 101:
Technical Disclosure Violations

The consequences to an unwitting franchisor can be severe when it fails to provide disclosure documents required by franchise law. Most franchise laws provide for rescission of the franchise agreement, allowing the franchisee to "unwind the deal" by enabling it to recover all monies it paid in connection with the franchise sale.

But what if the violation was merely a "technical" one because the franchisee did not suffer damages from non-disclosure?

The Sixth Circuit court confronted this question in Lofgren v. Airtrona Canada. After affirming that a sanitation services franchisor violated the Michigan Franchise Investment Law ("MFIL") when it failed to provide a franchisee with a disclosure statement, the court confirmed that rescission of the franchise agreement was the proper remedy under MFIL for this disclosure violation.

Plaintiff Brian Lofgren purchased equipment for a vehicle-deodorizing and sanitizing business. After Lofgren's business was struggling, he sued the franchisor Airtrona Canada and its sales representative, alleging that he was entitled to rescission and restitution because their failure to provide the disclosure statement violated the MFIL. Upon the Court's finding that Logfren's agreement did establish a franchise, the sales representative argued that rescission was a proper remedy for a violation of the MFIL only when the violation directly causes financial losses.

In rejecting this argument, the Sixth Circuit quoted directly from the MFIL, which states that "[a] person who offers or sells a franchise in violation of [the MFIL's disclosure requirements] is liable to the person purchasing the franchise for damages or rescission." The court noted that, although the absence of a disclosure statement did not directly cause the franchisee's financial struggles, there was no requirement under the MFIL to establish causation; it merely says that rescission is permitted if the franchisor fails to provide the disclosure statement.

The court observed that lower courts may choose not to permit rescission if considerations of fairness are in the franchisor's favor, such as where the franchisor inadvertently provided disclosure a few days late. In this case, however, the franchisee met his franchise requirements and took no improper actions. As a result, Lofgren had the right to rescission and restitution for even a "technical" disclosure violation, without needing proof that the failure to supply a disclosure statement actually caused his losses.

If you are a franchisee looking to "unwind" your Franchise Agreement, consider whether the franchisor dotted all 'i's and crossed all 't's when you started the relationship. If not, there may be a law out there that will grant your wish.

Read: Lofgren v. Airtrona Canada, et. al.

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.

Tuesday
Nov292016

Franchise 101: Recent "Franchisor as Joint Employer" Developments

Franchise 101 News

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

 

 

November 2016

 

Franchise Lawyers

David Gurnick Quoted in Franchise Lawyer

"Everybody is aware how divided the Supreme Court is, with all sorts of 4-5 or now 4-4 decisions. This was a 9 to 0 decision that a forum selection clause in an agreement is enforceable." Click to read: Ten Cases Rise to Top for Two Attorneys 

 

FRANCHISOR 101:
Recent “Franchisor as Joint Employer” Developments

 

In the last month, McDonald's settled a class action with employees of a franchisee, and a new President of the United States was elected. These two events have something in common with regard to franchising: they are significant developments concerning the issues of franchisor liability for actions of franchisees, and joint franchisor-franchisee employment of workers at franchised locations.

The settlement was in the case of Ochoa v. McDonalds. A U.S. District Court in California certified a class of more than 800 current and former workers of a multi-unit McDonald's franchisee in the San Francisco Area. They claimed damages for unpaid wages, unpaid overtime and time spent maintaining work uniforms. They sued their direct employer and also McDonald's Corporation, claiming the franchisor was also their employer. The court ultimately ruled against McDonald's in part, saying the claims might be valid if the workers truly thought they worked for McDonald's Corporation. The workers alleged they applied for their jobs on McDonald's website, wore McDonald's uniforms, served McDonald's food, worked at restaurants named McDonald's and the McDonald's name was on their paychecks.

Private claims like this received a boost in 2014 when the National Labor Relations Board (NLRB) alleged McDonald's was a joint employer with its franchisees. In 2015 and 2016 numerous actions were brought in various franchise systems, claiming that franchisors, along with their franchisees, were joint employers of the workers. These claims were made in wide ranging industries, among them restaurants, lodging, convenience stores and fitness.

