10560779 – closeup portrait of a businesswoman in shock, isolated on white background

Maybe you are an international company with a successful brand that sold a master franchise or area representative right in California without knowing the robust state franchise registration laws. Maybe you are an up-and-coming pizza joint operating in Los Angeles that decide to sell a business associate the right to operate a location under you brand with your recipes in exchange for a fee without considering if it was a “franchise.”

You did not mean to violate the California Franchise Investment Act but it turns out you did. What can you do? Is there any way to “fix” your violation? The answer is yes. Although, California has a very robust and stringent state registration and disclosure process, it also provides a fair remedy for curing these non-compliance issues. The state wants to encourage self-reporting and rewards a franchisor’s attempt to do so by offering a process to bring finality to an illegal sale.

If you or your franchise system client sold a franchise in California without pre-registering with the California Department of Business Oversight, then you will need to prepare a Notice of Violation.   Instructions on preparing a compliant Notice of Violation can be found here. This is a separate application than the general application for registering the franchise offering.   Once approved, you will submit the Notice of Violation to the franchisee.  The Notice of Violation will describe to the franchisee the nature of the violation and the franchisee’s rights under the law.   However, delivery of the Notice of Violation will also start a 90 day statute of limitations clock running shortening the statute of limitation of 4 years from the illegal act or 1 year from when the franchisee discovers the violation.

In most cases, this is a much better option for a franchise system rather than waiting to see if a franchisee becomes disgruntled and reports the system to the California regulators.

Many franchise agreements contain a provision that restricts a franchisee from hiring or soliciting the employees of the franchisor or other franchisees. A class action lawsuit that was recently filed in the Eastern District of Texas could require removal of this type of provision in the future. Though this suit is only at the initial complaint phase, the outcome of this case could help shape the future of franchisee restrictive covenants.

In Ion v. Pizza Hut, LLC, Kristen Ion (“Ion”) filed this complaint on behalf of similarly-situated managers of Pizza Hut restaurants. Ion claims that Pizza Hut, LLC (“Pizza Hut”) has colluded with all of its franchisees to engage in anticompetitive behavior in violation of the Sherman Act. Further, Ion claims that the restrictive provision is a naked restraint on competition and a per se violation of the antitrust laws.

The provision at issue, as seen in many franchise agreements, forbids a franchise owner from hiring or soliciting any employees of the franchisor, its units, or any other franchise. Ion claims that this restraint eliminated a franchisee’s incentive to offer competitive employment packages to management personnel and restricted the mobility of such personnel. Further, Ion argues that this restraint lowered salaries and benefits due to the limited job marketplace available to Pizza Hut personnel. Ion claims that the training she received from Pizza Hut is only transferable to other Pizza Hut units.

While Ion consistently refers to the fact that each Pizza Hut franchise is its own independent business that has the right to set its own wages for staff, in the same sentence, she argues that the franchisor and franchisees were “co-conspirators” in the endeavor to suppress those wages and mobility. Further, Ion cites to the continued practice of Pizza Hut and its franchisees to cut employee wages and hours through various policies and argues that this restriction is in furtherance of this purpose (as outlined in various news articles). Lastly, Ion claims that executive compensation and franchisee profit increased at the expense of its low-paid management personnel.

However, based on the facts in the complaint, it seems that Ion never attempted to find another job outside of the Pizza Hut franchise system to support her proposition. Further, the citations to commentary by scholars and professors on the topic logically leads one to assume that there is not yet a basis in prior case law for the requested remedy.

The outcome of this case could substantially and materially alter the scope of franchisee restrictive covenants. Any outcome in favor of Ion would trigger an immediate need for revisions to a franchise agreement that contains this restriction and it is important to keep watch of this case.

Fox Rothschild LLP has deployed a new mobile app to assist companies, including franchisors, as they rush to comply with the European Union’s General Data Protection Regulation (GDPR) – a complex set of new data privacy rules with major implications for businesses.  The app – GDPR Check – helps businesses catalog their data management practices and policies to determine necessary steps to comply with GDPR when it takes effect in May.

