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Franchise Law Update

Commentary on Business and Legal Issues of Franchising

Are Your Nondisclosure Agreements Compliant with the Defend Trade Secrets Act?

Posted in Business Updates, Legislative Updates

Contributed by Jim Singer, Chair of Fox Rothschild’s Intellectual Property Department.

Have you updated your company’s form employee and independent contractor non-disclosure agreements lately? Do they comply with new legal notice requirements relating to “whistleblowers”? If your answer is “no” or “I don’t know,” please read on.

The new Defend Trade Secrets Act helps U.S. businesses protect their trade secrets by asking federal courts to order seizure of property necessary to prevent dissemination of the trade secrets. It also permits businesses to seek injunctions and damages in federal court for trade secret misappropriation. The DTSA applies to any company that owns trade secrets and wants to protect those trade secrets from theft, breach of a duty to maintain secrecy, or espionage.

The DTSA also provides some immunity for whistleblowers who use trade secrets by stating that:

  • An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (a) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

and

  • An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.

The immunity section of the DTSA is especially important for employers because it requires employers to provide with notice of the DTSA’s immunity clauses “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The Act defines “employee” to include both actual employees and independent contractors. If an employer does not comply with the notice requirement, the employer’s ability to recover damages against that employee in a federal action for misappropriation of trade secrets will be limited.

Employers can comply with the notice requirement by updating their form employee and independent contractor agreements to include either the notice requirement or a cross-reference to a policy document (such as an employee handbook) that states the employer’s reporting policy for a suspected violation of law.

Philadelphia: Cheesesteaks with a Side of Taxes

Posted in Business Updates, Legislative Updates

On June 16, 2016 the Philadelphia City Council passed, and on June 20, 2016 Philadelphia’s mayor signed, into law a new chapter into The Philadelphia Code entitled” Sugar-Sweetened Beverage Tax”.  The mayor had proposed a tax on soda and other sugar-sweetened beverages last March (see blog of Marcy 29, 2016 entitled “Philadelphia Mayor Proposes Soda Tax), and, though modified, the tax will apply on January 1, 2017 and thereafter.

Instead of the original tax proposed of three cents per ounce, it is 1 1/5 cents per ounce.  As originally reported, the tax must be paid by the distributor of the “sugar-sweetened beverage”.  However, it is important to note that a “sugar-sweetened beverage” is not only any non-alcoholic beverage sweetened by sugar and the like, but also by an artificial sugar substitute, like saccharin or aspartame.  It explicitly includes sports drinks, flavored water and pre-sweetened coffee or tea as well as soda.

There are application and notification requirements for distributors and dealers of “sugar-sweetened beverages” within the new law, so it is important for franchisors and franchisees who do business in Philadelphia to comply with these requirements. Once we know the parameters of the scope of these requirements, we will follow up with another blog post.

North Carolina Moves to Define Franchise Employees

Posted in Joint Employer, Legislative Updates

Last month, the North Carolina State Assembly voted 109-0 to pass SB 303, which mandates that a franchisor is not the employer of a franchisee or a franchisee’s employees. The legislation now moves to the North Carolina Senate for consideration.  This follows the actions of many other states to provide clarity under state law as to what is an employee in a franchised business located in their state. For more information on these efforts, please see my blog of December 31, 2015: “More States Moving to Limit Fallout from Browning Ferris”.

The new provision is quite simple and states: “Neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purposes, including, but not limited to, this Article and Chapters 96 and 97 of the General Statutes.  For purposes of this section, “franchisee” and “franchisor” have the same definitions as set out in 16 C.F.R. 436.1.”   So, if an entity is a franchisor or franchisee under Federal law, neither the franchisee nor the franchisee’s employee shall be deemed an employee under North Carolina law.  Please note that this will not affect any determination of “joint employment” under Federal law.

And the story continues…

Does the Wendy’s Data Breach Prove a Single POS System is Best?

