50924014 - class action lawsuit concept as a plaintiff group represented by many judge mallets or gavel icons coming down as a symbol for social litigation or organized legal legislation.

Last week, the Supreme Court granted petitions for certioriari in Epic Systems Corp. v. Lewis, Ernst & Young v. Morris, and NLRB v. Murphy Oil USA.  All three cases involve clauses in arbitration agreements that require employees to waive their rights to pursue class and collective actions.

In theory, the Supreme Court will resolve a split between federal circuits and determine if employees can be compelled to litigate claims individually rather than in a class or collective action. However, because Justice Scalia’s seat remains vacant, it is possible that the justices deadlock.  In that case, the decisions of the circuit courts will be affirmed in each case and the split between the circuits will remain.

President Trump has a short list of potential nominees, but has not yet put forward a nominee for Justice Scalia’s seat that has been vacant for nearly a year.  It is unclear whether President Trump’s eventual nominee will be confirmed before these cases are decided.

In light of the Republicans’ steadfast refusal to even consider President Obama’s nominee Merrick Garland, Democrats are vowing to fight any Trump nominee.  It’s possible that the fight will be drawn out in addition to being nasty.  In order to overcome a filibuster that could block a vote on the nominee, Republicans would need 60 votes.  There are only 52 Republican senators.  Assuming every Republican votes for the nominee, some Democrats will have to jump ship before the GOP can obtain the votes needed to defeat a filibuster.

We will be keeping an eye both on the composition of the Supreme Court and these cases.

The question of whether a relationship between a watch manufacturer, Swatch, and a watch shop operator amounts to a “franchise” was answered in the negative by the U.S. Court of Appeals for the Third Circuit in Philadelphia in Orologio v. Swatch Group (U.S.) Inc. Here, after Swatch terminated its relationship with the operator, the operator brought suit against Swatch under the New Jersey Franchise Practices Act (“NJFPA”) claiming that Swatch’s termination of the relationship violated the NJFPA for termination of a franchise relationship without good cause.

Copyright: vician / 123RF Stock Photo
Copyright: vician / 123RF Stock Photo

Under the NJFPA, it is illegal to terminate a franchise relationship without good cause. However, in order to bring a lawsuit under the NJFPA, the parties must first establish that a franchise relationship exists. In determining whether a franchise relationship existed between Swatch and the operator, the Court utilized the community of interest balancing test, which focuses on the following four factors: (i) licensor’s control over licensee; (ii) licensee’s economic dependence on the licensor; (iii) disparity in bargaining power; and (iv) the presence of a franchise-specific investment.

First, the Court found that the operator was economically independent from Swatch because the operator derived only 25% of its revenue from Swatch and the operator still thrived after the termination of the relationship due to its relationship with other watch suppliers.

Second, the Court analyzed the “franchise-specific investments” submitted by the operator, including Swatch inventory as well as marketing, advertising and training costs. The Court determined that the inventory costs were irrelevant because Swatch offered to buy back the operator’s remaining inventory of Swatch required products. With respect to the marketing, advertising and training costs, the Court reasoned that these types of costs are inherent in the type of business the operator owns. Further, the operator failed to demonstrate that such investments were mandatory and the skills were not transferable to other inventory carried by it.

The Court also reasoned that there was not a significant disparity in bargaining power due to the absence of required, non-refundable investments. Lastly, the Court determined that Swatch did not exert the requisite level of control over the operator despite certain rules and limitations in place in connection with the sale of its watches. The Court determined these rules and limitations did not rise to the level of “unfettered control” over the operator, which is typical of a franchise relationship.

As such, the Court ultimately upheld the District Court’s grant of summary judgment in favor of Swatch ruling that no franchise relationship existed between the operator and Swatch. If you are creating a business relationship that you do not want to be considered a “franchise”, it is important to keep the community of interest factors in mind. Specifically, you want to ensure that each party maintains a significant degree of autonomy when structuring any relationship.

Is a franchisor liable as a “statutory employer” under Pennsylvania law if its franchisee fails to obtain workers’ compensation insurance?  The Pennsylvania Supreme Court recently answered “no” under the facts of Saladworks, LLC v. W.C.A.B. (Gaudioso). The decision is a victory for franchisor Saladworks on a narrow legal issue.  But it is a bigger win for the franchise model itself, which relies on the premise that a franchisor is not the employer of its franchisee’s employees.

