From our Family to Yours, all of the Franchise and Distribution attorneys of Fox Rothschild send to you the warmest Thanksgiving wishes. We are most thankful for our franchise friends and clients, and wish them every continued success.
The Trump administration is moving forward with an Obama-era initiative requiring certain food establishments to list calorie information on menus and menu boards, including food on display and self-service food. The FDA recently released new draft recommendations to help affected businesses comply with the menu labeling rule.
The rule implements the nutrition labeling provisions of the Patient Protection and Affordable Care Act of 2010, which are intended to give consumers direct, point-of-purchase access to nutritional information, including the calorie content of foods. When the rule was originally published, we blogged about its impact on restaurants and followed up with a report on the Small Entity Compliance Guide, which explains the rule’s requirements in a question/answer format.
The rule has met stiff opposition and enforcement has been delayed multiple times. Most recently, just four days shy of implementation, the deadline for compliance was extended to May 7, 2018. The extension was intended to give the FDA time to consider how to reduce the rule’s regulatory burden and increase flexibility, while providing consumers with nutritional information.
The FDA’s recent guidance is non-binding and addresses stakeholder concerns regarding implementation of the rule, including:
- Clarifying calorie disclosure requirements for self-service food, including buffets and grab-and-go food;
- Addressing the need for flexible methods to provide calorie disclosure information;
- Explaining the criteria for distinguishing between menus and marketing materials;
- Addressing how the FDA will assist covered establishments to comply with the rule, and how it will enforce compliance;
- Expanding upon the “reasonable basis” standard that covered establishments must meet when disclosing nutritional information; and
- Explaining the criteria for determining whether establishments (including franchises) and menu items are subject to the rule.
The FDA invites public comment on the draft guidelines through January 8, 2018. We will continue to monitor developments and the rule’s effect on franchise systems.
The intersection of franchise law and general corporate law is extensive. A recent decision in the Michigan Court of Appeals (Court) highlights the importance of thoroughly understanding and considering the ramifications of transactions involving both spheres of law.
In Retail Works Funding LLC v. Tubby’s Sub Shops Inc. and JB Development LLC, the plaintiff (Plaintiff) brought suit against each defendant (Tubby’s and JBD or collectively, the Defendants) after JBD purchased the rights and goodwill to the service mark JUST BAKED (Mark) from Just Baked Shop LLC (JBS). Prior to that, Plaintiff obtained a judgment against JBS for over $184,000.
In this suit, Plaintiff claims that JBD should be liable for Plaintiff’s judgment under a successor liability theory because JBD is a mere continuation of the Just Baked system by carrying Just Baked products in its stores and offering franchises. Further, Plaintiff argued that JBD held itself out to the public in news articles as having merged with JBS. Defendants argued that JBD only purchased the rights to one asset of the Just Baked business, the Mark, and did not agree to take on any its liabilities as supported by the language of the Service Mark Purchase Agreement.
As was the case here, when assets of a business are purchased with cash and not stock, the successor is generally not liable for the predecessor’s liabilities unless an exception to the rule applies. In holding for the Defendants, the Court determined that none of the three exceptions to successor liability argued by Plaintiff applied to the case at hand. First, the instant case did not constitute a “de facto merger” because JBD purchased the Mark for cash. Second, JBD was not a “mere continuation” of the former Just Baked business because Plaintiff failed to provide any evidence of common ownership between the entities or that JBD acquired substantially all of the assets of JBS. Lastly, the “continuity of enterprise” exception did not apply because judgment creditors cannot rely upon it. As such, the Court held that the Defendants were not liable for the judgment against JBS.
If the deal to purchase the Mark had been structured in a different way, there is a chance that the Defendants would have been held liable for the Plaintiff’s judgment against JBS. As such, a franchisor (and its counsel) must evaluate how a transaction will effect multiple areas of law and ensure adequate protection from adverse consequences in each area.
As cyber scams become more widespread and sophisticated, social engineering fraud is quickly turning into one of the most popular way for a thief to rip-off a company using computers. Every franchise system should be asking itself and its franchisees “do we/you have insurance coverage to protect against these losses?” In most cases, the answer is No!
“Social Engineering Fraud” are schemes that mislead and deceive victims (typically a company employee) into transferring funds or divulging confidential information to a fraudster. The difference between social engineering theft techniques and other types of cyber attacks is that the victim voluntarily performs the acts of transferring the funds or providing the information. For example, a fraudster may send an email to someone in a human resource department posing as the company’s accountant and request social security numbers and tax information of employees. The unwitting HR employee does not think twice and quickly compiles the information and hits reply. In other cases, an employee in accounting is tricked into sending a payment to a “vendor” of the company which turns out to be a scammer.
