Franchise 101: All the King’s Poachers; and Subject Matter Mania

Franchisor 101: All the King’s Poachers

A federal appellate court held that Burger King and its franchisees may violate Section 1 of the Sherman Act (antitrust) by engaging in concerted action when entering into “no-hire” agreements. The appellate court reversed dismissal of antitrust claims brought by current and former Burger King restaurant employees.

The plaintiffs claimed that between 2010 and 2018, Burger King had a “No Hire” clause in its franchise agreement, prohibiting Burger King and franchisees from hiring people previously employed by the franchisor or by any Burger King franchisee for six months after leaving a location, unless the first Burger King employer consented.

The plaintiffs argued the “No Hire” clause violated the Sherman Act by prohibiting franchisees from competing to attract or keep employees. The plaintiffs alleged the resulting hiring prohibition lowered wages, reduced employee benefits, and deprived employees of job mobility.

Burger King and its franchisees moved to dismiss the claims, arguing they could not violate the antitrust law because they are a single economic entity and cannot engage in requisite “concerted action.” The district court agreed and dismissed the action, holding that Burger King and its franchisees were not separate actors for antitrust purposes, and that the No-Hire clause was an internal agreement to implement a single policy.

The appellate court disagreed, finding Burger King and its franchisees were distinct entities. Burger King’s franchise agreement said: “no fiduciary relationship between [franchisor and franchisee] exists”; that Burger King restaurants “may” face competition from one another; each franchisee is an independent contractor; and each franchisee is responsible for its own hiring decisions. The court declined to rule whether franchise agreements with no-poach provisions are presumed to violate antitrust laws.

Franchisors should be mindful of antitrust risk and other claims if their franchise agreements contain no-poach provisions. Franchisors should consult franchise counsel regarding antitrust risks in franchise agreements and employment agreements (i.e., non-compete) to reduce exposure.

Franchisee 101: Subject Matter Mania…

A federal court in Florida dismissed an action by franchisees against their franchisor for lack of subject-matter jurisdiction.

The franchisees asserted claims under California and Florida laws alleging the franchisor, OR Mania USA, Inc. (“Mania”) fraudulently induced them to enter into franchise agreements, breached the agreements, interfered in the franchisees’ business relations, and engaged in unfair business practices.

The franchisees brought their claim in federal court in Florida, alleging federal subject-matter jurisdiction based on complete diversity. Diversity jurisdiction exists in federal court when every plaintiff’s citizenship is from one or more different state(s) than every defendant’s citizenship. The franchisees were citizens of Florida and California and alleged that all defendants were citizens of Delaware and Israel.

Mania moved to dismiss the complaint based on lack of subject-matter jurisdiction, arguing there was not complete diversity. Mania is a Delaware corporation, but argued it is a citizen of Florida because its principal place of business is in Florida. The franchisees did not dispute Mania’s physical presence in Florida, but argued Mania is just the “alter ego” of its Israeli parent company (also a defendant) and therefore Israeli citizenship should be imputed to Mania.

The court rejected the franchisees’ argument, finding (i) Mania’s leadership team is in Florida; (ii) Mania is authorized to enter into licensing agreements with third parties and vendors; and (iii) Mania conducts payroll, maintains corporate records, and employs its bookkeeper in Florida. Therefore the court concluded Mania’s principal place of business is in Florida.

The court noted that while the franchisees’ evidence showed that some organizational and franchise decisions were made in Israel by the parent company and executives, the court was bound by Supreme Court precedent, instructing courts to apply the “nerve center” approach to determine a company’s principal place of business. The franchisees did not cite authority to use the alter ego theory as a basis to establish citizenship of a corporation. Rather, “alter ego” is a theory of liability that lets courts pierce through a corporation to hold individuals and/or affiliated companies liable for a corporation’s actions.

If a dispute arises among franchisees and a franchisor with a complex corporate organization, including subsidiaries, affiliates, and/or parent/sister companies, franchisees bringing a claim against the franchisor must determine the right court and location before starting litigation. Filing in the wrong court can have significant consequences. For example, statutes of limitations may expire before a franchisee realizes the case was filed in the wrong court, potentially barring the franchisee from refiling the case in the right court. Also, a defendant can raise lack of jurisdiction any time, even on appeal from a judgment in favor of a franchisee. Franchisees should consult franchise counsel well in advance of filing deadlines.

See: Mania Premium Outlet Int’l Dr LLC v. OR Mania USA, Inc., No. 21-60054-CIV-SMITH, 2022 U.S. Dist. LEXIS 158320, at *2 (S.D. Fla. Sep. 1, 2022).

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