Updating our blog posts of March 29, July 7 and December 26 of 2016, an appeal to the Commonwealth Court of Pennsylvania seeking to invalidate the Philadelphia Beverage Tax on Sugar Sweetened Beverages (the “PBT”) failed.  In a majority opinion filed on June 14, 2017, Judge Michael Wojcik, joined by 5 of the 7 judges hearing the appeal, affirmed the judgement of the Philadelphia County Court of Common Pleas that the tax is constitutional and consequently agreed that an injunction against the tax was properly denied.

17974512 – soft drink can

Those opposing the PBT, known in the opinion as the “Objectors”, raised two significant challenges. First, they argued on several levels that the PBT is an illegal city-imposed sales tax. Under both federal and state law, municipal governments cannot impose unauthorized retail sales taxes. Here, the Objectors claimed that the PBT is a retail sales tax. The Commonwealth Court rejected this argument. The Court found that the PBT is not a retail tax but instead an excise tax on distribution of sugary beverages. This conclusion is based upon the fact that the PBT is imposed not upon end purchasers who consume the beverages but distributors or dealers. Such excise taxes, the Court held, do not run afoul of state or federal preemption law.

The second argument was that the PBT is an unconstitutional property tax because it was imposed on a quantity and not an ad valorem (value) basis. The Commonwealth Court quickly dispensed with this argument because the Court had already concluded that the PBT is an excise, not a property, tax. Consequently, the PBT could constitutionally be imposed on a quantity basis.

The dissenting opinion focused on the fact that the Objectors’ appeal arose after preliminary objections (what are often referred to as grounds for a motion to dismiss in other jurisdictions) had been denied. Because the standard for preliminary objections in Pennsylvania is that the Objectors’ complaint must be “free from doubt”, the dissent would have allowed the case to proceed before the county court in Philadelphia. The dissent reasoned that payment of the PBT is triggered in relation to retail sales, so perhaps the Objectors could develop an argument against it. That said, even the dissent allowed that the PBT did not appear to be unconstitutionally duplicative of a sales tax.

This Commonwealth Court decision places the PBT on very strong footing. Unless the Pennsylvania Supreme Court accepts an appeal, the PBT is likely here to stay.

A recent case involving the Whataburger franchise system reminds franchisors of the importance of the use of iron-clad language when granting future development rights. In Whataburger, Inc. et. al. (“Whataburger”) v. Whataburger of Alice, Ltd. (“WOA”), the court was tasked with interpreting the language of a settlement agreement (“Settlement Agreement”) to determine whether WOA had the unfettered right to open new restaurants.

Cheeseburger and fries
Copyright: jagcz / 123RF Stock Photo

As background, WOA had previously operated 28 franchised restaurants and sold them to Whataburger under the Settlement Agreement. In that Settlement Agreement executed in 1993, Whataburger granted WOA the exclusive right to construct, operate or develop Whataburger restaurants in certain counties in Texas. Each location would have a fixed royalty fee and advertising fee. In 2013, WOA had 12 new franchised restaurants and had found a location at which it wanted to open another franchised restaurant. Whataburger refused to grant WOA the right to open the additional franchised restaurant arguing that it had the right to approve new site locations. Further, Whataburger claimed it would not approve any new sites unless WOA agreed to renegotiate its current franchise agreements to increase the fixed royalty fee and advertising fee to the standard rates. The instant lawsuit stemmed from this disagreement.

 

In affirming the trial court decision in favor of WOA (partially), the District Court looked to the specific language of Settlement Agreement. Specifically, the District Court held that the clear language in the Settlement Agreement that states WOA has the “exclusive right to construct, operate or develop” Whataburger restaurants means just that. It does not require any prior site approval by Whataburger. Further, it held that the terms of the franchise agreement that provide for Whataburger’s prior approval of sites does not come into effect until after that franchise agreement is signed. Lastly, it held that even if it is standard industry practice for franchisors to approve sites, the parties were free to agree to different terms. As such, Whataburger was required to provide its standard form of franchise agreement (with its negotiated royalty fee and advertising fee rates) for each location WOA chose in the subject counties.

The District Court held that the trial court erred in its declaration that WOA had the right to “re-designate” each of its current franchised restaurants as “new locations” upon renewal. This time, the District Court looked to the language of the franchise agreement in making its determination. Specifically, the District Court held that the “Entire Agreement”, “Superseding Effect” and renewal provisions superseded the terms of the Settlement Agreement with respect to those specific locations. At this point, the parties were only bound by the terms of the franchise agreement for that opened location.