Copyright: halfpoint / 123RF Stock Photo
Copyright: halfpoint / 123RF Stock Photo

In Saladworks, an employee of a Saladworks franchisee was injured on the job.  The franchisee did not have proper workers’ compensation insurance coverage.  Under Pennsylvania law, when an employee is unable to recover from its direct employer, the employee can file a workers’ compensation claim against a “statutory employer” under the Pennsylvania Workers’ Compensation Act.  If Saladworks was found to be a statutory employer, it would be liable for the employee’s injuries.

The Workers’ Compensation Judge initially held that Saladworks was not a statutory employer.  However, the Workers’ Compensation Appeal Board (the “Board”) reversed that decision and held Saladworks liable for the employee’s injuries.  The Board found that Saladworks was a statutory employer because it contracted with the franchisee to perform work which was a “regular or recurrent part of Saladworks’ business, occupation or trade.”

Here, the Board fundamentally misunderstood the franchise model.  Saladworks sells franchises.  Its franchisees sell salads and other food products.  For those familiar with franchising, these are distinctly different businesses.  In making its decision, the Board misinterpreted the franchise agreement, which (naturally) granted Saladworks franchisees the right to open a restaurant according to the Saladworks’ system.  The Board read this to mean that the franchisee was engaging in the same business as the franchisor, as if Saladworks had engaged a subcontractor to perform its regular duties.

On appeal, the Commonwealth Court reversed the Board’s decision.  It recognized the difference between Saladworks’ business model and the business engaged in by its franchisees.  In short, the court reasoned that “Saladworks is not trying to sell more salads . . . .”  The employee was injured while working for a franchisee engaged in the sale of food products, an entirely different business model than selling franchises.

The Supreme Court of Pennsylvania dismissed the appeal from the Commonwealth Court’s decision as improvidently granted. As a result, the Commonwealth Court’s holding remains intact.  Whether or not franchisors are liable if franchisees fail to obtain workers’ compensation insurance is a narrow issue.  But the decision was a victory for Saladworks nonetheless.  However, the big win is for the franchise model itself.  The Board’s decision was based on a fundamental misunderstanding of the relationship between franchisor and franchisee.  Had the decision been allowed to stand, it could have set a precedent for other cases dealing with broader issues.  The Commonwealth Court’s decision (as upheld by the Supreme Court) was based on a strong understanding of the franchise model, which will benefit franchisors and franchisees alike in future litigation.

A very important case for the retail industry–and all franchisors and franchisees operating within it–will be argued before the United States Supreme Court on January 10, 2017. The case is Expressions Hair Design v. Schneiderman. The issue is credit card surcharges.

The background is pretty simple. New York, nine other states, and Puerto Rico prohibit retailers from engaging in the practice of charging a surcharge when a customer uses a credit card. Importantly, the ten states involved are some of the biggest commercial states in the Union. In addition to New York, the list includes California, Texas and Florida. Those four states alone count over 107 million Americans–and each one is a major tourist destination in its own right.

Copyright: dacosta / 123RF Stock Photo
Copyright: dacosta / 123RF Stock Photo

The question before the Supreme Court changes depending upon who is framing it. The Petitioners, five New York state merchants, admit that New York law allows them to charge a higher price to those who pay by credit card. In fact, all states allow for such pricing. Their complaint lies with a state law which prohibits them from saying the higher price is a “surcharge”. Instead, New York law only allows merchants to offer “discounts” to those who pay in cash. The Petitioners allege that this law amounts to an illegal prohibition on their free speech rights under the First Amendment to the Constitution. Further, they claim the law prevents consumers from learning about the actual cost of using a credit card.

The Respondent, the New York Attorney General, responds that the law doesn’t implicate free speech at all. Instead, he argues that the law is a “classic form of price regulation”. All the law does, according to the Attorney General, is forbid the imposition and collection of additional fees from credit-card users in excess of the regular price for a good or service. Consequently, the Attorney General says the law governs conduct not speech. The Attorney General also makes an argument regarding the protection of consumers. Specifically, that the law prevents sellers from imposing special fees for those consumers who choose to use a credit card.

