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Thursday
Aug232018

Franchise 101: Run for the Border(line) Wage Claim; and Your Neighborhood Inspector

Franchise & Distribution Law Practice Group

Best Lawyers 2018 BadgeSouthern California Tier 3 Best Lawyers in Franchise Law 2018 bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com
tvernon@lewitthackman.com

 

 

August 2018

 

Attorney of the Year 2018

Barry Kurtz was recognized at the San Fernando Valley Business Journal's annual Trusted Advisors Awards event as the Valley's Attorney of the Year , receiving a Client Service Excellence Award . This is the third time Barry was similarly honored. He received Trusted Advisor recognitions previously in 2012 and 2015.

Read: San Fernando Valley Business Journal's Trusted Advisors

Franchise Law Journal - David Gurnick & Samuel C. Wolf article

"Although franchising is a relatively modern business method, the existence of one-sided agreement is nothing new. From time immemorial, laws and courts have been called upon to protect weaker parties against overreaching..."

Read: Unconsionability in Franchising

Valley Lawyer - David Gurnick & Matthew J. Soroky article

"In 2013, motor fuel was available at about 150,000 locations across the United States. This was a 25 percent decline from two decades earlier when the number of gas stations exceeded 202,000. The number of gas stations is expected to continue to fall and there are many reasons why..."

Read: Gas Station Franchises: Federal & California State Regulations

 

FRANCHISOR 101:
Run for the Border(line) Wage Claim

Taco Bell Wage Claim

The Ninth Circuit Court of Appeals upheld summary judgment in favor of Taco Bell on class claims that employees should be paid under California law for time spent on company premises eating employer-discounted meals during meal breaks.

California law requires employers to relieve nonexempt employees of all duties during required meal periods or pay the employee a meal premium. Taco Bell’s meal break policy let employees, on a voluntary basis, buy discounted meals, but the meals had to be eaten in the restaurant. Taco Bell’s requirement sought to prevent employees from giving the food to friends or family, which Taco Bell considered to be theft.

The plaintiff, a former Taco Bell employee, brought a class action against Taco Bell claiming she was entitled to be paid for time spent on Taco Bell's premises eating discounted meals during her meal breaks. The former employee argued that because Taco Bell required the discounted meal to be eaten in the restaurant, she was under Taco Bell’s control, making the time compensable.

A lower court disagreed, finding that Taco Bell’s meal policy satisfied California law. This was because Taco Bell relieved employees of all duties and relinquished control over their activities during meal breaks. In upholding this ruling, the Ninth Circuit noted that under the discounted meal policy, employees were free to use meal break time as they wished, and an employee had to stay on premises only if the employee voluntarily chose to buy a discounted meal. The Ninth Circuit found the requirement to eat the discounted meal on premises did not amount to control over the employees’ working conditions.

In California, an employer must relinquish control over nonexempt employees during meal breaks. Franchisors and franchisees that employ nonexempt employees should have their meal break policies, and any changes to the policies, reviewed by counsel before implementation.

Rodriguez v. Taco Bell Corporation, No. 16-15465 (9th Cir. July 18, 2018)

FRANCHISEE 101:
Your Neighborhood Inspector

Home Inspection Service Non-Compete

A Tennessee federal judge granted a preliminary injunction in favor of AmeriSpec, a national franchisor of property inspection services, enforcing a one-year post-termination covenant not to compete against its former franchisee.

The franchise agreement expired May 1, 2017. The franchisee did not sign a new franchise agreement or notify AmeriSpec of any intent not to renew. After expiration, the franchisee continued to operate using AmeriSpec’s trademarks and business systems and continued to pay franchise fees to AmeriSpec.

In February, 2018, the franchisee opened a competing inspection business, advertising that “Your Local AmeriSpec is now American Property Inspections.” AmeriSpec then wrote to the franchisee, complaining that he was violating the agreement’s non-compete clause, demanding that he stop operating the competing business and providing him thirty days to cure. After the franchisee did not respond to the letter, AmeriSpec sued.

The franchisee argued that the franchise agreement expired May 1, 2017, meaning the one year post-term non-compete expired May 1, 2018 and was no longer enforceable. The court rejected this argument, finding that the parties operated under the franchise agreement or an implied contract with the same terms, until April 7, 2018 – thirty days after AmeriSpec wrote to the franchisee. The court found no evidence of the franchisee communicating intent not to renew the franchise to AmeriSpec. The court concluded that the parties created an implied contract based on conduct, that the non-compete covenant was enforceable and AmeriSpec would be irreparably harmed without injunctive relief.