“The pending implementation of GDPR will impact all companies that process or control the personal data of any EU citizen,” said Mark G. McCreary, chief privacy officer at Fox Rothschild and co-creator of GDPR Check.  “Every business, regardless of where it is headquartered, will be responsible for complying with these sweeping new data privacy rules when collecting or processing Personal Data,” said Daniel L. Farris, co-chair of the Fox’s Technology Group and co-creator of GDPR Check.

Even if a business does not collect personal data from EU citizens, the GDPR requirements apply to that business if it provides services to another business that must comply with GDPR.  Failure to comply with the regulations can result in fines of up to €20 million (approx. US$24.7 million) or 4 percent of global annual revenue in the prior year.

GDPR Check maps an organization’s data management practices in 17 areas that are key to determining compliance, including:

  • Types of data collected
  • Privacy policies (external and internal)
  • Consent
  • Data retention
  • Breach readiness

The app produces a report for each key area that a company can share with its attorneys and compliance team.

GDPR is intended to protect the rights of EU citizens to control the use of their personal data, including customer data such as birthdates, mailing addresses, IP addresses, product purchases and payment information, as well as supplier data, employee data and “sensitive data” such as health information, race, and sexual orientation.

This is the second app Fox Rothschild has launched in the data privacy space. The firm also maintains Data Breach 411, which provides easy access to applicable state statutes and breach notification rules to enable in-house counsel and compliance professionals, in the midst of a data breach crisis, to quickly identify controlling law and relevant guidance.

GDPR Check is available for free download in the Apple App Store and Google Play stores.

As we head into Tuesday night’s State of the Union Address, our thoughts at Fox Rothschild return to last year at the ABA Forum on Franchising Annual Meeting in Palm Desert, California.  One of the most interesting seminars was entitled “What’s New and What’s Next: The New Administration and Beyond.” In addition to reviewing updates on joint employer issues, SBA lending rules and changes to accounting rules, the session provided an interesting update on whether the FTC Franchise Rule will succumb to the Trump administration’s mandated review of all regulations.

70035381 – president holding shredded federal regulations isolated on white.

The short answer (drumroll please) is probably not, at least not anytime soon. The Federal Trade Commission was scheduled to review its 66 rules and regulations (including the FTC Franchise Rule) to determine whether they should be modified, expanded or repealed in 2018. However, the FTC decided it will not proceed with the review. Further, the administration clarified that the FTC is not subject to the Executive Order requiring that two regulations be discarded for every new regulation.   For now, it appears there may not be any immediate changes to the FTC Rule.

However, the NASAA’s Franchise Project Group chaired by Dale Cantone, Maryland Deputy Attorney General, is forging ahead with a number of initiatives. According to the session presenters, such projects include:

  1. Working with state franchise regulators to implement the new FPR Commentary [PDF];
  2. Revising the NASAA state cover page;
  3. Revising the 2008 Franchise Registration and Disclosure Guidelines [PDF];
  4. Making Risk Factors requirements uniform among states; and
  5. Developing one electronic filing system for all states to use.

Although, there may be little action on the federal level, it appears that the NASAA Franchise Project Group will continue to make strides to eliminate conflicting applications of franchise disclosures among the states and work towards standardization.  An action plan that all franchise regulatory attorneys likely endorse.

The New York State Department of Labor published proposed regulations to the Miscellaneous Industries and Occupations Wage Order in the New York State Register addressing so-called “just in time,” “call-in” or “on-call” scheduling demands facing employees. The proposed regulations, published on November 22, are subject to a 45-day comment period.

According to Governor Andrew M. Cuomo and the NYSDOL, employers sometimes schedule or cancel a worker’s shift a few hours before the shift begins, or just after it starts, which “often leave[s] workers scrambling to find child care and forces them to miss appointments, classes or important family commitments.” The proposed regulations aim to create fairness for employee pay and flexibility for employers scheduling unpredicted shifts by modifying only the Minimum Wage Order for Miscellaneous Industries and Occupations (the “Miscellaneous Wage Order”) for non-exempt employees at for-profit and certain nonprofit institutions. Importantly, the proposed regulations would not affect businesses subject to the Wage Orders for the hospitality industry, building services industry or agricultural industry. That said, they will still affect many franchised businesses.

