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Freshii Not Joint Employer; 7-Eleven to Disclose Metadata

Franchise 101 News

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.







Forum Selection & Automatic Termination Clauses

Franchise 101

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


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.


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.



Accidental Franchises in Atypical Industries; FDA Labeling

Franchise 101

January 2015


Department of Business Oversight

Tal Grinblat, Chair of the Franchise Law Committee of the Business Law Section of the State Bar of California and Certified Specialist in Franchise and Distribution Law, organized and met with Department of Business Oversight (DBO) members to discuss new legislation proposed by the Committee. Tal chaired the meeting which was held in the DBO's office in San Francisco.

Southern California Super Lawyers 2015

Barry Kurtz, David Gurnick and Tal Grinblat (all are State Bar Certified Specialists in Franchise & Distribution Law) have been named Southern California Super Lawyers for 2015. The designation is determined by a 12 point peer recognition and professional achievement ratings system, and via independent research. The list is published in Los Angeles Magazine, and can be found online. Click to see our 2015 Southern California Super Lawyers.

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.

Steering 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.

Accidental Franchises in Industries Not Typically Associated With Franchising

Accidental Franchise 

Almost everyone recognizes the nation's most prominent franchises: McDonald's, Domino's, Hilton or 7-Eleven, to name a few. And business people are becoming aware that arrangements that look like franchises, but are characterized by parties as something else, may still be franchises under U.S. laws. Examples include a successful restaurant that brings in investors to own new locations, or a plumbing or lock-and-key service that lets its best employees start their own branches. These deals may be or become accidental franchises.

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

The Federal Trade Commission's definition of a franchise may be summarized as a business relationship, no matter what it is called, in which: 

  1. One party will grant another the right to operate a business or sell goods or services, identified or associated with originator's trademark;

  2. There will be significant control or assistance from the trademark owner; and

  3. The operator must pay money to the trademark owner.

It is easy to see how these elements could all be present in the relationships described above. When the elements are present, the franchisor must prepare an extensive "Franchise Disclosure Document" and allow a 14-day cooling-off period before entering into any agreement with a franchisee. The franchisor cannot unilaterally change or terminate or not renew franchise agreements. In 13 states, registration is required before an agreement may be entered into. Violations can mean civil and criminal penalties.

Considering the wide scope of the FTC or state law definitions, the elements can be found in relationships in unexpected fields. Who would think the Girl Scouts, an organization chartered by Congress, would be an illegal franchise? But a federal court ruled the elements were present between the Girl Scouts and one of its local councils, based largely on selling Girl Scout cookies and merchandise.

Commercial shopping centers often require tenants to join and pay money to a shopping center association for advertising. These associations promote members using the center's distinctive brand, organize promotional events, regulate when tenants can and cannot conduct special sales, mandate operating hours, and require tenant members to participate in gift-card and loyalty programs. Possibly, the elements of a franchise are present, meaning the shopping center landlord or its tenant association may be a franchisor.

In some industries, such as software development and pharmaceuticals, independent businesses form networks and consortiums to develop products and services. These organizations require members to make payments to fund operations and create, develop or obtain products for members to use, sell, or distribute. Often the organization adopts a distinctive name which members and re-sellers may use, or be required to use. This scenario could contain all the elements of a business franchise, requiring regulatory and other franchise law compliance.

Unexpected franchises occur in other business relationships, too. For example, a snack-foods distributor or route driver who must pay material fees to the manufacturer (e.g., to purchase a vehicle or for advertising, training, manuals or meetings), follow the manufacturer's policies and promote the brand, could be a regulated franchise. In one case, a California court found a foreign winemaker to be a franchisor because the vintner sold ancillary promotional items to its U.S. importer and assisted in customer sales calls.

Franchise laws are written in broad terms. Companies, and organizations, even nonprofits and consortiums, that develop and distribute products and services, whether through their own members or others who are recruited, should assess whether their arrangements may be franchises.


Complying with the FDA's New Menu Labeling Requirement

On November 25, 2014, the Food and Drug Administration (FDA) released final rules governing menu and vending machine labeling to implement some of the Affordable Care Act's nutrition labeling requirements.

The final rule for menu labeling is entitled the Nutrition Labeling of Standard Menu Items in Restaurants and Similar Retail Food Establishments Rule ("Menu Rule"). Its coverage includes restaurant franchise systems.

According to the FDA's website, the Menu Rule "applies to restaurants and similar retail food establishments if they are part of a chain of 20 or more locations, doing business under the same name, offering for sale substantially the same menu items and offering for sale restaurant-type foods." Covered establishments include sit-down restaurants, drive-thrus, take-outs, delis (including grocery store delis), places with self-serve salad/food bars, bakeries, coffee shops, movie theatres, amusement parks, ice cream stores, convenience stores serving ready-to-eat foods and drinks, and certain bars serving alcohol. The FDA claims the Menu Rule will help consumers make informed choices by providing accurate, clear and consistent nutrition information when they eat out. The FDA says that at least two-thirds of adults and one-third of children in the U.S. are overweight or obese and eat one-third of their calories away from home.

The Menu Rule requires posting calorie information for standard menu items on the menu and menu boards, including electronic and online menus, so customers can understand the posted caloric information in context of their total daily diets. The postings must state that detailed, written nutrition information is available to customers on request. A covered establishment must have a reasonable basis for its nutritional declarations, keep records relating to the nutritional data used as a basis for, and methods used to determine, the nutritional information provided to customers, and make the information available to the FDA on request.

Starting December 1, 2015, franchisees, and franchisors operating company-owned locations, need to comply with the Menu Rule. Franchisees should be proactive and communicate with their franchisors and suppliers to obtain accurate nutritional data and determine what new standards their franchisors plan to implement to maintain uniformity and enable franchisees to comply with the Menu Rule's requirements.

Restaurant franchisors are likely starting to test standard menu items and work on new menu and menu board standards to provide to franchisees. But franchisees should not wait to hear from their franchisors since franchisees will be responsible to comply with the Menu Rule in December regardless of any action taken by their franchisors.


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.


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