Franchisees considering operating a competing business should pay close attention to the non-compete provisions of their franchise agreements and should consult their legal counsel about the implication of such provisions before starting such an endeavor.

Amerispec, L.L.C. v. Omni Enters., Inc., 2018 WL 2248459 (W.D. Tenn. May 16, 2018)

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 2018. All Rights Reserved.

Thursday
Mar292018

Franchise 101: Liability as Certain as Death & Taxes; and To First Refuse, or Not to Refuse

Franchise 101 News

Best Lawyers 2018 BadgeSouthern California Tier 3 Best Lawyers in Franchise Law 2018 bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
msoroky@lewitthackman.com
kwallman@lewitthackman.com



 

March 2018

 

 

Franchise Distribution Attorneys

FRANCHISOR 101:
Liability as Certain as Death & Taxes

Structuring a franchise to reduce risk of joint employment and vicarious liability means limiting a franchisor's control over franchisees. This is a challenge in a professional services franchise, where the brand is intertwined with the franchisee's personnel and the end product.

A California federal court held that a franchisee's former customer sufficiently alleged claims that tax preparation franchisor Jackson Hewitt exercised sufficient control over processing of tax returns to be vicariously liable for fraudulent conduct of a franchisee's rogue employee. The franchisor must also face claims of making fraudulent statements about accuracy of its tax preparation services.

The customer claimed the franchisee manipulated his tax returns to get a larger refund, and kept part of the refund as fees, without the customer's knowledge. In a prior ruling, the Court found the franchisor's controls were typical of a franchise relationship, and that control over certain aspects of a franchisee's operations was insufficient to create vicarious liability. This time, the customer alleged that Jackson Hewitt controlled the instrumentality of the harm by hiring and training tax preparers, and reviewing, approving and submitting tax returns to the IRS through the franchisor's proprietary and mandatory computer system. The Court was persuaded by allegations that the franchisor's "Code of Conduct" referred to the reader as an "employee" of Jackson Hewitt (not of the specific franchisee), mandated background checks and training programs to prevent preparation of fraudulent returns, and set parameters for termination of franchisee employees for failure to comply with system requirements.

Jackson Hewitt was also alleged to have made fraudulent ads touting 100% accurate returns, comparison to mom and pop tax preparers, and the "Preparer's Pledge" to handle a customer's tax return like their own. The Court said the purpose of the ads was to engender trust in potential customers, so they would hire Jackson Hewitt and its franchisees to prepare their taxes.

A professional services franchisor should be cautious in preparing training materials and manuals to delineate no more supervision than needed over franchisee personnel, to protect the franchisor's brand and intellectual property while trying to reduce the risk of vicarious liability for acts of a franchisee's employees.

Read: Lomeli v. Jackson Hewitt, Inc.

 

FRANCHISEE 101:
To First Refuse, or Not to Refuse

A franchisee looking to transfer assets of a franchised business may be subject to the franchisor's right of first refusal, the franchisor's option to purchase the business, or both, depending on the language of a franchise or dealer agreement.

In a federal court in Pennsylvania, a franchisee of seven car dealerships prevailed against Audi of America, the franchisor of one of the dealerships. Audi claimed the franchisee breached Audi's dealership agreement and violated state dealer law when, subject to the franchisor's right of first refusal, the franchisee did not provide pricing and other terms to transfer an Audi dealership.

The dealership agreement and Pennsylvania dealer law granted Audi a right of first refusal if the franchisee attempted to sell its majority ownership interest in the Audi dealership. The franchisee found a buyer and entered into an asset purchase agreement which packaged all seven dealerships as an "auto multiplex" for $17 million. The agreement did not separately price the Audi dealership. Believing the franchisee was acting in bad faith in valuing the Audi dealership at $8 million, Audi sued to block the transaction. A court granted a preliminary injunction.

After Audi filed the lawsuit, the franchisee and buyer signed two addenda to the purchase agreement, seeking to remove the Audi dealership from the sale. The franchisee contended that Audi's right of first refusal ended because it was no longer selling the Audi dealership. The trial court sided with the franchisee, finding there was no breach of the dealership agreement because the second addendum removed the Audi dealership, and the terms of the dealership agreement permitted the franchisee to withdraw the proposed sale after Audi elected its purchase right.

The Court also rejected Audi's claim that the first refusal right ripened into an irrevocable option to buy the dealership. It was only a general right of first refusal, which Audi failed to exercise before the franchisee withdrew the Audi dealership.

While Audi claimed it was unable to exercise its right due lack of a good faith price breakdown, the dealer was free to withdraw the asset from the sale. Accordingly, the franchisor received the full benefit of its right of first refusal, and was not entitled to further rights after failing to accept the right of first refusal prior to the withdrawal.