The proposed regulations would revise the Miscellaneous Wage Order’s call-in pay requirement to create the following circumstances where non-exempt employees will be eligible to receive call-in pay:

  • Reporting to work– an employee who reports for work on any shift shall be paid for at least four (4) hours of call-in pay.
  • Unscheduled shift– an employee who reports to work for any hours that have not been scheduled at least 14 days in advance of the shift shall be paid an additional two (2) hours of call-in pay.
  • Cancelled shift– an employee whose shift is cancelled within 72 hours of the shift’s beginning shall be paid for at least (4) hours of call-in pay.
  • On-call– an employee who is required to be available to report to work for any shift shall be paid for at least four (4) hours of call-in pay.
  • Call for schedule– an employee who is required to be in contact with the employer within 72 hours of the shift’s beginning to confirm whether to report to work shall be paid for at least four (4) hours of call-in pay.

Calculation of Call-In Pay

Under the proposed regulations, call-in pay for actual hours worked (i.e. when an employee reports to work for a scheduled or unscheduled shift) shall be calculated at the employee’s regular or overtime rate of pay, whichever is applicable, less any allowances (i.e. credits) permitted by law. However, call-in pay for hours not actually worked (i.e. when an employee’s shift is cancelled or the employee is on-call or must call in for his/her schedule) shall be calculated at the basic minimum wage (based on the employer’s geographic area and size). Call-in pay for hours not actually worked will not count as payments for time worked or work performed and, therefore, need not be included in the regular rate of pay for purposes of calculating overtime. The proposed regulations also include a provision eliminating the offset amount that is currently permitted for pay exceeding the minimum wage, and also prohibiting any offset to pay from the required use of leave time.

In certain situations, the four (4) hours of call-in pay normally owed to an employee for reporting to work or for a cancelled shift may be reduced to the lesser number of hours that the employee normally works for the regular shift, as long as the employee’s total hours worked—or scheduled to work—for that shift do not change from week-to-week. The proposed regulations also contain four exceptions to the call-in pay requirements, details of which can be viewed in the accompanying Alert.

The NYSDOL insists these proposed regulations help protect minimum wage employees from unpredictable work schedule practices. For employers, the regulations offer flexibility with scheduling new shifts without a premium during the first two weeks of a worker’s employment, permit worker shift swaps and substitutions without penalty and allow for weather-related cancellations without penalty at long as 24-hours’ notice is given. As long as employers are diligent in giving employees advance notice of any schedule changes, they can avoid the call-in pay requirements imposed by the regulations.

If employers would like to submit a comment during the remainder of the 45-day comment period, they may do so by submitting any such comments to hearing@labor.ny.gov.

Employers should anticipate that the proposed regulations will be finalized without any substantial changes and plan accordingly. All managers responsible for scheduling should become familiar with the regulations’ requirements and exceptions, and employers should re-examine their scheduling practices. Employers should inform employees that scheduling changes will likely be made at least 14 days in advance in order to comply with the new regulations.

The content for this post was contributed by Fox Rothschild attorneys Glenn S. Grindlinger and Matthew C. Berger.

Restaurant operators and their financiers often need to predict the future. The operators, mostly from franchised brands, need to adapt to changing tastes and fashion. The financiers need to assess risk before making commitments or investments. Experts in these fields met together in November 2017 to test their assumptions.

Kevin Burke, Managing Director of Trinity Capital LLC, delivered a report which he summarized the economy for restaurants “As Good as it Gets.” The formal title was a very analytical “A Reversion to the Mean: What Happens When Industry Tailwinds End?” Burke’s basic conclusion is that things are great now, but the analytics show eventually the metrics will return to baseline, and this reversion to the mean predicts a slowdown of business and a tightening of credit.

You should in no way conclude that the credit punch bowl will be removed soon. Bankers are still enthusiastic about restaurants, and the chains are doing well. Current valuations of multiples of cash flow for merger and acquisitions average near historical highs of 10.6, and growing franchisors have multiples of double that. Leverage is at near historical highs of 5.3. These are multiples not seen nor sustained since 2007.  Private equity investment has slowed this year, and so have exits from their investments. Everyone looks fat and happy.

While there is still room for growth, current market conditions cannot last forever, and changes are coming via changing demographics. The discretionary spenders driving the restaurant renaissance are now the millennials. Millennials constitute the majority of the U.S. population. Their student loan debt is at all time highs. Less than half of the millennials make as much or more than their parents at the same age. The maturity cycle of millennials will have profound effects on the economy.