Posted in Articles, Business Updates, Food Service

This month Wendy’s revealed that the security breach it disclosed earlier this year was much larger than it initially reported. As most people know by now, Wendy’s originally announced that customer credit card data was stolen from approximately 300 Wendy’s locations.  Wendy’s blamed a third-party point-of-sale (POS) provider used by some of its franchisees for the breach.  It reported that hackers stole the credentials of personnel employed by a third-party vendor and used the credentials to gain access to certain franchisees’ POS systems.  The hackers then installed malware that read the magnetic strip on credit and debit cards and sold the information to criminals.  A class action lawsuit was filed by customers affected by the data breach against Wendy’s in February.

According to reports, hacking third-party providers is a very common way for criminals to gain access to a system. The question for a franchisor then becomes, “what can we do to prevent data breaches at the third-party provider level  Unfortunately, when franchisees are left to choose their own POS vendor, they often do not have the resources to properly vet a provider.  A franchisee may compare providers based on price and not have security as a top priority.

Many franchise systems are responding to this issue by moving to a single point of sale system.   Wendy’s is migrating to a single system and the data breach did not affect locations in that system. Subway does not allow franchisees to shop for POS systems.  Popeyes and Pizza Hut are  also moving towards a single system.  Pizza Hut’s CEO stated in April that they were moving from 9 POS systems down to one.  Advocates for a single POS system structure argue that it is actually easier to protect one entry point for a good well-designed POS system vs. using many different POS systems.  There are certainly other security improvements that will help in preventing data breaches, such as installing card readers that can handle transactions from more secure chip-based cards, which are far more expensive for thieves to clone.  However, this may be the time for franchise systems to start considering the benefits of a single point of sale system if they have not done so already.

Location, location, location: Franchise litigation in the venue of your choosing

Posted in Articles, Legal Decisions

A Massachusetts franchisor can sue an Oregon franchisee in Massachusetts, according to a recent decision from the United States Court of Appeals for the First Circuit. The case contains important lessons for franchisors seeking to keep lawsuits on their home turf.

When parties to a lawsuit hail from different states – or, as here, different coasts –the first issue adjudicated is often not the merits of the case, but rather, where the case will be adjudicated. This issue can be especially important for franchisors, who often engage in complex business relationships with franchisees across the country. If one or more of those relationships sours, how can a franchisor ensure that litigation occurs in a convenient forum?DCF 1.0

While there are no certainties, Baskin-Robbins Franchising LLC v. Alpenrose Dairy, Inc. (“Alpenrose Dairy”) provides a glimpse into the analysis a court might conduct when determining jurisdiction in the franchise context. No. 15-2190 (1st Cir. June 6, 2016).

The Background

Alpenrose Dairy involves a dispute over renewing a franchise agreement. From 1965 until 2014, Alpenrose Dairy, Inc. (“Alpenrose”) was a franchisee of Baskin-Robbins Franchising, LLC (“B-R”) and the parties renewed their franchise agreement multiple times. Alpenrose could renew at its option with at least 1 year’s notice. When the parties negotiated the original franchise agreement, B-R was headquartered in California and the negotiations occurred in Oregon. In 1998, B-R moved its operations to Massachusetts.

After B-R’s move, Alpenrose exercised its renewal option two times, in 2001 and 2007 (for a term ending on December 8, 2014). On December 2, 2013, Alpenrose notified B-R that it would not renew the franchise agreement. But in July 2014, Alpenrose wrote again, stating that it wished to “revoke” its decision and renew the franchise agreement again. Later, Alpenrose warned that if the franchise agreement was not renewed, it would be entitled to compensation under a Washington state law. B-R refused on the grounds that Alpenrose should have exercised its option prior to December 8, 2013; it also rejected Alpenrose’s claim that compensation was due in connection of the non-renewal.

With an impasse on the horizon, B-R filed suit in federal court in Massachusetts, seeking a declaration that the franchise agreement expired on December 8, 2014 and that it owed no compensation to Alpenrose. Alpenrose moved to dismiss or to transfer the case, arguing that the Massachusetts federal court did not have personal jurisdiction over the Oregon-based franchisee.

The Analysis

Courts must have jurisdiction to hear cases, and one form of jurisdiction is a court’s “personal jurisdiction” over defendants. When a person is sued, that person must have “minimum contacts” with the state in which the lawsuit is filed. Alpenrose argued that because it was based in Oregon, it did not have sufficient contacts with Massachusetts, and therefore the Massachusetts federal court did not have jurisdiction over Alpenrose.

