Copyright: goldfinch4ever / 123RF Stock Photo
Copyright: goldfinch4ever / 123RF Stock Photo

Following on the heels of other states, Republicans in the Virginia House of Delegates have pre-filed a bill intended to override any action by the U.S. Department of Labor to make the employees of a franchisee also employees of the franchisor.  The bill is House Bill No. 1394 for the January 2017 General Assembly legislative session.  A very similar bill was vetoed by Governor Terry McAuliffe during the 2016 session.  Virginia Republicans are hoping to gain the support of enough delegates to override a potential future veto.

Similar to other states, the legislation clarifies that an employee, for purposes of Virginia labor law, is not an employee of a franchisee’s franchisor.  The following additional language proposed is added to the definition of “Employee”:  “Notwithstanding any voluntary agreement entered into between the U.S. Department of Labor and a franchisee, neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisee’s franchisor for any purpose to which this section applies.

Delegate Chris Head, who introduced the legislation, states “Small businesses are the backbone and lifeblood of our economy.  In recent years, President Obama’s National Labor Relations Board has sought to expand the influence of labor unions over small business franchises to the detriment of their hard working employees. This legislation protects employees from the overreaching federal government and overzealous labor unions.  This bill is consistent with Virginia’s proud history as a right-to-work state.”

For more information, I recommend the following Bloomberg podcast interviewing Bloomberg BNA Capital Hill reporter Chris Opfer.

If your brand standards require franchisees to upgrade and improve their locations, a recent federal case demonstrates how thoughtful disclaimers and disclosures can shut down a franchisee lawsuit in its early stages. 

In Devayatan, LLC v. Travelodge Hotels, Inc., a franchisor terminated a franchise agreement due to the franchisee’s alleged failure to improve and maintain a hotel in accordance with brand standards.  No. 6:14-cv-561-Orl-41TBS (June 24, 2016 M.D. Fla.).  The franchisee filed suit, alleging the franchisor negligently misrepresented the amount of required repairs and violated Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”).  Citing the franchisor’s multi-pronged disclosure of the franchisee’s improvement and maintenance obligations, the Court granted the franchisor’s motion for summary judgment, stopping the franchisee’s claims short of trial.

In Devayatan, a franchisee signed a franchise agreement with hotel franchisor Travelodge Hotels, Inc. (“THI”).  A prior franchisee had been operating the hotel under a franchise agreement with THI, but the hotel was in a state of disrepair and the prior franchisee was in default of its maintenance obligations.

THI put the new franchisee on notice that it would be responsible for bringing the hotel up to brand standards.  The franchise disclosure document estimated the initial investment ranged from $177K to $1.4M, depending on the condition of the property.  The franchise agreement also provided a “punch list” of items that were not in compliance with brand standards.

When the real list of repairs far exceeded the punch list (including curing multiple legal violations), the franchisee cried foul.  The franchisee claimed that the franchisor negligently misrepresented that the punch list was a complete list of required improvements.  However, the negligent misrepresentation claim required “justifiable reliance” on an incorrect statement and the FDUTPA claim required statements that were “likely to mislead.”  Thanks to thoughtful drafting, both claims missed the mark.

Several features of the FDD and franchise agreement proved valuable in defeating the franchisee’s legal claims:

  • First, the FDD disclosed a broad range of possible initial investments, and indicted that the range was based on the condition of the property.
  • Second, the franchise agreement clearly indicated that the punch list was based on a “random sample inspection” and did not purport to be a complete list based on a full inspection.
  • Third, the punch list explained that the franchisee was “responsible for ensuring that the hotel was in compliance with all applicable federal, state and local laws, codes, ordinances and regulations.” The punch list explicitly stated that such renovations were not included.

2528605_sThus, the court found the franchisee unreasonably assumed that the punch list was a complete list of repairs and that the franchisor’s statements were not likely to mislead.

