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.

Many franchisors employ arbitration as its preferred method of dispute resolution.  Generally, courts view arbitration agreements favorably. An agreement to arbitrate waives the fundamental right to have a court decide the merit of their disputes. As such, valid, enforceable arbitration agreements are required to waive this essential right. Two recent decisions highlight the importance of ensuring that a valid agreement to arbitrate exists between the parties.

arbitration agreement
Copyright: designer491 / 123RF Stock Photo

Theo’s Pizza, LLC v. Integrity Brands, LLC

In this case, the franchisee sued the franchisor for violation of the South Carolina Business Opportunity Sales Act and breach of contract. The franchisor sought to dismiss the action because all actions related to the franchise agreement were subject to arbitration (per the Franchise Agreement). The parties entered into a Market Development Agreement under which the franchisor granted franchisee the right to open multiple units. The Market Development Agreement explicitly stated that the parties must execute a separate franchise agreement for each unit. Despite the franchisee opening its first unit, the parties never signed a Franchise Agreement. The Market Development Agreement and Franchise Agreement both contain clauses that require arbitration of all disputes.

The Court held that the claims arose out of the operation the unit, not the Market Development Agreement.  Thus, in the Court’s opinion, there was not an explicit agreement to arbitrate disputes because the parties never signed the Franchise Agreement.  Additionally, the Court refused to impute an agreement to arbitrate where the franchisee had not expressly agreed to one.

Stockade Companies, LLC v. Kelly Restaurant Group, LLC

In this case, the franchisor terminated the Franchise Agreement for failure to pay royalties. The franchisee continued to operate its business after the termination of the Franchise Agreement. Subsequently, the franchisor filed for an injunction against the franchisee for its continued operation of its business. The franchisor argued that the franchisee’s continued operation of the business infringed on franchisor’s trademark rights and violated the post-termination non-competition clause. The franchisee argued that the franchisor was not entitled to an injunction because all actions under the Franchise Agreement must be arbitrated. However, the Franchise Agreement provided that the franchisor may file for injunctive relief where necessary to protect its proprietary marks and other rights or property.

The franchisee argued that the claims fall within the arbitration clause because (a) they are not “actions” within the meaning of the exclusion clause, (b) they are not “necessary” to protect the franchisor’s property, and (c) the exclusion clause is vague and invalid. The Court dismissed each of the franchisee’s arguments noting that the exclusion clause permits the specific action the franchisor took (the filing of a request for injunctive relief). Further, the franchisor’s (i) right to enforce its non-compete protects its property, and (ii) trademark infringement claims protect its proprietary marks. Lastly, the Court noted that the language of the exclusion clause was clear and that the franchisor had carved out its right to seek injunctive relief. As such, the Court held there was no valid agreement to arbitrate the injunction action.

Conclusion

These cases illustrate it is of utmost importance to ensure that your franchise agreements are well-written and explicit when it comes to dispute resolution procedures. Additionally, when entering into a development relationship, a franchisor must ensure that it enters into a separate franchise agreement for each unit so it is bound by those terms. Lastly, a franchisor must ensure that all reserved rights to obtain injunctive relief are clear and conspicuous. While these recommendations are not earth-shattering, these cases are important reminders of the consequences of improper franchise administration and documentation.

This week, the Federal Trade Commission (FTC) updated its guidance for businesses on complying with the Children’s Online Privacy Protection Rule (COPPA) .   If a website operator or operator of online services collects personal information from kids under 13, then the business must comply with COPPA.   The definition of “personal information” is broad and includes a child’s name, voice, address, photo, email address or telephone number.   COPPA encompasses a wide range of activities, including mobile apps and toys or other products connected to the internet.  This means that businesses, including franchised businesses, geared towards selling products or providing services to children are covered by COPPA and must strictly comply with the Rule.