In the Ochoa case, rather than risk liability to the workers, McDonald's settled for 3.75 million. In 2015, 7-Eleven similarly settled a joint employer liability claim brought by a 19-year sales associate of a New York 7-Eleven franchisee, although that settlement was for only $5,000, including attorneys' fees. A U.S. District Court in New York approved the 7-Eleven settlement.

The NLRB claims against McDonald's in 2014 were the result of the Board adopting a new definition of "joint employer," after President Obama appointed a majority of the Board's members. Under the prior standard, which had been in effect for over thirty years, joint employer status existed where two separate entities shared or co-determined matters governing the essential terms and conditions of employment. For a franchisor (or anyone) to be a joint employer, they had to exert "direct and immediate" control over employment actions like hiring, firing, discipline, supervision, and direction. The new standard is wider, broader and vaguer, assessing whether a claimed employer has sufficient control over employees' essential terms and conditions of employment to permit meaningful bargaining. Words and phrases like "sufficient control," allow this condition to be met by direct, indirect (through an intermediary) or even a reserved right of control, even if not actually exercised.

However, relief for franchisors may be coming. By law, the NLRB is headed by a five member board, appointed by the President. Currently the Board has two vacancies. It is possible the filling of vacancies by President Trump may change the political and philosophic makeup of the board, resulting in a return to the prior joint employer definition or something closer to it.

Regardless of the particular formulation of the joint employer standard, and other standards creating potential liability for acts of franchisees (actual agency, apparent agency, direct negligence, co-venture or joint venture liability and others), there are many steps franchise companies can take to reduce the risk of being held liable for acts or omissions of their franchisees. Earlier this year, we presented an extensive list of ways franchisors and franchisees should consider to prevent or reduce risk of co-employer liability claims. Given the recent developments, please revisit: 68 Steps to Reduce Risk of Joint Employer Liability.

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

Tuesday
Sep132016

Franchise 101 Spotlight: The International Franchise Association

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
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swolf@lewitthackman.com
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Special Edition

 

Franchise Lawyers

President of International Franchise Association (IFA) Visits Lewitt Hackman

 

For more than 55 years, the International Franchise Association has been committed to improving methods and business practices for all participants in franchising - whether working with the Federal Trade Commission, lobbying on legislation; or collaborating with franchisors and franchisees to improve relationships. The Lewitt Hackman firm has been a strong supporter of IFA, participating in the Association's annual conventions and often speaking at the annual IFA legal symposium.

In recent years, IFA has faced an important threat to franchisors and franchisees - the changing standard on "joint employers" and increasing risks of "joint employer liability." To increase awareness about this issue, receive ideas about IFA member preferences, and meet and greet the many franchise clients of the Lewitt Hackman firm, IFA President and Chief Executive Officer Robert Cresanti traveled from Washington D.C. to visit Lewitt Hackman. President Cresanti spoke with several of our franchisor and franchisee clients and firm attorneys about the joint employer liability problem, other work of the IFA, and developments in franchising.

Mr. Cresanti provided a history of joint employer litigation. In an unprecedented move in 2014, the National Labor Relations Board's general counsel issued unfair labor practice complaints against McDonald's and several of its franchisees, seeking to hold the franchisor partially liable for alleged labor practices because the franchisor established general operating procedures. This is alarming to IFA because most franchisors establish general operating procedures.

In 2015 the NLRB decided a case involving waste disposal company Browning-Ferris. The Board changed decades of practice, deciding that direct and immediate control of an employee is no longer the standard for determining joint employer liability. Based on the Browning-Ferris precedent franchisors could be liable as joint employers by just having the right to indirectly control terms of employment, even if a franchisor never exercised that control. The decision blurred the lines, further threatening the franchise business model.

Mr. Cresanti described the numerous closed doors he and IFA encountered in trying to explain a franchisor's tenuous position in light of the NLRB's decisions. Despite obstacles, he vowed IFA will continue fighting to keep franchise business models thriving in the U.S.

Several Lewitt Hackman clients who attended indicated they wish to get more involved in IFA. Lewitt Hackman has signed up to host regular IFA networking events, and firm lawyers will continue to speak at IFA events. Lewitt Hackman thanks IFA CEO Robert Cresanti for visiting our firm and encourages franchisors and franchisees to thin about involvement in IFA. More information is at www.franchise.org.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

 

 

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