Millennials dine-in on delivery, according to Andrew Charles, Senior Analyst, Cowen & Co. Millennials are driving 30% of restaurant industry sales growth based on their delivery predilections. The largest demographic with the most demand for delivery is the 18-34 year-old, living in a major metropolitan area earning in excess of $100,000.00. Demand for delivery is less frequent in the suburbs and mid-size metro areas among 35-44 year-olds earning over $50,000 a year. Demand for delivery is lowest among those in small metro areas or small cities over the age of 45 years old earning less than $50,000.00 per year. Delivery users clearly prioritize convenience and time over the specific restaurant’s food. Based on the data, Charles predicts that the better a restaurant can meet the delivery demands of its customers, the more delivery will drive sales.

Looking at the data alone, this would suggest that restaurants have a great opportunity to expand their business by catering to millennials and providing delivery. However, the world is not that simple. When looking at the buying habits of millennials, they are now saving for houses and having children. For the past two years their restaurant spending as a group has trended down, and is predicted to fall as they invest in housing and their families. This will put a cap on growth and an emphasis on catering more to the millennial lifestyle of automation, convenience, delivery, healthful choices, as well as “foodie” choices.

Expect new entries in the artisan breads, foods and pizza categories. The “better pizza” will follow the “better burger” trend, with state of the art menu, delivery and payment systems. Expect menu changes in the casual dining sector to accommodate millennial tastes and the tastes of their children. Look for brands to tout their autonomous car, drone and other novel promises of delivery. Look for slumps in steak houses and casual dining as these brands need to adjust. Because of these trends, we are seeing a lot of activity in the mergers and acquisitions by strategic buyers ready to upgrade the brands to millennial friendly.

The millennials are the future, and the rest of us are merely tenants.

Yesterday afternoon, the NLRB issued a decision in Hy-Brand Industrial Contractors that caused a collective sigh among employers.  The decision rolls back the joint employer standard to what it was before Browning-Ferris Industries, 362 NLRB No 186.

The Browning-Ferris decision was greeted with alarm by most employers, especially franchisers and franchisees, as it made it easier for employees to claim that two entities were joint employers.

Specifically, Browning-Ferris held that two entities could be joint employers even where they never exercised joint control over essential terms and conditions of employment.  It was enough that there was an agreement between the parties where they reserved the right to exercise joint control.

The Hy-Brand decision explicitly overrules Browning-Ferris.  Interestingly, the decision discusses in some detail the negative impact Browning-Ferris had on franchisers.

Now the test for determining whether an employer has exercised joint control goes back to what it was before Browning-Ferris was decided in 2015.  Two entities will be found to be joint employers where:

  • joint control is exercised;
  • the control has a “direct and immediate” impact on employment terms; and
  • where such control is not merely “limited and routine.”

Franchisers should still be careful when setting up controls over payroll processes or scheduling of employees of franchisees or when they have reserved the right to address discipline with the franchisee’s employees.  The mere fact that an employer reserves the right to weigh in on disciplinary issues will no longer mean that they could be a joint employer.  However, if that right to weigh in on discipline is frequently exercised, then there might be a finding of joint employment.  In other words, wade carefully.

If your franchise–or your franchisees–operate a website that accepts user-generated content, NOW is the time to contact the Copyright Office.

Whether you realize it or not, your website probably accepts user-generated content. Examples of such content include e-commerce websites that accept product reviews, franchise-sponsored blogs that publish user comments on posted articles, and brand fandom sites that permit users to share photos or videos.

It can be very difficult for you to determine whether user-generated content posted to your brand’s website was created by the user who posted it, or whether the content infringes someone else’s copyright.

To protect your brand from being liable for copyright infringement resulting from user-generated content, since 1988 the Digital Millennium Copyright Act (DMCA) has provided a “safe harbor” from liability so long as you follow certain procedures, including:

  • not actually knowing about the infringement;
  • not financially benefiting from the infringement;
  • when gaining knowledge of infringement, acting quickly to remove or disable access to the infringing material; and
  • designating an agent to receive notifications of claimed copyright infringement, and providing the agent’s contact information to the Copyright Office.

As of December 2016, the procedures for designating a DMCA agent changed. Previously, DMCA agent designation was handled by completing a form and filing the form with the Copyright Office with a required filing fee.