Copyright: jgaunion / 123RF Stock Photo

The FTC now provides new and updated guidance in three main areas:

  1. New Business Models.  The FTC broadens the scope of covered businesses to account for new ways that companies collect data.
  2. New Products.  If your franchise offers and sells a product that connects to internet and collects personal information, including voice recordings or geolocation data, then COPPA applies to your business.
  3. Parent Consent Collection Methods.  One of the main features of COPPA is its requirement that businesses obtain parental consent BEFORE collecting a child’s personal information.  The new guidance discuses two newly-approved methods for getting parental consent: asking knowledge-based authentication questions and using facial recognition to get a match with a verified photo ID.

With technology constantly evolving and the nearly universal collection of personal data by websites and apps (particularly the now frequently common collection of geolocation data), a franchise system providing products or services to children must keep up to date on the FTC’s latest COPPA guidance.  The FTC also provides answers to frequently asked questions about COPPA here or you can email the FTC at coppahotline@ftc.gov.

Employers frequently require employees to sign confidentiality and non-competition agreements.  In most jurisdictions, these agreements are both lawful and prudent provided that they are carefully drafted.

In my practice, I draft confidentiality and non-competition agreements and litigate claims of breaches of those agreements.  In almost every agreement I either draft or review, there is a choice of law provision.  If I am drafting or editing the choice of law section, I do not just randomly select any state or a state that might be more favorable to my clients.  I pick the state that makes sense legally — such as because that is where the company is located or the employee signing the agreement will be working.

Although this is not an example of a choice of law provision that I drafted, it is fairly typical of ones I review:

“This Agreement is governed by, construed, interpreted and enforced in accordance with the substantive laws of the State of New York without regard to conflict or choice of law rules.”

For legalese, this is actually clear and I am sure many of you are wondering what might be wrong with this provision.  The problem with this provision is the last part.

24173069 - read the fine print words in small tiny letters or font typeface under a magnifying glass to illustrate a warning or danger alert to pay close attention to legal disclaimers

Even if a contract has a provision that says it shall be governed by one state’s laws without regard to conflict or choice of law rules, that does not mean a court will blindly enforce that choice.  Often the drafters of these contracts believe that simply because the parties agree to waive any conflict of law rules, that the contract terms will govern.  Instead, in many jurisdictions, the court will disregard these provisions and still independently analyze which state’s law applies.

A recent example of this is the DJR Associates LLC v. Hammond, et al. case in the Northern District of Alabama.  The Court dedicated a significant amount of time to discussing the choice of law provision before partially disregarding it.  I won’t bore you with the details of the court’s reasoning, but do note why this is important for companies.

There are some states that do not allow non-competition agreements at all (I’m talking to you California) and there are other states that will enforce them in only certain limited circumstances. When employers are located in multiple jurisdictions, it is important to know the laws in all of the jurisdictions that could apply in order to try to draft enforceable agreements.

In the DJR case, the court found that part of the agreement was governed by Georgia’s law despite the fact that the agreement stated Alabama’s laws would apply.  Georgia and Alabama’s laws differ on the extent to which an employer can prohibit a former employee from soliciting or accepting business from customers.  Indeed, Georgia law is far more critical of such provisions than is Alabama.  Further, under Georgia law, the court can only “blue-pencil” the agreement to strike the overbroad clause; courts cannot rewrite the provisions to be more narrowly tailored.

Although the Court ultimately found in favor of DJR, it also found that the non-compete provision was void under Georgia law, leaving DJR without an enforceable provision that would prohibit the soliciting of its Georgia customers.  Companies should take this as a lesson to have their counsel do an analysis as to which state’s law applies and to draft non-compete agreements accordingly.

Copyright: byzonda / 123RF Stock Photo
Copyright: byzonda / 123RF Stock Photo

Are you ready for the next frontier in ADA Access Litigation? We invite you to read Part 1 and Part 2 in a series of posts by Fox partner Dori K. Stibolt, regarding the new trend in ADA Title III litigation involving access to the internet for the visually impaired.