This ruling serves as a reminder that it’s important to be extremely clear in the language a franchisor uses to grant future development rights. Franchisors must ensure that they maintain the right to site-approval in the development right grant. Further, it is extremely important to ensure that the franchise agreement contains the requisite “boilerplate” provisions to ensure that it supersedes any prior agreement with a franchisee. Lastly, it is critical to draft strong renewal provisions that require franchisees to comply with certain obligations in order to renew.

As many Canadians, as well as foreign companies doing business in Canada, now know, the cornerstone of Canada’s Anti-Spam Law (CASL) is a general prohibition against sending any “commercial electronic message” without the prior express or implied consent of the recipient. A “commercial electronic message ” or “CEM” is broadly understood as any electronic message that encourages participation in a commercial activity. That’s a big deal, because one of the fundamental elements of CASL that makes it so onerous is that it is an ‘opt-in’ regime. Every other anti-spam law out there in the world provides for an ‘opt-out’ framework, meaning that senders have to implement an unsubscribe option which is identifiable, accessible and functional. But CASL requires senders to have consent first before anything can be sent, and obtaining that consent can pose a big wall to have to climb.

Chad Finkelstein

While express consent ought to be intuitive enough to be able to identify, CASL contains a number of instances of implied consent, any of which may be relied upon when sending a CEM. The most commonly relied upon example of implied consent is probably the permission that follows for the 2-year period after a customer purchases a product or service from you, but there are several others which your recipient may or may not comfortably fit into. In all cases, whether consent is expressly or implicitly given, you have to maintain and keep careful track of the categories of consent which your recipients fall under to ensure that they are removed from distribution lists should one of the eligible criteria expire or become unavailable.

And CASL has teeth! Statutory damages of up to $10,000,000 for corporations, or $1,000,000 for individuals. And the Canadian Radio Television Commission (or, the CRTC, which oversees and enforces CASL) has not shied from imposing significant fines on offenders in the tens and hundreds of thousands of dollars.

Oh, and did I mention the personal liability? Companies’ directors and officers can be found personally liable under certain provisions of CASL if they directed, authorized, assented to, acquiesced in or participated in the commission of a contravention of CASL!

And it was about to get worse. Until recently, Canadian businesses were planning around July 1, 2017, upon which date it was expected that the remedies available under CASL would no longer be limited to CRTC fines, but would also include a new private right of action, meaning that individuals and corporations could also sue alleged infringers of this law.

Copyright: viperagp / 123RF Stock Photo

In addition to the statutory damages already mentioned, courts would also be able to order people liable under CASL to also pay to the complainants an amount equal to their actual loss or damage (if any), plus up to $200 for each violation of sending unsolicited messages up to $1,0000,000 for each day on which a violation occurred.

And those damages were to be available per violation per person! This raised alarm bells for businesses about the virtual inevitability of a new breed of class action litigation with a view towards court-ordered award against alleged violators of CASL that could be potentially in the millions of dollars.

Fortunately, the federal government of Canada heard the concerns of the business community and, on June 7, 2017 announced that the private right of action under CASL has been suspended indefinitely. Phew!

The other requirements of CASL are still very much in effect, though, so businesses around the world who have Canadians on their email distribution lists ought to take a deep dive into the composition of those lists, the nature of the electronic communications being sent to recipients and internal recording-keeping and audit practices to ensure that one, mistakenly sent mass email does not snowball into a catastrophe.

Contributed by Chad Finkelstein

Chad is a partner at the Canadian law firm of Dale & Lessman LLP and a registered trademark agent.  Chad’s practice includes all areas of business law with an emphasis on franchise law, licensing and distribution.  He can be reached at cfinkelstein@dalelessmann.com.

Janitorial services franchisor Jan-Pro Franchising International, Inc. (“Jan-Pro”) is not the employer of its unit franchisees, according to a recent California federal court decision. Roman v. Jan-Pro Franchising Int’l, Inc., No. C 16-05961 WHA (N.D. Cal. May 24, 2017). The plaintiff franchisees failed to show that Jan-Pro exercised sufficient control over their day-to-day employment activities.

Copyright: stocksolutions / 123RF Stock Photo

What makes this case unique is that Jan-Pro operates a three-tiered franchising structure, often called a subfranchise arrangement. Under this arrangement, Jan-Pro grants subfranchise rights to a regional master franchisee (“Master Franchisee”), who is responsible for selling Jan-Pro unit franchises to individual franchisees (“Unit Franchisees”) in a particular geographic territory. The Unit Franchisees operate the franchised cleaning service business. Importantly, as is common in a subfranchise arrangement, Jan-Pro never directly contracts with its Unit Franchisees. Instead, Jan-Pro directly contracts with its Master Franchisees. Then, the Master Franchisees directly contract with the Unit Franchisees.