Under the new DMCA agent designation procedure, all DMCA agent designations must be done online. Even entities that previously designated an agent must file an online designation to maintain their DMCA designations. Any entity that previously designated an agent with the Office will have until December 31, 2017 to use the online system to update their agent designation. You must create an account on the Copyright Office website and complete the agent designation form online.

The Copyright Office has published several video tutorials to help you understand how to use the new online designation system. Those tutorials are available on the Copyright Office website.

This lightly-edited post was drafted by my partner Jim Singer and originally appeared, in a slightly different form, on the IP Spotlight blog.

A recent decision in the United States District Court of Arizona (“Court”) could have far-reaching consequences to many franchisors based on the broad-sweeping principles the Court used in its reasoning. In Zounds Hearing Franchising, LLC et. al. v. Bower et. al., the Court answered the question of whether the Ohio Business Opportunity Purchasers Protection Act (BOPPA) trumps a choice of law and venue provision that provides for the application of law other than the State of Ohio.

Here, four franchisees filed suit against Zounds Hearing Franchising, LLC and Zounds Hearing, Inc. (collectively, “Zounds”) in the state court of Ohio for failure to comply with the five-day cancellation requirement under the BOPPA. Further, the aggrieved franchisees claim that Zounds made false, misleading and/or inconsistent representations than that contained in its FDD in connection with the sale of its franchises in violation of the BOPPA. Each Franchise Agreement provides that Arizona law governs the interpretation and enforcement of the Franchise Agreement and all disputes are subject to pre-suit mediation (at Zounds’ option) and venue in Arizona. As such, Zounds moved to remove the suits to Ohio federal court, which then transferred the suits to the instant Court.

In analyzing whether BOPPA should trump the provisions of the Franchise Agreement, the Court relied on the rules of the Restatement of Conflict of Laws. Specifically, the law of the state with the “most significant relationship” to the parties shall govern the agreement or, if the parties chose the law of another state, that state’s law shall govern. However, if the choice of law is contrary to a fundamental policy of the state with the most significant relationship, that state will presume to have the materially greater interest in its state law governing the agreement. In holding that Ohio has the most significant relationship to the parties, the Court noted that all of the franchises and franchisees were located in Ohio and it has a strong interest in protecting its residents, particularly where the underlying statute is designed to protect franchisees that are in an inferior bargaining position. Further, Arizona lacks a statute that protects purchasers of franchises, while BOPPA is directly on point to address the franchisees’ purported harm. Essentially, the franchisees would be left with little recourse against Zounds if Arizona law applied.

Further, the Court held that it is difficult to imagine that a statute that makes certain conduct a crime as being anything but the fundamental policy of the state. Additionally, the Ohio legislature amended the BOPPA in 2012 to explicitly state that any venue or choice of law provision that deprives an Ohio resident of protection thereunder is contrary to public policy, void and unenforceable further evidencing its intent. Lastly, the Court went so far as to say that even if a statute does not explicitly outline that it is fundamental policy of that state, a court still could deem it so by its very nature. Further, the lack of a non-waivability term does not doom the statute under this analysis. These principles may open the door to seemingly endless arguments about what constitutes the fundamental policy of a state.

As such, even though the parties agreed to the Arizona choice of law and venue provisions, the application of Arizona law would be contrary to the public policy of Ohio because Arizona does not have a statute that protects the rights of franchisee purchasers as does Ohio. Further, Ohio has a materially greater interest in the enforcement of its law because the franchisees are Ohio residents and the franchises are located therein.

In the alternative, Zounds filed a motion to compel mediation pursuant to the requirement for pre-suit mediation in Arizona in the Franchise Agreement. Here, the Court determined that the pre-suit mediation requirement violated the franchisees’ rights to Ohio venue because the mediation is “intimately bound up” with the franchisees’ right to sue under the BOPPA. Lastly, the Court determined that the mediations for all four franchisees could be joint despite the Franchise Agreement requiring that all proceedings arising out of the Franchise Agreement be decided on an individual basis. Here, the Court held that because pre-suit mediation was a “proceeding” (as argued by Zounds’ counsel), then the BOPPA prohibitions apply to the mediation requirement and the BOPPA specifically prohibits class action waivers. As such, the requirement to conduct pre-suit mediation was void in violation of the BOPPA. However, the parties conceded to conduct mediation during the course of the suit. As such, the Court required that the parties conduct joint pre-suit mediation. To take it a step further, the Court awarded the franchisees their attorneys’ fees because Zounds burdened the franchisees with a multiplicity of actions in a distant forum. Further, the Court cited the unequal provision in the Franchise Agreement that stated Zounds could recover attorneys’ fees upon a successful claim against a franchisee but did not afford franchisees with a reciprocal right. The Court noted that it would be a presumptive abuse of discretion not to award attorneys’ fees against an unsuccessful party who “used its superior bargaining position to impose such a term”.