Many of these cases have focused on travel, hospitality, restaurant and service companies which necessarily include many companies in the franchise community.  Additionally, claims related to web access for the visually impaired* also implicate the self-serve kiosks which are rapidly becoming popular in many hospitality and service environments.

Become familiar with, and get in front of, this litigation trend so that you provide meaningful access to internet resources for all of your potential customers–and avoid costly litigation as a benefit.

*Self-serve kiosks should also be assessed for compliance with ADA’s 2010 Standards for Accessible Design which includes such issues as clear floor space, location of display screen, reach range of operable parts, etc.  

Copyright: mikkolem / 123RF Stock Photo
Copyright: mikkolem / 123RF Stock Photo

This past Friday, May 12th, ransomware known as WannaCry (also known as WannaCrypt or WCry) spread throughout the world, affecting more than 100,000 systems in 150 countries. Victims of the massive cyberattack included the NHS in the UK, cellular networks in Spain, universities in China and many other large organizations worldwide. For both franchisors and franchisees who are dependent on Windows systems, the attack highlights the significant risks and high costs associated with keeping cybersecurity on the back burner.

Fox partner Mark McCreary provided an update on the attack today on the firm’s Privacy Compliance and Data Security blog, and reflected on its impact after addressing client concerns on Friday and over the weekend.

 

 

Tesla, the electric vehicle automaker, recently lost a round in the Supreme Court of Utah. Tesla set up a wholly-owned subsidiary called “Tesla UT” that was to hold a license to sell Tesla’s cars to the public. The Utah Supreme Court, in a narrow but unanimous decision, held that the arrangement between Tesla and Tesla UT amounted to an illegal automobile franchise under Utah law.

The case turned on a relatively straightforward point of Utah law. To wit, in Utah, automobile manufacturers are prohibited from having a subsidiary obtain a license to sell that manufacturer’s cars. In other words, the statute is written such that an entity independent from the manufacturer must hold the license.

Copyright: michaeljung / 123RF Stock Photo
Copyright: michaeljung / 123RF Stock Photo

Tesla first tried to argue that Tesla UT was not a franchise under Utah auto dealer laws. The Court handily rejected that claim based upon use of trademarks, a community of interests and purpose of the laws. First, despite an explicit disclaimer, the Court concluded that Tesla had in fact licensed Tesla UT to utilize its trademarks. Second, the Court found that there was a community of interests between Tesla and Tesla UT. Specifically, the Court found that they have a joint interest in the sale of Tesla cars. Finally, Tesla argued that the “purpose” of the Utah dealer laws–according to Tesla, the protection of independent franchisees–was not present because Tesla UT is wholly-owned by Tesla. The Court concluded that protection of franchisees was only one purpose of the law and found Tesla’s arguments to the contrary unavailing.

Tesla also advanced constitutional arguments, chief among them that Utah’s automobile dealership laws violated equal protection and due process. The Court rejected the constitutional arguments because it found that the Utah legislature could have a reasonable, rational basis of the enactment of the dealership laws. Importantly, the Court said that Utah’s legislators, in their wisdom, had rationally decided to split the responsibilities between manufacturers and dealers. The Court saw no irrationality with a conclusion that the legislature could decide that locally-owned dealers would likely be more responsive to their customers than a far-off manufacturer.

Whatever you think of Tesla’s efforts to re-imagine how cars are sold in the United States, it is a fascinating story that continues to be told all over the country. Most interesting to me is that old standards of franchise law–things like trademarks and communities of interests–continue to play a key role in the analysis even when the product being sold is a new and 21st century as automobiles that have an “insanity” mode!

Respecting a issue of great importance to the franchise community, Bloomberg Law this morning is reporting that repealing a cap on debit card transaction fees is the only issue holding up an otherwise unified Republican bill to revamp and largely repeal the Dodd-Frank Act, the Financial CHOICE Act of 2017.