Many companies incorrectly assume that these types of losses are covered under a standard cyber liability policy or crime policy. However, most crime and cyber policies require a computer hack or active invasion of a computer system by a criminal to trigger coverage under a policy. Insurance carriers argue that there was no “direct” fraud. This is becoming a huge gap in coverage for franchisors and franchisees as insurance carriers are denying coverage for these claims and winning coverage disputes.
All hope is not lost. Many insurance carriers offer endorsements to either a company’s crime policy and/or cyber policy for social engineering theft losses. The coverage under the endorsement is often sub-limited and may have a higher deductible but it is better than no coverage at all. Before a loss effects your system, franchisors should do the following:
- Ensure that social engineering fraud coverage is clearly part of the franchise system’s crime or cyber policy.
- Modify insurance requirements for franchisees to mandate coverage for social engineering fraud claims.
- Keep in touch regularly with your broker and insurance counsel to make sure your insurance is covering new risks as they arise.
- Educate your employees on spotting potential scams. Many brokers and insurance counsels even offer data security training for clients at reasonable rates. It is a good place to start.
The U.S. House Committee on Education and the Workforce recently approved the “Save Local Business Act” (HR 3441 – Byrne). If enacted, the Act would limit joint employer liability by reversing the rule announced by the NLRB in Browning-Ferris Industries, 362 NLRB No. 186. The Browning-Ferris decision departed from 30 years of precedent by issuing a new joint employer test with significant ramifications for the franchise model. Under Browning-Ferris, a company (e.g., a franchisor) that has “indirect” or “potential” control over the employees of another company (e.g., a franchisee) may be considered a joint employer of those employees. The decision significantly expanded franchisors’ potential liability for matters related to their franchisees’ employees (including collective bargaining and employment torts). Browning-Ferris is currently on appeal before the D.C. Circuit Court of Appeals.
The Save Local Business Act would amend the National Labor Relations Act and Fair Labor Standards Act to clarify that a person or company is a joint employer only if it “directly, actually, and immediately, and not in a limited and routine manner, exercises significant control over the essential terms and conditions of employment.” Essential terms and conditions include hiring employees, discharging employees, determining individual employee rates of pay and benefits, day-to-day supervision of employees, assigning individual work schedules, positions, and tasks, and administering employee discipline.
During its hearings, the Committee heard from franchise owners who described the impact of the Browning-Ferris rule on their business operations. Many legislators have specifically cited the franchise industry in announcing their support for the Act. The Act’s passage would be a major win for the franchise model, which has been plagued with uncertainty over joint employer liability since the Browning-Ferris decision.
A recent decision by the Ninth Circuit Court of Appeals (Court) in Marsh v. J. Alexander’s throws a wrench into the equation with respect to the guidance on the tip-credit provision of the Fair Labor Standards Act (FLSA) promulgated by the Department of Labor (DOL).
The nine consolidated cases at issue were brought by servers/bartenders against their former employers. Each employee claimed that his respective employer violated the tip-credit provision of the FLSA. The applicable provision of the FLSA provides, in part, that an employer may claim a credit towards minimum wage where that employee is in an occupation where he customarily and regularly receives more than $30 a month in tips. Further, if an employee is employed in dual jobs, the employer can only claim the tip credit for the employee’s hours of employment in his tipped position. However, even if an employee is performing additional duties related to the tipped occupation, the completion of these tasks alone does not mean the employee has dual jobs.
Confusion around this regulation stems from establishing a threshold of when a server completing multiple related tasks while still serving becomes employed in dual jobs. In response, the DOL issued its guidance on this regulation in the Field Operations Handbook (FOH). Specifically, this guidance states that the employer cannot use the tip-credit provision where the employee spends more than twenty percent of his time performing any “related duties” or where the employee is completing tasks that are unrelated to the tipped occupation.
Each employee argued that his respective employer improperly applied the tip-credit provision of the FLSA because the employer forced each to complete either too many “related duties” or tasks unrelated to the tipped occupation. These duties included brewing tea and coffee, stocking lemons and limes, cleaning soft drink dispensers, stocking ice and cleaning tables.