Read: Audi of America, Inc. v. Bronsberg & Hughes Pontiac, Inc.

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 2018. All Rights Reserved.

Tuesday
Dec202016

Are Franchisees Your Employees?; and Locked In to One Approved Vendor

Franchise 101 News

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

 

 

December 2016

 

Certified Franchise Executives

Barry Kurtz, Tal Grinblat and David Gurnick completed the experience, education and participation requirements to become Certified Franchise Executives under the auspices of the International Franchise Association (all three are already State Bar of California Certified Specialists). This distinction will be conferred on Barry, Tal and David at a ceremony at the International Franchise Association's annual convention in January, 2017. 

FRANCHISOR 101:
Are Franchisees Your Employees?

Prudent franchisors have been reducing their apparent control over franchisees' employees to reduce the risk of becoming joint employers of those employees. But could a franchisor's control over the franchisees themselves be used to prove that franchisees are the franchisor's employees?

In Matter of Baez, the Unemployment Insurance Appeal Board determined that franchisees of Jan-Pro Cleaning Systems, a janitorial franchisor, were Jan-Pro's employees. The Board held Jan-Pro liable as an employer to pay unemployment insurance contributions on payments it made to franchisees.

A New York appeals court said the Board may find an employment relationship if "substantial evidence" shows that an alleged employer "exercises control over the results produced or the means used to achieve the results," and said that control over the means is the more important factor. The court found there was sufficient evidence that Jan-Pro exercised such control over franchisees.

This was because Jan-Pro:

(i) Assigned geographic territories to franchisees;

(ii) Required franchisees to be trained, which Jan-Pro paid for;

(iii) Required franchisees to operate according to Jan-Pro's procedures and standards, including using only pre-approved equipment and supplies;

(iv) Could claim ownership of concepts or techniques created by franchisees;

(v) Had a contractual non-compete provision against franchisees for 1 year after termination;

(vi) Helped resolve complaints between franchisees and their clients;

(vii) Had the right to discontinue franchisees' services to any of their clients;

(viii) Provided franchisees with a starter set of business cards bearing Jan-Pro's logo, and had to approve any franchisee-designed business cards before use; and

(ix) Had the sole right to bill and collect payments from franchisees' clients.

As a result, the court upheld the Board's ruling against Jan-Pro.

Experienced franchisors will recognize much of the court's assembled "evidence of control" as common features of franchise systems. But franchisors may distinguish themselves from Jan-Pro, and hopefully avoid the same fate, by:

A) avoiding, to the extent possible, inserting themselves between franchisees and their customers as Jan-Pro did in points (vi) through (ix) above; and

B) charging franchisees a distinct "initial training fee," instead of offering training "for free" as Jan-Pro did (point (ii) above).

The latter may be potent counter-evidence against a finding of employment because employees rarely pay their employers for the right to be trained.

See In the Matter of Baez, N.Y. Sup. Ct., App. Div., ¶15,878

 

FRANCHISEE 101:
Locked In to One Approved Vendor

Franchisors often require franchisees to purchase supplies, materials, or inventory only from suppliers the franchisor approved. But where franchisors see benefits of consolidating by requiring franchisees to participate in volume purchases and ensuring product quality and consistency, franchisees see potential conflicts of interest.

In Window World of Baton Rouge v. Window World, a vinyl window sales and installation franchise, the franchisees agreed to: "sell and install only and exclusively those products, goods, equipment, and parts from vendors approved by [Window World]." The agreements added that Window World would try to get the lowest possible wholesale pricing for franchisees. Window World did not collect royalties from franchisees. Instead it collected from vendors a percentage of the sales price of items sold to franchisees.

In 2007, Window World announced that Associated Materials (AM) would be the only approved supplier of windows. Franchisees sued under antitrust law, claiming Window World and AM had an illegal conspiracy to "lock them in", forcing them to buy inventory at higher prices than they could get from other suppliers or even than they could get from AM if they weren't franchisees. The alleged price inflation increased AM's profits and Window World's royalty collections.

The North Carolina court concluded the franchisees could pursue their antitrust claim if Window World conspired to manipulate the "market" so that franchisees were forced to pay artificially high prices. But in this case Window World was able to require franchisees to buy windows solely from AM not because of power over the market, but because the license agreements gave the franchisor the right to approve even only one supplier if it wished.

The agreements were clear, so when franchisees signed they had fair warning of the risks of buying a Window World franchise. Franchisees effectively purchased windows in a free market; before signing, they had freedom in the "market" to buy a different franchise in which the franchisor didn't have the right to designate a sole supplier. The court dismissed the claim.

