Franchisee Not Bound by Arbitration Provision
bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
March 2014
Tal Grinblat Selected to 2014 Legal Eagles
Tal Grinblat was named a Franchise Times’ 2014 Legal Eagle. Nominated by peers, Tal was then chosen for the distinction by the publication’s editorial board. The list of 2014 Legal Eagles will be published in April.
Barry Kurtz, David Gurnick & Tal Grinblat Honored as 2014 Southern California Super Lawyers
Barry Kurtz, David Gurnick and Tal Grinblat have each been selected as a 2014 Super Lawyer in their specialty of Franchise & Distribution Law. This honor is bestowed by the Journal of Law and Politics, in conjunction with Los Angeles Magazine. The Super Lawyer designation is the result of peer evaluation. Nominations are received from thousands of lawyers throughout the state. According to the Journal of Law and Politics, this honor is reserved for the top five percent of the lawyers in each practice area.
David Gurnick in Los Angeles Lawyer Re Cooperatives
How are cooperatives organized and regulated? David Gurnick’s article, Cooperative Conditions: California Law Allows for Flexible Application of the Operative Principles of Cooperatives takes an in-depth look at these enterprises. Click: Cooperative Conditionsto read the full article.
FRANCHISOR 101:
Franchisee Not Bound by Arbitration Provision
In March 2013, Edison Subs, LLC, a Subway franchisee/transferee, filed a complaint in New Jersey against Subway and Aliya Patel (the original franchisee/transferor) and Subway’s affiliate for breach of contract, fraud, violations of the New Jersey Consumer Fraud Act, negligent misrepresentation and violations of the covenant of good faith and fair dealing. Edison alleged that it entered into an oral franchise agreement with Subway that Patel induced Edison to accept through misrepresentations and omissions and that Subway and Patel breached the oral agreement by ejecting Edison from the premises after Edison had operated the Subway restaurant for two years.
The Subway Franchise Agreement required all claims to be arbitrated in Connecticut, so Subway brought an action to compel arbitration of Edison’s claims. The U.S. District Court in Connecticut observed that it was undisputed that Edison did not sign, and denied ever receiving, a copy of the Franchise Agreement.
Subway argued that Edison could be bound by the terms of the Franchise Agreement under common law principles of contract and agency, including estoppel. Despite the fact that Edison never signed the Franchise Agreement, the court noted that a signatory may be able to compel a non-signatory to comply with certain terms of an agreement when the non-signatory directly benefits from the agreement.
To rely on this theory and enforce arbitration, Subway had to prove that Edison received notice of the Franchise Agreement and the arbitration provision and knowingly accepted the Franchise Agreement’s benefits. The court found there was no evidence offered that Edison had notice of Subway’s written Franchise Agreement or that Edison knowingly exploited the Franchise Agreement. Therefore the court denied Subway’s plea for an injunction to compel arbitration.
Franchisors should maintain a signed and dated copy of each Franchise Agreement for each franchised business and a signed and dated FDD receipt that predates the Franchise Agreement and any payments made to the franchisor under the Franchise Agreement by at least 14 days. Click: Subway Franchise Arbitration Ruling to see the ruling.
FRANCHISEE 101:
Franchisor May Be Joint Employer Under Federal Law
A U.S. District Court in New York found that the plaintiffs, current and former employees of a Domino’s Pizza franchisee, sufficiently alleged multiple violations of federal and state labor laws against their franchisee-employer to add the franchisor, Domino’s, as a “joint-employer” defendant under the federal Fair Labor Standards Act (FLSA) and New York labor laws and to survive a motion to dismiss their case.
The franchisee’s employees alleged that Domino’s:
- dictated compensation policies that were implemented in the franchisees’ stores; required a system of tracking hours and wages; and required franchisees retain payroll records that were submitted to Domino’s for review,
- created management and operations policies and practices that were implemented at the franchisees’ stores by providing materials for use in training store managers and employees, posters with directions on how employees were to perform tasks, and monitored employee performance through required computer hardware and software,
- developed and implemented hiring systems for screening, interviewing, and assessing applicants for employment at all franchised stores, and
- had the right to inspect franchisees’ stores to ensure compliance with the franchisor’s policies, including those related to day-to-day conditions of the employees.
The court found that, taken together, these facts were enough to establish Domino’s as a joint employer for the purpose of a motion to amend, notwithstanding the fact that other courts in the U.S. have generally concluded that franchisors are not employers within the meaning of the FLSA. Click: Domino’s Challenges Joint Employer Liability for more information.