In its decision, the Court held that the DOL’s guidance outlined in the FOH did not deserve controlling deference. This interpretation was an attempt to create a de facto regulation and was inconsistent with the language of the FLSA. The Court noted that the guidance in the FOH tried to parse out three separate categories of duties within a single occupation. Further, the DOL should, in the Court’s mind, focus on the circumstances when an employee was employed in two occupations as is expressly contemplated by the FLSA.
In effect, the Court concluded, the guidance in the FOH created an alternative regulatory approach with new substantive rules. The Court held that an employee cannot rely on the aggregate amount of time he performed “related duties” intermittently with the duties directly related to the tipped occupation to argue that he held dual jobs. This decision is in direct conflict with the Eighth Circuit Court of Appeals, which gave deference to the guidance in the FOH. As such, the Court remanded the case to allow the employees to amend their pleadings in light of its decision. As similar cases arise in various circuits across the United States, the DOL’s response to the decision will likely be guided by whether other circuits give deference to such guidance. Further, it is important for business owners to keep apprised of whether the FOH guidance is the law of their land as the case law further develops.
The U.S. Court of Appeals for the Third Circuit upheld a New Jersey district court’s decision that 7-Eleven did not violate the New Jersey Franchise Practices Act (NJFPA) after the franchisor terminated a New Jersey multi-unit franchisee for breaching its franchise agreements. This is a win for 7-Eleven as well as any franchise system operating in New Jersey as the case affirms that the implied covenant of good faith and fair dealing cannot override an express term in a contract.
Problems with the multi-unit franchise operator, Karamjeet Sodhi, started in 2011 when 7-Eleven performed an audit of the franchisee’s stores. 7-Eleven uncovered several violations of the franchise agreement, including the failure to report sales, failure to withhold income taxes and using the proceeds from the sales to pay undocumented workers. After providing notices of the default to the franchisee, 7-Eleven brought an action seeking declaratory relief that it properly terminated the franchise agreements for cause. The defendants counterclaimed alleging violations of the NJFPA, breach of the implied covenant of good faith and fair dealing, violations of the Fair Labor Standards Act, and violations of the New Jersey Law Against Discrimination.
The district court granted 7-Eleven’s motion for summary judgment on the franchisee’s counterclaims as well as its claim for declaratory judgment that 7-Eleven properly terminated the franchise agreements. We blogged on that decision last year. The franchisee appealed. On appeal, the franchisee argued that 7-Eleven breached the parties’ implied covenant of good faith and fair dealing by targeting his stores for closure because he was a vocal critic of 7-Eleven’s franchise management methods. However, the franchisee did not dispute he breached the franchise agreement. He also failed to present any evidence that he cured the defaults. Therefore, the Third Circuit held that 7-Eleven had good cause to terminate the franchise agreements regardless of its motivation and affirmed the lower court’s decision.
It is important franchisors always act in good faith when enforcing obligations and duties under agreements with franchisees. This is not only a legal obligation but also just good business. However, this case reassures franchise systems that when a franchise fails to uphold its end of the bargain, the New Jersey courts will enforce default and termination provisions as written.
Another case has been decided adding to the back and forth in the legal world on the issues of a joint employer relationship of a franchisor and its franchisee and vicarious liability and agency between a franchisor and franchisee.
In Harris v. Midas, (2017 WL 3440693 (W.D. Pa. Aug. 10 2017)) a federal court in Pennsylvania dismissed an auto repair service franchisor from a sexual harassment case brought by a former employee of one of its franchisees. The plaintiff alleged multiple and continuing acts of sexual, emotional and physical harassment against multiple managers of the franchisee. The plaintiff sued the franchisor, Midas, under theories of joint employment, agency and vicarious liability. In particular, for the joint employment claim, they relied on Myers v. Garfield & Johnson Enters, Inc., 679 F. Supp. 2d 598 (E.D. Pa. 2010) where the Third Circuit stated that “a joint employer relationship may exist for the purposes of Title VII when two entities exercise significant control over the same employee.”
The Harris court went through a detailed analysis of various aspects of control in an employment situation which had been used by district courts within their circuit and found them to be lacking. In this case, the court stated that the plaintiff did not plead facts sufficient to support that the franchisor “had any authority to: hire or fire her [the plaintiff], promulgate work assignments, control her compensation, benefits, or hours, supervise her day-to-day work, discipline her, pay her salary, or manage her employee records.” This lead the court to believe that the local franchisee company retained almost all control over her employment and to reject the claim of joint employment.
The court followed a somewhat similar analysis for the agency and vicarious liability claims. In this analysis, the parties agreed that the issue is whether a franchisor exercised control over the franchisee’s business operations.