The issue of the difference between the regulation of speech versus conduct is extremely important. This is because a law regulating speech must pass the narrow constitutional test of “strict scrutiny”–which is a very high bar to meet. On the other hand, if the New York law merely regulates conduct in commerce, no special constitutional test is required.

As you might imagine, many, many amici briefs have been filed in this case on both sides of the issue. The case presents some very difficult questions at the intersection of commerce and speech. I personally am very excited about the upcoming argument–and we’ll continue to monitor the case, providing updates after argument and when a decision is handed down.

While the changes coming to Our Nation’s Capital in 2017 likely mean the end of the fight over reclassifying franchisees as employees at the federal government level, a recent New York state case suggests that the battle will remain alive and well at the state level. The case, In re Baez, was decided by the New York Supreme Court, Appellate Division. The question presented by the case was whether the franchisor, Jani-Pro Cleaning  Systems (“Jani-Pro”) was the employer of two independent franchisees for purposes of unemployment insurance contributions.

Copyright: axentevlad / 123RF Stock Photo
Copyright: axentevlad / 123RF Stock Photo

Baez was a franchisee of Jani-Pro who ceased his operations in 2009 and subsequently sought unemployment insurance benefits. At about the same time, the New York Department of Labor opened an unemployment tax audit of Jani-Pro. As a consequence of the combination of Baez’s application for unemployment benefits and the audit, the Department determined that Baez and all persons similarly situated—i.e., other New York franchisees of Jani-Pro—were employees of Jani-Pro and that Jani-Pro owed unemployment insurance contributions on their behalf.

Jani-Pro appealed and, after a hearing, an Administrative Law Judge reversed the Department’s determination. This decision, in turn, was reversed by an appeal board (“Board”), which reinstated the determination of the Department. Jani-Pro then appealed to the Appellate Division of the Supreme Court.

An extremely important consideration was that the Appellate Division showed great deference to the decision of the Board.  The Appellate Division said that whether an employment relationship exists is a factual question for the Board to determine and that no single factor was determinative of that question. The Appellate Division noted that there was evidence on both sides of the franchisee versus employee question. Nonetheless, it concluded that “substantial evidence” supported the Board’s determination.

The decision is far from detailed, unfortunately. Reading between the lines, however, it seems the Appellate Division was particularly troubled by the facts that Jani-Pro handled all of the franchisees’ invoicing and collections, and that Jani-Pro accepted all payments from the franchisees’ customers. The court also noted that Jani-Pro paid for the training of new franchisees, which is common in employment relationships. The court additionally explained that Jani-Pro maintained the relationship with a franchisee’s customers, retaining the right to discontinue the franchisee’s services “at any time”.

Nonetheless, the guidance offered by the Baez decision is limited. However limited it is, franchisors—and those franchisees who do not want to re-classified as employees—would be advised to take heed of the decision. Where exactly the line falls at which franchisors exert too much control over the operations of their franchisees can be a difficult call to make. It is always a balancing test. The Baez case shows, however, that the question will not go away solely because of the coming changes in Washington.


Copyright: grahammoore999 / 123RF Stock Photo
Copyright: grahammoore999 / 123RF Stock Photo

Following up on our blog posts on March 29 and July 7 of 2016 about the Philadelphia Beverage Tax on Sugar-Sweetened Beverages (the “PBT”), a challenge to that tax in the Court of Common Pleas of Philadelphia County has been defeated in a decision by Judge Glazer on December 19. The plaintiffs included beverage distributors, the American Beverage Association, the Pennsylvania Beverage Association, the Philadelphia Beverage Association and the Pennsylvania Food Merchants Association. The court rejected the plaintiffs’ arguments ruling that the PBT does not duplicate Pennsylvania’s sales and use tax, violate the Pennsylvania Constitution’s Uniformity Clause, nor force beneficiaries of the federally funded Supplemental Nutrition Assistance Program (“SNAP”) to spend the program’s funds on the PBT.