 

The plaintiff Unit Franchisees claimed that they were misclassified as independent contractors when they were really Jan-Pro’s employees. They sought minimum wages and overtime premiums from Jan-Pro. The plaintiffs argued that they were Jan-Pro’s employees under California law because the contracts between Jan-Pro and its Master Franchisees permitted Jan-Pro to control the business of the Master Franchisees and Unit Franchisees through its policies and procedures.

Under California law, “to employ” means

  1. To exercise control over the wages, hours or working conditions, or
  2. To suffer or permit to work, or
  3. To engage, thereby creating a common law employment relationship.

Martinez v. Combs, 49 Cal. 4th 35, 64 (2010). However, in the franchise context, controlling the “means and manner” of a franchisee’s operations is not sufficient to make a franchisor an employer. A franchisor is only an employer if it retains or assumes general control over employment matters such as hiring, direction, supervision, discipline and discharge. Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474, 498 (2014).

The court concluded that Jan-Pro did not employ the Unit Franchisee’s employees. It reached this result despite the fact that the Master Franchisees exerted control over the Unit Franchisees under the contracts between them. Critical to the court’s analysis was the fact that these contracts did not confer any rights on Jan-Pro to control or terminate the Unit Franchisees. Nor was Jan-Pro a third party beneficiary of these agreements, which could give Jan-Pro the right to directly enforce them. Moreover, Jan-Pro never directly contracted with the Unit Franchisees.

The court’s analysis focused on features that are specific to subfranchise arrangements, especially the lack of a direct contractual relationship between Jan-Pro and its Unit Franchisees. A subfranchise arrangement is only one form of multi-unit arrangement, and is not appropriate for all franchise systems. Franchisors engaged in or considering this system should perhaps not put too much emphasis on the court’s analysis. For one thing, a franchisor may want to have some contractual rights it can enforce directly against Unit Franchisees. Additionally, even if Jan-Pro had directly contracted with Unit Franchisees, there appeared to be scant evidence that Jan-Pro controlled employment conditions in a manner that would make it a joint employer. However, if a franchisor were to indirectly control employment conditions through a subfranchise arrangement, a court might come to a different conclusion. In any event, the court’s decision was well reasoned and grounded in a firm understanding of franchising. It was certainly a win for the franchise model, made especially important by the fact that it took place in California, which is typically considered an employee and franchise friendly jurisdiction.

As a surprising new gift from the Trump Administration, the Department of Labor has decided that it will again start issuing opinion letters on thorny questions about the FMLA and the FLSA and other laws enforced by the Wage and Hour Division.

For reasons that were never quite clear, the Obama Administration had done away with the practice; instead preferring to sporadically issue administrator interpretations.

For employers, opinion letters are often more helpful as you can tell the DOL your specific facts and get a tailored opinion instead of having to try to apply a theory to your facts.

A lot of my clients are understandably nervous about submitting a request for an opinion letter for fear that the DOL will come knocking if they opine that the employer’s practice is in violation of the law.  That is where your employment counsel comes in handy.  Counsel can submit requests on behalf of clients without disclosing the identity of the client to the DOL.

So, if you have been dying to know the answer to a sticky question, you may want to consider requesting an opinion letter. If you are interested in obtaining an opinion letter, the DOL has a helpful link on its website or you can contact employment counsel to help your craft and submit a request.

Ransomware is back in the news. Yet again, massive and not-so-massive corporate enterprises find themselves at risk of having their computer systems and records held hostage to internet raiders. And, in an added twist, this time systems are not necessarily unlocked even after the ransom is paid.

Copyright: tonsnoei / 123RF Stock Photo

What can you do? The key is advance preventative measures. Over at Fox Rothschild’s Privacy Compliance and Data Security blog, we follow these issues regularly. There, we have noted that the United States Computer Emergency Readiness Team at the Department of Homeland Security has provided several recommendations for preventative measures individuals and organizations can take against ransomware attacks, including the following;

  • Have a data backup and recovery plan which can be tested regularly for all critical information;
  • Backups should be kept on separate storage devices;
  • Allow only specified programs to run on computers and web servers to prevent unapproved programs from running (known as application whitelisting);
  • Make use of patches to keep software and operating systems current with the latest updates;
  • Maintain current anti-virus software and scan all downloaded software from the internet prior to executing;
  • The “Least Privilege” principle should prevail – restrict users’ access to unnecessary software, systems, applications, and networks through the usage of permissions;
    Preclude enabling macros from email attachments. Enabling macros allows embedded code to execute malware on the device. Organizations should have blocking software to cut off email messages with suspicious attachments; and last, but certainly not least
  • Do Not Click on unsolicited Web links in emails.