Franchisors often require franchised locations to be improved and maintained according to continually evolving brand standards.  Franchisors may find it beneficial to provide a punch list of repairs or other assistance the help franchisees to meet their obligations.  However, franchisors should take care that their good deed is not punished.  Devayatan provides a few lessons:

  1. FDDs and franchise agreements should clearly state and disclose franchisee’s obligations to improve and maintain their locations and, where appropriate, disclose the amount or range of amounts for such expenses.
  2. Punch lists or similar documents should not attempt to list every single repair and improvement. Doing so may require a franchisor to bear the burden of inspection and assume the risk of any issues not included.  Any such list should clearly state that it is not a complete list.
  3. Franchisees often assume the responsibility of complying with federal, state and local laws and ordinances. If this is the case, a list of improvements and maintenance should explicitly state that it does not include renovations required for such compliance.

Unfortunately, proper disclaimers and disclosures can only make a lawsuit less likely, not prevent it altogether.  But they may help achieve dismissal in the early stages of a lawsuit, saving the money and time that would otherwise be spent at trial or in settlement.

Franchisors offering and selling franchises in Rhode Island should take note of recent amendments to Rhode Island’s Franchise Investment Act:

Disclosure Requirements

Franchisors must now provide prospects with an FDD at least 14 calendar days before the execution of an agreement or the payment of any consideration related to the franchise.  “Calendar days” include all days of the week, including weekends. The amendments delete Rhode Island’s prior requirement that franchisors provide an FDD in advance of the first meeting to discuss a franchise sale.

Advertising Requirements

Franchisors must now retain any advertising that offers to sell a franchise for 5 years (if the franchise is required to register under Rhode Island law).  The amendments delete Rhode Island’s prior requirement to file advertising with the state at least 5 days prior to its first publication.

 

Copyright: qvist / 123RF Stock Photo
Copyright: qvist / 123RF Stock Photo

The headlines regarding data hacks of the last two months from both the business world and presidential campaigns remind us that our data security is constantly under attack. Whatever you think of the campaigns this year, you need to resign yourself to the fact is that you are almost certainly going to be hacked.

I am not suggesting you should forget about electronic walls or moats or fences. You’d be foolish not to have them. But the number one thing to remember is this: 100 percent deterrence is practically impossible to come by, unless you want to unplug yourself from the web entirely. And that’s not realistic.

Because I thought they are again timely, following are a couple of observations I made about the alternative strategy of containment several months ago:

  1. Acknowledge that, while necessary, security walls and other deterrence measures are highly unlikely to be 100% effective at defeating determined hackers.
  2. Admit to yourself that breaches will occur.
  3. Have two plans in place: one for before the hack and one for after the hack.
  4. The “before” plan should include a detailed review of what data is stored on your systems and where is it stored. Map it out so you know. Also, take a hard look to see if you really need all of the data being stored. As storage has become cheaper, more and more data is being stored for longer and longer periods of time. Importantly, conduct a review with all of your vendors. In many of the high profile breaches of the last three years, vendors’ systems were used as a “back door” into the primary target.
  5. The “after” plan is what to do after you learn of a hack. This means having your IT, insurance, PR, marketing and legal team, and response plans, in place. Getting in front of the breach is essential. You want to reassure your customers and, if a franchisor, your franchisees, that you are putting their interests first.

Now is the time to develop your plans. Customer loyalty depends upon your preparation.

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.

Copyright: mipan / 123RF Stock Photo
Copyright: mipan / 123RF Stock Photo

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.

Copyright: msheldrake / 123RF Stock Photo
Copyright: msheldrake / 123RF Stock Photo

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.

Copyright: eintracht / 123RF Stock Photo
Copyright: eintracht / 123RF Stock Photo

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…

Copyright: zavgsg / 123RF Stock Photo
Copyright: zavgsg / 123RF Stock Photo

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.

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.
Copyright: photoncatcher / 123RF Stock Photo
Copyright: photoncatcher / 123RF Stock Photo

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.”