The court disagreed. It analyzed three relevant factors and found that it had jurisdiction over Alpenrose.

Factor 1: Does the claim directly arise out of, or relate to, the defendant’s forum state activities?

Factor 1 was satisfied because the claim arose directly out of the 2013 and 2014 letters that Alpenrose sent to B-R’s Massachusetts offices. The letters related directly to B-R’s claims that Alpenrose’s renewal notice was not timely and that Alpenrose was not entitled to compensation in connection with the agreement’s expiration.9732125_l

Factor 2: Do the defendant’s in-state contacts represent a purposeful availment of the privilege of conducting activities in the forum state, thereby invoking the benefits and protections of that state’s laws and making the defendant’s involuntary presence before the state’s courts foreseeable?

Factor 2 is a mouthful, but essentially asks whether a defendant’s connections with a forum state are voluntary and whether litigation in that state is foreseeable. Accordingly, under Factor 2, the court analyzed whether (i) Alpenrose’s contacts with Massachusetts resulted from Alpenrose’s own actions and whether (ii) it was foreseeable that Alpenrose could be sued in a Massachusetts court. The court specifically noted the services that B-R provided to its franchisees, e.g., a product quality assurance process, customer service department, and assistance on a wide variety of operational issues. The court recognized (as would most zees and zors) that these activities were “vital to the continuation of the franchisor-franchisee relationship.” Therefore, the court found that Alpenrose deliberately targeted the Massachusetts economy and reasonably should have foreseen that a controversy could be adjudicated in a Massachusetts court.

Factor 3: Is the exercise of jurisdiction reasonable?

Under Factor 3, the court found that the exercise of jurisdiction was reasonable. The analysis need not be addressed in detail; however the court did note that both parties had significant means and, therefore, cross-country travel was not an obstacle. A court could decide the matter differently in the context of a less successful or start-up franchisee.

Mature franchise concepts often have franchisees across the country, and emerging franchisees aspire to. This model risks franchisors becoming involved in litigation in multiple jurisdictions far from home base. As Alpenrose Dairy demonstrates, franchisors can take certain steps to increase their odds of litigating on their own turf.

  1. Make sure your franchise and other agreements include forum selection clauses that require all controversies to be litigated (or arbitrated) in the state of your choosing.
  2. In consultation with counsel, when litigation looks imminent, consider filing a claim first in your preferred court. The Alpenrose Dairy court specifically noted that B-R had “raced” to the federal court in Massachusetts and sued Alpenrose when the impasse became clear
  3. Require correspondence between you and your franchisees to be in writing and addressed to your offices in your preferred forum state. While this may not be sufficient in itself, it can help build a case for personal jurisdiction. The Alpenrose Dairy court noted in particular that B-R’s move to Massachusetts was “unilateral activity” and that Alpenrose’s letters to Massachusetts, by themselves, were insufficient to satisfy Factor 2.  However, the letters helped establish Factor 1, because the lawsuit arose directly out of those written communications.
  4. If possible, provide the bulk of your services as a franchisor from your preferred home state. This may help demonstrate that franchisees voluntarily take advantage of your state’s economy and expect that a lawsuit could be filed against them there.

7-Eleven Prevails on Claim that it Violated the New Jersey Franchise Practices Act and Federal Labor Standards Act

Posted in Joint Employer, Legal Decisions

A federal district court in Trenton, New Jersey, has ruled that franchisor 7-Eleven was entitled to summary judgment on a franchisee’s claims that it violated the New Jersey Franchise Practices Act (NJFPA) by imposing unreasonable performance standards and attempting to terminate the franchise agreement without good cause.

7-Eleven brought suit against a New Jersey multi-unit franchisee requesting that the court enjoin the franchisee from operations and compel the franchise owner to vacate and surrender five 7-Eleven locations.   The franchisor alleged the franchisee committed incurable breaches of the franchise agreement which included a failure to maintain a minimum required net worth at each location.  The franchisee brought counterclaims including alleged violations of the NJFPA, federal Fair Labor Standards Act (FLSA) and the New Jersey Law Against Discrimination (NJLAD). 7-Eleven then moved for summary judgment on the counterclaims.