As usual, you should always report hacking or fraud incidents to the FBI’s Internet Crime Complaint Center (IC3).

In the case of the current attack, one of the ways it seems to be spreading is through the use of auto-updating software for an accountancy program. This method of transmission points out the critical importance of turning off “auto-update” self-executing software and scanning every download prior to installation.

Many franchisors employ arbitration as its preferred method of dispute resolution.  Generally, courts view arbitration agreements favorably. An agreement to arbitrate waives the fundamental right to have a court decide the merit of their disputes. As such, valid, enforceable arbitration agreements are required to waive this essential right. Two recent decisions highlight the importance of ensuring that a valid agreement to arbitrate exists between the parties.

arbitration agreement
Copyright: designer491 / 123RF Stock Photo

Theo’s Pizza, LLC v. Integrity Brands, LLC

In this case, the franchisee sued the franchisor for violation of the South Carolina Business Opportunity Sales Act and breach of contract. The franchisor sought to dismiss the action because all actions related to the franchise agreement were subject to arbitration (per the Franchise Agreement). The parties entered into a Market Development Agreement under which the franchisor granted franchisee the right to open multiple units. The Market Development Agreement explicitly stated that the parties must execute a separate franchise agreement for each unit. Despite the franchisee opening its first unit, the parties never signed a Franchise Agreement. The Market Development Agreement and Franchise Agreement both contain clauses that require arbitration of all disputes.

The Court held that the claims arose out of the operation the unit, not the Market Development Agreement.  Thus, in the Court’s opinion, there was not an explicit agreement to arbitrate disputes because the parties never signed the Franchise Agreement.  Additionally, the Court refused to impute an agreement to arbitrate where the franchisee had not expressly agreed to one.

Stockade Companies, LLC v. Kelly Restaurant Group, LLC

In this case, the franchisor terminated the Franchise Agreement for failure to pay royalties. The franchisee continued to operate its business after the termination of the Franchise Agreement. Subsequently, the franchisor filed for an injunction against the franchisee for its continued operation of its business. The franchisor argued that the franchisee’s continued operation of the business infringed on franchisor’s trademark rights and violated the post-termination non-competition clause. The franchisee argued that the franchisor was not entitled to an injunction because all actions under the Franchise Agreement must be arbitrated. However, the Franchise Agreement provided that the franchisor may file for injunctive relief where necessary to protect its proprietary marks and other rights or property.

The franchisee argued that the claims fall within the arbitration clause because (a) they are not “actions” within the meaning of the exclusion clause, (b) they are not “necessary” to protect the franchisor’s property, and (c) the exclusion clause is vague and invalid. The Court dismissed each of the franchisee’s arguments noting that the exclusion clause permits the specific action the franchisor took (the filing of a request for injunctive relief). Further, the franchisor’s (i) right to enforce its non-compete protects its property, and (ii) trademark infringement claims protect its proprietary marks. Lastly, the Court noted that the language of the exclusion clause was clear and that the franchisor had carved out its right to seek injunctive relief. As such, the Court held there was no valid agreement to arbitrate the injunction action.

Conclusion

These cases illustrate it is of utmost importance to ensure that your franchise agreements are well-written and explicit when it comes to dispute resolution procedures. Additionally, when entering into a development relationship, a franchisor must ensure that it enters into a separate franchise agreement for each unit so it is bound by those terms. Lastly, a franchisor must ensure that all reserved rights to obtain injunctive relief are clear and conspicuous. While these recommendations are not earth-shattering, these cases are important reminders of the consequences of improper franchise administration and documentation.

This week, the Federal Trade Commission (FTC) updated its guidance for businesses on complying with the Children’s Online Privacy Protection Rule (COPPA) .   If a website operator or operator of online services collects personal information from kids under 13, then the business must comply with COPPA.   The definition of “personal information” is broad and includes a child’s name, voice, address, photo, email address or telephone number.   COPPA encompasses a wide range of activities, including mobile apps and toys or other products connected to the internet.  This means that businesses, including franchised businesses, geared towards selling products or providing services to children are covered by COPPA and must strictly comply with the Rule.