To follow up on some of the logistics of the tax, distributors are generally responsible to pay the tax. If the dealer is not a registered distributor and has not paid the tax, the dealer (who is selling the beverages through retail sale) must pay the tax. The PBT requires that the distributor give a receipt to the dealer which details “the amount of sugar-sweetened beverage supplied in the transaction and the amount of tax owing on such a transaction”.

So, it looks like the tax will be coming into effect on January 1, 2017, imposing a tax of 1.5 cents per fluid ounce on sugar-sweetened beverages (which, as noted in my prior blog, are not all truly sugar-sweetened).

Contributed by Mark G. McCreary & Kevin P. Dermody

One of the major benefits of the Digital Millennium Copyright Act (DMCA) is that website owners can gain the protection of the DMCA’s safe harbor provisions by registering a DMCA agent with the U.S. Copyright Office. The safe harbor allows a copyright holder to notify a website operator that its protected material was uploaded to the website and is being infringed. That website owner can avoid liability by removing the copyright-infringing material from its website after being notified. Currently, once a website owner registers a DMCA agent there are no additional requirements to ensure the protection is available. However, based on a recent announcement from the Copyright Office, the process for securing and maintaining the DMCA’s protection will be changing.

Copyright: studiom1 / 123RF Stock Photo
Copyright: studiom1 / 123RF Stock Photo

On October 31, the Copyright Office announced a change to the registered agent database that will require additional action on the part of website owners in order to stay protected under the DMCA’s safe harbor provisions. The change, which is scheduled to take effect on December 1, 2016, replaces the old paper filing system with a new electronic filing system. The system is designed to make it easier for individuals to search within the registered agent database and contact the registered agent for a website.

This change puts every registered agent on the old system at risk of being wiped off the record unless he or she re-registers with the Copyright Office using the new electronic system no later than December 31, 2017. Additionally, website owners will now be required to update their registered agent information every three years in order maintain their registration with the Copyright Office and their protection under the DMCA.

These new requirements are partly in response to a significant amount of outdated information within the database. According to the Copyright Office, roughly 22 percent of registered agents on the database are defunct, and of those that are not defunct, 65 percent contain inaccurate contact information for the registered agent. The Copyright Office believes that implementing the new electronic system will alleviate these issues, but many commentators do not believe that the benefit of the electronic system is worth the extra effort and risks that will be placed on website owners.

The main risk created by this change is that website owners who miss the December 31, 2017, registration deadline will lose their DMCA protection and will be exposed to potential lawsuits if infringing material is posted to their website. The Copyright Office is confident that the 13-month transition period will provide enough time for website owners to register on the new system. However, website owners that do not stay well informed on updates to the requirements, or forget to update their registered agent contact information every three years, will suffer. Many website owners may lose the protection of the DMCA’s safe harbor provisions without even knowing that their current registration has been erased.

If you have any questions or would like Fox Rothschild’s help in registering your website under the new electronic filing system, please contact Mark G. McCreary at 215.299.2010 or mmccreary@foxrothschild.com, Kevin P. Dermody at 215.444.7159 or kdermody@foxrothschild.com, or any member of the firm’s Franchise Law Practice Group.

On November 4, 2016, Pennsylvania Governor Tom Wolf signed into law Senate Bill 1265Act 161 of 2016 (the “Act”) amends the Pennsylvania Wage Payment and Collection Law (the “WPCL”) and allows employers to pay wages and other compensation via the use of debit cards commonly called payroll cards. This Act, which takes effect on May 3, 2017, supersedes previous case law which held that the use of payroll cards violated the WPCL.

Copyright: nyo09 / 123RF Stock Photo
Copyright: nyo09 / 123RF Stock Photo

There are some very important employee protections embedded in the Act. For example, the decision to accept payment via a payroll card must be authorized in the writing or electronically by the employee. Additionally, receipt of wages or other compensation via payroll card cannot be made a condition of employment in any way. An employee also must be permitted at least one free withdrawal and one free ATM withdrawal for each payroll period, or weekly, if the employee is paid more frequently than weekly.

Before an employer may shift employees to payment by payroll card, an employer must provide its employees with “clear and conspicuous notice” of the following information:

  • All of the employee’s payment options (i.e., check, draft, cash, etc.);
  • The terms and conditions of payroll card option, including any fees to be charged by the card issuer;
  • A notice that third parties may assess fees in addition to an issuer fees; and
  • The methods available to the employee for accessing wages without fees.