Copyright: leaf / 123RF Stock Photo
Copyright: leaf / 123RF Stock Photo

Chairman Jeb Hensarling (R-Texas) told Bloomberg that the cap on debit card transaction fees is the “single most contentious portion” of the repeal bill.  The cap, also known as the Durbin Amendment, has many supporters in the retail industry. Retail believes that the fee caps promote competition and save customers money. Banks, the entities on the other side of this debate, want to repeal the Durbin Amendment.  Banks contend that the fee caps have cost them money while merchants have pocketed the savings and not passed them onto customers.

Like aspects of the fight to repeal the Affordable Care Act, repeal of the debit card transaction fee issue is one that splits Republicans yet leaves Democrats–who generally want the Durbin Amendment to remain in place–unified. Hensarling and his top lieutenants support repeal. Other top Republicans like Rep Dennis Ross (R-Fla.) support the Durbin Amendment’s caps because they believe the fees saved encourages employment growth at small businesses.  Consequently, getting to a unified Republican position on debit card fees is essential to getting the Financial CHOICE Act–a top priority of Congressional Republicans and the Trump White House–out of committee and onto the House Floor.

If you are interested in the issue of debit card transaction fees–and, if you are reading this, you probably are–now is the time to call or, better yet, write, your Congressperson and express your opinion.

Safe Step Walk In Tub Co. (“Safe Step”) failed to take the requisite “safe steps” before potentially becoming an accidental franchisor. In Safe Step Walk In Tub Co. v. CKH Industries, Inc., Safe Step filed an action against a licensee, CKH Industries, Inc. (“CKH”) for breach of contract for non-payment of certain fees. CKH filed 22 counter-claims against Safe Step including violation of the Federal Trade Commission Rule on Franchising (“FTC Rule”) as well as the state franchise laws of Connecticut, New Jersey, New York and Rhode Island for illegal franchise sales and wrongful termination of the franchise relationship. Safe Step filed a motion to dismiss CKH’s counter-claims and the Court denied that motion (in part) as further outlined below.

Under the terms of the applicable licensing agreements, CKH is the exclusive licensee permitted to market the Safe Step products in designated regions. Additionally, CKH was required to pay Safe Step a licensing fee. Lastly, there were certain addenda to the licensing agreements that regulated CKH’s business plan. Specifically, Safe Step assisted CKH with a marketing plan and could makes changes to CKH’s business model. Further, the agreements forbid CKH from offering competitive products and allowed Safe Step to terminate the licensing agreements if CKH failed to complete certain training programs.

Copyright: iimages / 123RF Stock Photo
Copyright: iimages / 123RF Stock Photo

When examining whether a franchise relationship had been formed, the Court first looked to the FTC Rule. The FTC Rule of course defines a franchise as an arrangement where the franchisee obtains the right to use the franchisor’s mark, the franchisor exerts a significant degree of control over the operation of the business, and the franchisee pays the franchisor a non-nominal fee. Here, the Court easily determined that the licensing agreements fulfilled the first and third prongs of the test because Safe Step permitted CKH to offer products under Safe Step’s marks and CKH paid Safe Step a licensing fee. Additionally, the Court held that Safe Step’s alleged involvement in the business outlined in the paragraph above may rise to the requisite level of “significant degree of control”. Further, as have many courts before it, the Court noted that it did not matter that Safe Step called the arrangement a licensing agreement.

The Court then examined the state franchise laws. The definition of a franchise under each state law is similar to the definition under the FTC Rule except that the state laws are more specific with respect to the “significant degree of control” aspect of the test. Under each state law (except for New York where the statute of limitations had already run on certain of its counter-claims), CKH had proffered enough facts to argue that its Safe-Step related operations qualified as franchises.

The outcome of this case is another cautionary tale for those companies that are structuring licensing arrangements to avoid complying with federal and state franchise laws. It is important to examine federal law and each state’s law to make sure you are taking the “safe steps” to prevent the accidental franchise relationship. As this blog has often noted, many people, including otherwise experienced business lawyers unfamiliar with franchise law, are unaware of how easy it is to form a franchise relationship under federal law and many state laws.