Copyright: jgaunion / 123RF Stock Photo

The FTC now provides new and updated guidance in three main areas:

  1. New Business Models.  The FTC broadens the scope of covered businesses to account for new ways that companies collect data.
  2. New Products.  If your franchise offers and sells a product that connects to internet and collects personal information, including voice recordings or geolocation data, then COPPA applies to your business.
  3. Parent Consent Collection Methods.  One of the main features of COPPA is its requirement that businesses obtain parental consent BEFORE collecting a child’s personal information.  The new guidance discuses two newly-approved methods for getting parental consent: asking knowledge-based authentication questions and using facial recognition to get a match with a verified photo ID.

With technology constantly evolving and the nearly universal collection of personal data by websites and apps (particularly the now frequently common collection of geolocation data), a franchise system providing products or services to children must keep up to date on the FTC’s latest COPPA guidance.  The FTC also provides answers to frequently asked questions about COPPA here or you can email the FTC at coppahotline@ftc.gov.

Employers frequently require employees to sign confidentiality and non-competition agreements.  In most jurisdictions, these agreements are both lawful and prudent provided that they are carefully drafted.

In my practice, I draft confidentiality and non-competition agreements and litigate claims of breaches of those agreements.  In almost every agreement I either draft or review, there is a choice of law provision.  If I am drafting or editing the choice of law section, I do not just randomly select any state or a state that might be more favorable to my clients.  I pick the state that makes sense legally — such as because that is where the company is located or the employee signing the agreement will be working.

Although this is not an example of a choice of law provision that I drafted, it is fairly typical of ones I review:

“This Agreement is governed by, construed, interpreted and enforced in accordance with the substantive laws of the State of New York without regard to conflict or choice of law rules.”

For legalese, this is actually clear and I am sure many of you are wondering what might be wrong with this provision.  The problem with this provision is the last part.

24173069 - read the fine print words in small tiny letters or font typeface under a magnifying glass to illustrate a warning or danger alert to pay close attention to legal disclaimers

Even if a contract has a provision that says it shall be governed by one state’s laws without regard to conflict or choice of law rules, that does not mean a court will blindly enforce that choice.  Often the drafters of these contracts believe that simply because the parties agree to waive any conflict of law rules, that the contract terms will govern.  Instead, in many jurisdictions, the court will disregard these provisions and still independently analyze which state’s law applies.

A recent example of this is the DJR Associates LLC v. Hammond, et al. case in the Northern District of Alabama.  The Court dedicated a significant amount of time to discussing the choice of law provision before partially disregarding it.  I won’t bore you with the details of the court’s reasoning, but do note why this is important for companies.

There are some states that do not allow non-competition agreements at all (I’m talking to you California) and there are other states that will enforce them in only certain limited circumstances. When employers are located in multiple jurisdictions, it is important to know the laws in all of the jurisdictions that could apply in order to try to draft enforceable agreements.

In the DJR case, the court found that part of the agreement was governed by Georgia’s law despite the fact that the agreement stated Alabama’s laws would apply.  Georgia and Alabama’s laws differ on the extent to which an employer can prohibit a former employee from soliciting or accepting business from customers.  Indeed, Georgia law is far more critical of such provisions than is Alabama.  Further, under Georgia law, the court can only “blue-pencil” the agreement to strike the overbroad clause; courts cannot rewrite the provisions to be more narrowly tailored.

Although the Court ultimately found in favor of DJR, it also found that the non-compete provision was void under Georgia law, leaving DJR without an enforceable provision that would prohibit the soliciting of its Georgia customers.  Companies should take this as a lesson to have their counsel do an analysis as to which state’s law applies and to draft non-compete agreements accordingly.

Copyright: byzonda / 123RF Stock Photo
Copyright: byzonda / 123RF Stock Photo

Are you ready for the next frontier in ADA Access Litigation? We invite you to read Part 1 and Part 2 in a series of posts by Fox partner Dori K. Stibolt, regarding the new trend in ADA Title III litigation involving access to the internet for the visually impaired.

Many of these cases have focused on travel, hospitality, restaurant and service companies which necessarily include many companies in the franchise community.  Additionally, claims related to web access for the visually impaired* also implicate the self-serve kiosks which are rapidly becoming popular in many hospitality and service environments.

Become familiar with, and get in front of, this litigation trend so that you provide meaningful access to internet resources for all of your potential customers–and avoid costly litigation as a benefit.

*Self-serve kiosks should also be assessed for compliance with ADA’s 2010 Standards for Accessible Design which includes such issues as clear floor space, location of display screen, reach range of operable parts, etc.