Regarding fees, the Pennsylvania Legislature has prohibited many of them, including any fees relating to:

  • the application, initiation or privilege of participating compensation via payroll card;
  • the original issuance of the payroll card or any employee-requested replacements (up to one per year);
  • the process of placing wages, salary or other compensation into the payroll account;
  • purchase transaction at a point-of-sale; and
  • nonuse or inactivity during the first 12 months after compensation is transferred onto the payroll card account.

An employee must also be provided with manner of determining a card’s balance without cost. Importantly, compensation transferred to a payroll card cannot expire.

There are several more requirements to the Act. I would encourage all employers, franchisors and franchisees alike, considering utilizing voluntary payroll cards after the Act becomes effective on May 3, 2017, to review its terms, and any regulations or guidance issued by the Department of Labor and Industry respecting it. At long last, however, the question of the use of payroll cards in Pennsylvania has been put to rest. So long as employers practice careful adherence to the law, payroll cards will soon be legal in Pennsylvania.

Copyright: olegdudko / 123RF Stock Photo
Copyright: olegdudko / 123RF Stock Photo

On November 22, Judge Mazzant of the U.S. District Court for the Eastern District of Texas issued a nationwide injunction against the Department of Labor blocking its Final Overtime Rule, which was set to go into effect on December 1, 2016. The Final Rule would have more than doubled the Fair Labor Standards Act (FLSA) salary test for executive, administrative, and professional employees from $455 per week to $913 per week. White-collar employees earning below the $913 threshold would have been entitled to overtime. The Department of Labor rules also established a mechanism for the threshold to adjust automatically every three years starting in 2020.

Click here to read the full alert published by our Labor & Employment practice, which includes important takeaways for employers.

Not long before the election, the Obama Administration issued a “call to action” statement in which it urged state governments to restrict many of the non-compete agreements that employers often impose on employees. The statement calls on state legislatures to adopt certain “best practices” for regulating employee non-compete agreements, including:

  • banning non-compete clauses for certain categories of workers, such as workers under a certain wage threshold, workers in certain occupations that promote public health and safety, and workers who are unlikely to possess trade secrets;
  • refusing to enforce non-compete clauses against workers who are laid off or terminated without cause;
  • disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted;
  • requiring employers to give additional consideration (i.e., more than just continued employment) to workers who sign non-compete agreements;
  • encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work; and
  • encouraging the elimination of unenforceable provisions through the use of legal doctrines that make such provisions (or contracts containing them) void.
Copyright: bswei / 123RF Stock Photo
Copyright: bswei / 123RF Stock Photo

The statement follows the administration’s May 2016 report titled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses.” The administration stated that the May 2016 report was intended to address “issues regarding misuse of non-compete agreements and describe[] a sampling of state laws and legislation to address the potentially high costs of unnecessary non-competes to workers and the economy.”

The statement noted that the laws of three states (California, Oklahoma, and North Dakota) already contain significant restrictions on non-compete agreements signed by employees, and at least a dozen states have considered legislation in this area during the past year. To accompany the report, the White House also published a “state-by-state explainer” of existing state non-compete laws to help interested parties understand the restrictions that are already in place across the country.

Despite last week’s election, the Administration’s proposal is certain to attract a significant amount of attention, both pro and con. For one thing, there is an ongoing discussion in the economic and business press regarding whether non-compete agreements are good for the economy. Of particular importance for franchisors and franchisees, unless the Republican Congress and Trump Administration enact national non-compete laws and regulations, the focus of non-compete regulation is likely to shift to the individual states over the next four to eight years. Given the deep political divides present in the country, regional and national franchise systems could be facing a myriad and conflicting patchwork set of state regulations. Because of this, franchisors and franchisees should be careful to note that a particular form agreement may be fine for employees in some states but less-than-ideal for employees in a different state. The “explainer” document can be a helpful tool to help franchisors and their franchisees understand those differences when they hire new employees across the country.

Much of the text of this post was originally authored by Jim Singer and first appeared in a slightly different form on his IP Spotlight Blog. We thank Jim greatly for his permission to re-post it here in a slightly modified form.