Overall, this result could have substantial effects to any franchisor that currently has franchises in Ohio or has Arizona law as its choice of law. This decision suggests courts have wide latitude to determine whether another state has a substantial interest in the transaction and whether that state’s law should govern the agreement. Further, it is important to take note of the consequences this has on a franchisor’s ability to enforce non-binding mediation as a preliminary form of dispute resolution (and on an individual basis) and to collect attorneys’ fees (without a corresponding right afforded to the franchisee). Lastly, it would be prudent for all franchisors to review their franchise agreements in light of this decision.

A federal court in Colorado recently upheld a franchisor’s non-competition provision despite that state’s strong public policy against non-competes. The franchisor prevailed due to its thoughtful contract drafting and ability to effectively communicate the unique nature of franchising to the court.

In-home care franchisor Homewatch International, Inc. and its franchisee, Prominent Home Care, Inc., signed a franchise agreement that terminated on June 30, 2016. The next day, Prominent’s sole shareholder and officer (the “Defendant”), started a competing company. Homewatch sued the Defendant for breach of contract, seeking to enforce the non-competition provisions in their agreements.

The Defendant made two arguments in her defense (i) the franchise agreement’s non-competition provision did not bind her because she signed the franchise agreement only in her executive capacity on behalf of Prominent; and (ii) the non-competition provision was unenforceable under Colorado law.

Argument 1:  Parties Bound
The franchise agreement stated that, after the term of the franchise agreement, Prominent and its officers and shareholders could not own or operate a competing business within a twenty-five mile radius of a Homewatch location. Only Prominent (not the Defendant) signed the franchise agreement. However, the franchisor had also required the Defendant to sign a personal guaranty. The guaranty stated that the Defendant would be bound by the non-competition covenant in the franchise agreement.

The court ruled in the franchisor’s favor. It held that the guaranty unambiguously stated that the Defendant—in her individual capacity—would be bound by the franchise agreement’s non-competition provisions.

Argument 2:  Colorado Policy
Colorado law generally disfavors non-competition provisions. One exception to this rule is for a contract for the purchase and sale of a business. This exception promotes the purchase and sale of businesses by protecting the good will of the business being sold (i.e., a purchaser may be less likely to buy a business if it cannot obtain an enforceable non-compete from the prior owner).

Prior to Homewatch, the courts had not definitively decided whether the sale of a franchise qualified for this exception under Colorado law. The Defendant argued that the exception did not apply because the sale of a franchise is not a sale of a business—instead it is the sale of a license to the franchisor’s methods and intellectual property for a certain term.

The court rejected this argument, holding that the exception applied and the non-compete was enforceable. The court concluded that the “good will” rationale was just as important in the franchise context, noting that a significant portion of the value of a franchise system is its good will. (It should be noted, however, that Homewatch is a federal court opinion. A Colorado state court could come to a different conclusion; however, the state court would likely consider the Homewatch rationale in its decision.)

The Takeaways
Franchisors should take note of the Homewatch decision and ensure that their franchisees’ owners and key employees, especially those with access to confidential materials and training, sign non-competes in their individual capacities. This is often addressed in the personal guaranty, as it was in Homewatch. Franchise systems in states that frown upon non-competition provisions should be aware of the Homewatch rationale in the event they need to enforce their non-competes. Franchisors should also make sure to use experienced franchise counsel. In Homewatch, counsel was able to communicate the unique franchise model to the court and to persuasively argue why the court should apply a law that was probably not drafted with franchising in mind. The result was a win for the franchisor and also franchising, which relies on non-competes to mitigate risks inherent in the franchise model.