In granting summary judgment to 7-Eleven the court rejected the franchisee’s claim that it violated the NJFPA by imposing unreasonable standards.  The court found there was no evidence that the compulsory standards were unreasonable. Further, the franchisee admitted that he failed to pay payroll taxes, provide workers’ compensation insurance, or withhold and pay Social Security taxes for employees of his stores, all of which constituted material breaches of the franchise agreements. 7-Eleven was entitled to summary judgment on this claim because no reasonable juror could find that 7-Eleven did not have good cause to terminate the franchise agreements under the NJFPA.

In addition, the court found that the franchisee could not be considered a 7-Eleven employee because the franchisee failed to demonstrate he was an employee in support of his FLSA claim. The court outlined five factors in support of its decision to grant summary judgment on this claim including the fact that: (1) 7-Eleven did not control the manner in which the franchisee performed his 7-Eleven business; (2) it was undisputed that the franchisee shared in the gross profits of the store; (3) the franchisee alleged that he spent millions of dollars on franchise fees, licenses, approvals, and related goods and services in operating his stores; (4) the franchisee demonstrated entrepreneurial skills in the operation of the six stores; and (5) the franchisee could terminate the franchise agreements at any time and 7-Eleven could terminate the agreements for good cause. 7-Eleven was therefore entitled to summary judgment on the terminated franchisee’s counterclaims brought under the FLSA and  NJLAD.

The court specifically details the voluminous records offered by the franchisor showing that (1) the franchisee clearly and unambiguously breached the franchise agreement, (2) notice was provided to the franchisee and (3) the franchisee had an opportunity to cure the default. This should be a lesson to all systems that (A) clear and fair system requirements along with (B)  internal processes which are followed at all times in the event of a franchisee breach, can help a franchisor prevail at the summary judgment stage.  This is true even in states with laws considered “franchisee-friendly.”

DOL Persuader Rule Enjoined

Posted in Legal Decisions

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Much to the relief of management-side lawyers, the Department of Labor’s controversial persuader rule that was slated to go into effect on July 1, 2016 has been enjoined.  The Hon. Sam R. Cummings, United States Senior District Judge for the Northern District of Texas issued a nationwide injunction of the rule a few hours ago.

The decision in National Federation of Independent Business, et als. v. Perez temporarily stops a mad scramble by employers and counsel to put measures into place before the July 1st deadline.

The rule, had it not been enjoined, greatly expanded the number of people who could be considered “persuaders” under the Labor Management and Reporting Disclosure Act (“LMRDA”) and who were thus required to make certain reporting obligations.  Prior to the latest rule, counsel for employers were exempt from reporting requirements where they did not directly communicate with employees and were providing advice to employers with regard to union campaigns.

The latest rule chipped away at that exemption and provided that some activities of counsel, even though not communicated directly to employees, would have to be reported by lawyers.  These activities might include providing advice on the drafting of campaign materials and, in some cases, questions regarding lawful employment policies even in the absence of a union campaign.  The rule could be interpreted so broadly as to apply in non-union settings where employers sought routine counseling advice.

If counsel acted as a persuader, then the employer and the counsel had to make a report as to all of the payments made to the counsel for all activities provided by counsel to that employer.  The rule also then required counsel to file additional reports for all clients for whom the counsel had done work, regardless of whether it engaged in any persuader activity on behalf of those clients.  Not only was the reporting intruding on the attorney-client relationship, the DOL noted that in order to determine if certain advice was exempt from the reporting requirements, it would be necessary to actually view the communication between the employer and counsel.

The Court found that the rule was vague and intruded on employers’ First Amendment rights.  Although this is a significant victory for employers and their counsel, it may be temporary.  The decision will likely be appealed.

We will keep you posted.  In the meantime, if you have not already spoken to labor counsel about the potential implications of the rule, we recommend that you do so.