In discussing the case Drexel v. Union Prescription Centers, Inc. , 582 F.2d 781 (3d. Cir. 1978), the court pointed to the differentiation between controls that led to a legitimate agency/vicarious liability relationship and those that “evidence [the franchisor’s} concern with the ‘result’ of the store’s operation rather than the ’means’ by which it was operated.” The court did acknowledge and allow for many of the usual controls exercised by a franchisor and the absence of daily control led them to rule that the plaintiff failed to allege a claim for agency or vicarious liability.
Just four days shy of the enforcement deadline, the FDA extended the date for restaurants and similar retail food establishments to comply with its menu labeling rule. The rule was originally published on December 1, 2014 and requires certain food establishments to list calorie information on menus and menu boards, including food on display and self-service food (the “Rule”). Enforcement was delayed multiple times, and the Rule was slated to go into effect on May 5, 2017. On May 1, 2017, the FDA extended the compliance deadline to May 7, 2018.
The Rule implements the nutrition labeling provisions of the Patient Protection and Affordable Care Act of 2010, which is intended to give consumers direct, point-of-purchase access to nutritional information, including the calorie content of foods. When the Rule was published, we blogged about the Rule’s impact on restaurants and vending machines. We’ve also reported on topics covered in the FDA’s Small Entity Compliance Guide, which restates the Rule’s requirements in plain language in a helpful question/answer format.
Intense lobbying in the final days before the compliance deadline prompted the FDA to again extend the Rule’s implementation. In the meantime, the FDA will consider how to reduce the Rule’s regulatory burden or increase flexibility, while continuing to provide consumers with sufficient nutrition information to make informed choices. The FDA has requested comment over the next 60 days, specifically inviting feedback with respect to:
- Calorie disclosure for signage for self-service foods, including buffets and grab-and-go foods;
- Methods for providing calorie disclosure information other than on the menu itself, including how different kinds of retailers might use different methods; and
- Criteria for distinguishing between menus and other information presented to the consumer.
We will continue to monitor the Rule’s progress and its potential effect on franchisors and franchisees.
If a franchisor waives the non-compete provision in its current franchise agreement, can it enforce a non-compete when the franchise agreement is renewed? According to a recent decision by the 9th Circuit Court of Appeals, the answer is yes, and franchisors should consider a few key lessons from the decision. Robinson, DVM v. Charter Practices International, LLC, No. 15-35356 (June 21, 2017).
In Robinson, a franchisee sued its franchisor for breach of contract and other claims when the franchisor refused to renew their franchise agreement for a veterinary hospital franchise. During the term of the original franchise agreement, the franchisee owned and operated independent veterinary clinics that competed with the franchise. The franchisor did not enforce the non-competition provision in the original franchise agreement. However, when it came time for renewal, the franchisor notified the franchisee that it would enforce the non-compete under the renewal agreement and gave the franchisee an opportunity to disinvest from his independent clinics. The franchisee refused, and the parties did not renew the franchise agreement. The franchisee sued the franchisor alleging improper refusal to renew under Oregon law.
The district court dismissed the franchisee’s claims and the 9th Circuit affirmed. The court’s decision holds three important lessons:
- The renewal provision specifically allowed the franchisor not to renew the original franchise agreement unless the franchisee complied with the non-competition provision in the renewal agreement. Renewal provisions typically (and should) include general language requiring the franchisee to acknowledge it will be bound by the new franchise agreement. However, it is often wise to specifically reference sensitive provisions, including non-competes and other restrictive covenants and confidentiality provisions.
- The renewal provision in the original franchise agreement stated that the renewal agreement would be substantially similar to the franchisor’s then-current form of franchise agreement. It made clear that the terms could differ from the original franchise agreement. This language highlighted that the original agreement and renewal agreement were different contracts. The court used concluded that the waiver of the non-compete under the original franchise agreement did not carry over into the renewal agreement.
- The franchisor provided notice to the franchisee that it intended to enforce the non-competition provision, and it gave the franchisee an opportunity to disinvest. The franchisee argued that he and the franchisor had a “course of conduct” that permitted him to compete. According to the court, the franchisor’s notice disrupted this course of conduct, and therefore the waiver under the original franchise agreement did not apply to the new agreement.
Franchisors (especially emerging franchisors) may find it necessary to waive provisions in their form of franchise agreement to close the deal with a prospect. While this may make sound business sense at one point in time, it can chafe down the road. As Robinson shows, a carefully drafted renewal provision and notice may provide an escape hatch in certain situations.