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.

Copyright: bluedarkat / 123RF Stock Photo
Copyright: bluedarkat / 123RF Stock Photo

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:

  1. Calorie disclosure for signage for self-service foods, including buffets and grab-and-go foods;
  2. Methods for providing calorie disclosure information other than on the menu itself, including how different kinds of retailers might use different methods; and
  3. 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:

  1. 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.
  2. 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.
  3. 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.

A recent decision by the Wisconsin Supreme Court (“Court”) has potentially far-reaching consequences for municipalities and how they conduct certain business. In Benson v. City of Madison, the Court analyzed whether the Wisconsin Fair Dealership Law (“WFDL”) applied to the arrangement between the City of Madison (“City”) and multiple entities, collectively (“Golf Pros”).

The City entered into contracts with Golf Pros to operate, manage and provide certain services at the golf courses owned by the City. The City paid Golf Pros a set fee for its services plus a portion of the additional revenue Golf Pros collected at the golf courses. Both the circuit court and court of appeals sided with the City and held that the parties did not have a dealership that fell within the definition of the WFDL.

The Court first examined whether the City was a “person” under the WFDL. In the WFDL, a “person” is defined as a “natural person, joint venture, corporation or other entity.” Here, the Court held that upon a plain reading of the statute, the City is a municipal corporation, which specifically falls within the “person” definition. As such, the City is subject to the WFDL if its arrangement constitutes a dealership. The Court also held the City could not avoid this designation by including language in the contract that expressly stated it was not subject to the terms of the WFDL.

Under the WFDL, a dealership has three distinct elements, which include a (1) contractual agreement, (2) that grants the right to sell or distribute goods or services, and (3) has the requisite “community of interest.” The Court held that it is undisputed that there is a contractual agreement between the parties. In holding that the provision of access to the golf courses was a “service”, the Court noted that the City expended time and effort to produce the golf course for public use and the public paid the City for the use of golf course, which fulfilled the definition of a “service”. Further, the City granted Golf Pros the right to sell this “service” to the public. As such, the dealership arrangement fulfilled the second prong of the rule.

In determining whether a “community of interest” existed, the Court held that two factors must be present, namely, (1) a shared financial interest, and (2) cooperation and coordination of the parties’ activities and shared common goals in the relationship. The Court held that a “community of interest” existed between the parties because the parties coordinated in the completion of the duties to operate the golf courses (common goal) and each party benefited from the revenue earned from such coordination (shared financial interest). As such, the Court reversed the prior courts’ decisions and held that the dealership arrangement was subject to the WFDL. Of further note, two of the Court’s justices wrote a lengthy dissenting opinion that focused on the issue of whether the City was a “person” under the WFDL. The dissenting opinion outlined several interpretive rules that all pointed to agreement with the court of appeals’ decision that the City is not a “person” under the WFDL.

With the WFDL being one of the oldest dealership laws and consistently used as a guidepost for other states in the interpretation of their own dealership laws, it will be notable to see if other states take Wisconsin’s lead. It will be especially telling given the extensive dissenting opinion. If this decision stands, it is extremely important to ensure that an entity structures its arrangements appropriately if they want to avoid being subject to the restrictions of various state dealership laws.

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.