Before buying a franchise, a potential franchisee should be sure to understand the scope of the franchisor's right to designate approved vendors. Ask other franchisees in the system if they get competitive prices from vendors. Check the franchise agreement for terms that may limit this freedom in the future. Make sure to understand how the franchisor gets its revenue. It may be illogical to expect to pay rock bottom prices for supplies if what the vendor charges must be enough to also provide revenue to the franchisor.

But don't automatically reject a franchise just because there is a single source of supply. A franchise brand's concentration and volume purchasing from a chosen supplier may have offsetting benefits that contribute to the success of the system and its franchisees.

See Window World of Baton Rouge v. Window World, N.C. Super. Ct., ¶15,880

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.

Wednesday
Jul272016

Franchisor 101: DBO re Outdated FDDs & Unregistered Franchises; and Domino's Delivered NY Wage Theft Claims 

Franchise 101 News

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

 

July 2016

 

Franchise Lawyers

David Gurnick in The Franchise Lawyer

 

”Franchise systems can build anti-terrorism measures into their systems, in ways that make business sense and align with their legal and moral principles..."

Click to read: Franchise Systems’ Roles in Combatting Terrorism 

 

FRANCHISOR 101:
Outdated FDDs and Unregistered Franchises

The California Department of Business Oversight ("DBO") recently issued three Orders against franchisors for violating California's franchise laws.

 No Good Deed

 

#1: Senior's Choice provides companion care services to seniors. In 2013 Senior's Choice renewed their franchise registration and disclosed the initial franchise fee was $45,000. Then they provided a prospective franchisee an older Franchise Disclosure Document, stating an initial fee of $25,000 not $45,000.

The DBO found Senior’s Choice violated the law by:   

  • not providing the current FDD;

  • selling a franchise on terms that differ from the registered offer (by lowering the initial fee from $45,000 to $25,000); and

  • violating a prior Desist and Refrain order from 2007 for unlawfully selling franchises without registration.

The DBO ordered Senior Choice directors, officers and managers to attend training on franchise law compliance, pay a penalty of $7,500 and not further violate the Franchise Investment Law.

This case shows that the government objects even when franchisors act to benefit franchisees (by lowering fees) or accidentally provide the wrong FDD.

 

Brewer’s Remorse

 

#2: In the Great Khan case, the DBO found Great Khan and its principals sold unregistered franchises and issued an order prohibiting further violations. Great Khan obtained a franchise registration in 2001 but failed to renew the registration in 2002.

After expiration of the registration, Great Kahn sold five franchises to California residents. Each franchisee paid an initial fee of at least $25,000. Great Khan and its principals were ordered to Desist and Refrain from further offers or sales until their franchises were registered or exempt from the registration requirements.

#3: In a third case the DBO found World Coffee Kiosk (WCK) offered and sold franchises without registration. WCK sold a business in which the operator sold approved coffee drinks, food products and merchandise in an assigned territory from kiosks at malls. Additionally, the operator was required to use approved signage and advertising and operate under WCK's plan, manual, policies, standards and procedures. WCK could require an operator to relocate.

Operators paid an initial franchise fee of at least $25,000. The DBO found this was a franchise that was not registered or exempt. WCK was ordered to Desist and Refrain from further offers or sale of franchises until they registered or satisfied an exemption.

The Great Khan and World Coffee Kiosk cases show that failing to renew a registration or not registering at all can have serious consequences and penalties.

 

Domino’s Delivered NY Wage Theft Claims

 

In May, 2016, the New York Attorney General (AG) brought a claim against Domino's Pizza for labor code violations at three franchised locations.

The AG alleged failure to pay delivery workers the legal minimum wage and overtime, and failure to fully reimburse workers for delivery expenses - totaling over $567,000 in back wages and underpayments to workers, liquidated damages and interest.

The NY AG alleged Domino's is liable as a joint employer because it exercised a high level of control over employee conditions at franchised stores and had a significant role in causing wage violations; and that Domino's role was significant in hiring, firing, discipline, wage payments, and in oversight and supervision of work.

The franchisor allegedly caused many of the wage violations by encouraging franchisees to use a "Payroll Report" function in the software system Domino's specified for franchisees (called "PULSE"). The AG claimed Domino's knew, but failed to disclose, that PULSE's "Payroll Report" systematically under-calculated gross wages owed to workers.

The Domino's case shows that franchisors should be careful in exercising control over a franchisee's operations concerning hiring, firing and employee relations, and should carefully evaluate whether to assist with payroll software. These controls can lead to claims by the government and franchisees that the franchisor exercises control and is therefore liable for claims at franchised locations.

 

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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