Franchise 101: Wrong Tools to Avoid California Courts; and Don’t Terminate the Hand That Delivers Your Pizza

Franchisor 101: The Wrong Tools to Avoid California Courts

The Ninth Circuit ruled that a California Matco Tool franchisee, John Fleming, could bring a class action wage and hour suit in California, even though a forum selection clause in the distribution agreement specified Ohio law.

Fleming claimed he and other Matco franchisees were wrongly classified as independent contractors so Matco could evade California employment laws. The distribution agreement contained an arbitration clause and forum selection clause stating that all arbitrations would take place in Ohio. When sued in California, Matco claimed the agreement specified Ohio as the forum. The federal court in California found the arbitration clause was prohibited by the anti-waiver provision of the California Franchise Relations Act (CFRA), and therefore invalidated the Ohio forum clause. Matco sought appellate review.

The Ninth Circuit Court of Appeals rejected Matco’s appeal. The Ninth Circuit ruled the arbitration clause was null and void because it required an impermissible waiver of Fleming’s claims under the California Private Attorney General Act (PAGA). A clause in the agreement said any provisions found to be unlawful could be severed and the rest of the agreement would stay in effect. In view of the severability clause, the Ninth Circuit affirmed the lower court’s ruling to sever the unenforceable arbitration clause from the agreement. This allowed the CFRA anti-waiver provision to apply to the forum selection clause,and permitted Fleming’s claims to remain in California.

Manufacturers and franchisors contracting with distributors and franchisees in California must be aware of California’s employment and labor laws. The PAGA, for example, authorizes an employee to bring an action for civil penalties on behalf of the state against his or her employer for Labor Code violations, with most of the proceeds going to the state. Labor Code provisions can invalidate otherwise enforceable dispute resolution terms of an agreement. Contact California licensed franchise and distribution attorneys for advice on how these laws can impact your business.

In re Matco Tools Corporation, 9th Cir., ¶16,540

Franchisee 101: Don’t Terminate the Hand That Delivers Your Pizza

A Wisconsin pizza maker, Heggie’s Pizza (Heggie’s) argued that its relationship with a purported pizza distributor A & B Distribution (A&B), did not meet the Wisconsin Fair Dealership Law (WFDL) definition of a “dealership.” The court disagreed and found the relationship was a “dealership.” This meant that, under the WFDL, to terminate the relationship, the manufacturer had to give the distributor an opportunity to cure, provide sufficient notice of termination, and have good cause to terminate.

Heggie’s sold frozen pizzas to A&B at a discounted wholesale rate. A&B in turn sold them to convenience stores, resorts and other local businesses in northern Wisconsin. A&B sold them at Heggie’s specified wholesale rate for almost 14 years. A dispute arose between Heggie’s (the manufacturer) and A&B (the distributor) after A&B’s customers complained to Heggie’s about A&B’s food safety and distribution practices. After a heated call, both parties claimed the other party terminated the relationship.

Heggie’s attorney sent A&B a notice of termination that referenced Heggie’s compliance with the WFDL. A&B sued, claiming Heggie’s termination violated the WFDL. Heggie’s argued WFDL did not apply because the relationship was not a “dealership” under the WFDL and, in any event, A&B terminated the relationship.

To determine if the WFDL definition of a dealership applies, Wisconsin courts evaluate (1) the existence of a contract or agreement between two or more persons; (2) which grants one of the rights specified; and (3) in which there is a “community of interest” or a continuing financial interest. The first two elements were met because the parties had a verbal agreement that let A&B distribute Heggie’s pizzas and use its trade name in advertising.

Regarding the community of interest, the court noted it was undisputed that Heggie’s and A&B had a business relationship over thirteen-years; 99 percent of A&B sales were Heggie’s pizzas; almost all A&B’s owner’s work related to selling Heggie’s pizzas; Heggie’s provided A&B signs so its customers could advertise that they sold Heggie’s pizzas; and A&B made substantial financial investments by buying a new truck, freezer, and rental space in a storage facility for Heggie’s pizzas and pizza ovens for its customers. The court found a community of interest because (1) A&B would suffer a severe financial impact if terminated on limited notice and (2) A&B spent significant time and effort developing goodwill for Heggie’s, for which it would not be compensated.

The fact that the relationship was a WFDL “dealership” did not end the litigation. Heggie’s denied terminating the agreement. The court ruled that a reasonable jury could differ as to which party terminated the relationship and whether or not the food safety claims, which are legitimate reasons to terminate a distributor, were reliable accusations by Heggie’s.

Many states have relationship laws to protect distributors from impulsive or otherwise unfair termination. Some statutes require manufacturers to compensate terminated distributors for the fair market value of their business. Even if a business operates under an oral agreement to distribute products from a manufacturer, as in this case, the facts and course of dealing can suffice to let the business invoke protection under applicable state statutes. This case demonstrates that dealers who are wrongly terminated by a manufacturer can use the state’s franchise or dealership’s laws as a tool to bring viable claims they would not otherwise have.

A & B Distributing, Inc. v. Heggie’s Pizza, LLC, W.D. Wis., ¶16,553

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