 

Franchising a Marijuana Concept? More Sticky Issues to Ponder

Posted in Start-Up and Emerging Franchisors

The Winter Edition of the Franchise Law Journal published an interesting article on franchising a marijuana business. We have posted in the past about various legal issues related to concepts that attempt to franchise businesses selling marijuana or related products marketed to the marijuana industry.   This legal article, however, expands in detail upon a number of issues which make franchising a tricky endeavor.  It offers a finer point on many likely roadblocks including:

  1. Obtaining a Federally Registered Trademark. The United States Patent and Trademark Office’s (USPTO) continued refusal to grant trademark registration for cannabis related goods and services because marijuana is still illegal under federal law. As the article explains, certain rights are created by the use of the mark in commerce but federal registration confers many benefits on the trademark owner such as (i) nationwide protection, (ii) the presumption of exclusive rights to use the mark and (iii) increased remedies against counterfeiters. If you cannot obtain a federally registered trademark for your brand’s name, then the ability to grow and protect the franchise system’s goodwill is severally diminished.
  2. Opening a Bank Account. The burden on banks to comply with the Bank Secrecy Act and other federal obligations regarding banking make it nearly impossible for a franchisee to have access to standard banking accounts and may make it difficult for a franchisor to collect royalties from marijuana related franchisees. The Department of Treasury makes it clear that any bank choosing to service a marijuana business does so at its own risk. While some credit unions will provide services to cannabis businesses, the hazards associated with doing so far exceed ost lending institutions appetite for risk.
  3. Sourcing Through Approved Vendors and Suppliers. Most franchisors require that franchisees source products and supplies through its own approved vendors. However, transporting cannabis plants, oils, extracts and related materials or products across state lines through interstate commerce is currently prohibited under the federal Controlled Substance Act.   This hamstrings a franchise systems ability to provide consistent, uniform and quality product.

These are just a few of the obstacles facing would be marijuana franchise systems. I encourage anyone interested in this fascinating topic to read the entire article here.

At Last, Federal Protection of Trade Secrets

Posted in Legislative Updates

The Defend Trade Secrets Act (DTSA) became law earlier this month. As my colleague Josh Horn has noted, the DTSA is a real game changer for the protection of your trade secrets. No longer are you limited to state law for the protection of your trade secrets.

What does this mean? It means that, so long as your trade secret is used or intended to be used in interstate or foreign commerce, you now have the legal right to go to federal court and have that court enforce your rights–no diversity (meaning parties from different states) jurisdiction required. Moreover, the uniformity of the DTSA and the federal courts means that there is no longer any need to worry about disparate state laws and rules regarding discovery and court procedure.

Importantly, while the standards for relief are quite high, in an appropriate case you also now have the option of seeking ex parte relief; that is, relief without providing notice to the party you believe is infringing upon your trade secrets. In order to obtain such relief, you need to prove you meet not only the traditional factors for a preliminary injunction, you also need to demonstrate that the offending party will “destroy, move, hide, or otherwise make [the trade secret] inaccessible to the court.” The law balances this extraordinary right by requiring the moving party to post security and the court to keep possession of the trade secret information until a final court hearing.

The DTSA also provides for damages for a variety of offenses, including actual loss caused by and/or unjust enrichment due to the misappropriation and a reasonable royalty. Willful and malicious misappropriation can result in exemplary damages. Finally, there is the potential for fee shifting if either party has acted maliciously in alleging or causing the misappropriation.

For more details on the DTSA, please review Josh’s detailed Alert.

Remembering Those Who Gave the Last Full Measure of Devotion for Our Country

Posted in Articles

Maybe I’m just becoming a cranky middle-aged man. But the seeming confusion over Memorial Day, especially when we’ve lost almost 7,000 American servicemen and women in the wars we’ve been fighting in Iraq and Afghanistan, and now against ISIS, for over a decade and a half, bothers me. I respect and admire our Veterans, but their day is November 11th. And I have the utmost respect for all those currently serving in uniform, including a number of whom I count as friends. But Armed Forces Day was May 21st–did you remember to fly your flag and/or thank a service member?unknown soldier

Memorial Day, in contrast, is when we pause to remember, and honor, those who gave, as Abraham Lincoln so eloquently expressed it, the last full measure of devotion for their country.

So, before you head out to the white sales, auto lots, picnics or pool this holiday weekend, I kindly ask that you join me–and Fox Rothschild–in pausing to remember those who truly gave the last full measure of devotion so that we can enjoy our freedoms. As General Patton wisely noted, “It is foolish and wrong to mourn the men who died. Rather, let us thank God that such men lived.”