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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Menu and chef
Copyright: yarruta / 123RF Stock Photo

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 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).

25151637 – tip jar with british currency and label saying thank you

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.

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.

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.

 

 

Menu and chef
Copyright: yarruta / 123RF Stock Photo

Over two years ago, on December 1, 2014, the U.S. Food and Drug Administration (“FDA”) published a food labeling rule requiring “chain” restaurants and similar retail food establishments to list calorie information on menus and menu boards, including food on display and self-service food (the “Rule”). On May 5, 2017, the FDA will begin enforcing the Rule. Businesses covered by the Rule must be in compliance by May 5, 2017.

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.

Who does the Rule apply to?

The Rule applies to any chain and franchised food business which meets the following criteria:

  1. It is part of a system with 20 or more locations;
  2. All of the restaurants or food establishments in the chain do business under the same name; and
  3. All of the restaurants in the chain offer for sale substantially the same restaurant-type food menu items.

What must covered businesses do?

Covered businesses are required to determine and disclose to consumers the nutritional content of the food they serve, including by:

  1. Disclosing calorie information on menus and menu boards for standard menu items;
  2. Posting a succinct statement concerning suggested daily caloric intake on menus and menu boards; and
  3. Posting on menus and menu boards a statement that written nutrition information is available upon request.

The Rule was originally slated to come online on December 1, 2015. In response to multiple requests from stakeholders to give businesses more time to comply, the FDA extended the compliance deadline until December 1, 2016. However, per applicable law, the Rule could not be enforced until one year after the FDA published a Level 1 guidance with respect to nutrition labeling of standard menu items. The FDA did so on May 5, 2016, extending the enforcement deadline until May 5, 2017. Recently, the FDA made clear that May 5, 2017 was the deadline for both compliance and enforcement 017.

In addition to the Rule itself, food establishments affected by the Rule should review the FDA’s Small Entity Compliance Guide, which restates the Rule’s requirements in plain language. The Guide is organized in a question/answer format. We’ve previously blogged in detail on the Guide, which includes information on multiple topics, including:

  • What establishments the Rule does and does not cover;
  • What types of food the Rule does and does not cover;
  • How to label menus and other displays with nutritional information; and
  • How to determine nutritional content of foods, including how to substantiate menu labels to the FDA.

Additional industry guidance is also available at the FDA’s website.

The Rule is highly detailed and includes requirements for restaurants to substantiate their nutritional information claims and clarifies how the Rule will be enforced. Experienced counsel can help businesses understand whether they are affected and, if so, how best to satisfy the new standards.

Many franchisors have experience with the U.S. Small Business Association (“SBA”) as numerous franchisees utilize the SBA’s loan programs for small businesses. Previously, franchisors could send an application to the SBA to get on the Franchise Registry. During this process, the SBA reviewed the franchise agreement and drafted an addendum to revise the franchise agreement to avoid inclusion under the SBA’s “affiliation” rule (“SBA Negotiated Addendum”). This process was time-consuming and costly to all parties involved.

On November 22, 2016, the SBA issued an information notice to streamline the process for loan programs for franchised businesses (“Information Notice.”) The Information Notice became effective January 1, 2017. First, the SBA announced a revision to the principles of affiliation with respect to franchise programs. The SBA now focuses on whether the franchisee “has the right to profit from its efforts and bears the risk of loss commensurate with ownership.” 13 CFR 121.301(f)(5). This is the key factor in ensuring that the franchisee maintains its eligibility status as a “small business” .

Copyright: belchonock / 123RF Stock Photo
Copyright: belchonock / 123RF Stock Photo

In the Information Notice, the SBA stated that it would no longer review franchise agreements. Instead, the parties falling under the definition of a “franchise” (under the FTC Rule on Franchising) would be required to execute the new standard addendum (“SBA Standard Addendum”). Further, the SBA removed the Franchise Registry and SBA Franchise Findings List.

On February 14, 2017, the SBA issued a new policy notice outlining temporary changes to the new process for loans to franchisees (“Policy Notice”). Specifically, if a franchisor developed a SBA Negotiated Addendum with the SBA during 2015 or 2016, the franchisor can continue using that form of SBA Negotiated Addendum instead of the new SBA Standard Addendum. With that, the franchisor also has to sign the required form of certification (“Certification”), which is attached to the Policy Notice. The Certification certifies, among other things, that the SBA previously approved its SBA Negotiated Addendum and determined that the franchise relationship did not create an affiliate relationship. It also certifies that the franchisor has not revised the franchise agreement with respect to the terms that relate to affiliation.

Many franchisees utilize the SBA loan programs and it is important for franchisors and their legal counsel to be well-versed in this process to expedite the loan process . The Policy Notice expires on February 1, 2018, so franchisors must review and revise their process for franchisees seeking SBA loans.

Not long before the election, the Obama Administration issued a “call to action” statement in which it urged state governments to restrict many of the non-compete agreements that employers often impose on employees. The statement calls on state legislatures to adopt certain “best practices” for regulating employee non-compete agreements, including:

  • banning non-compete clauses for certain categories of workers, such as workers under a certain wage threshold, workers in certain occupations that promote public health and safety, and workers who are unlikely to possess trade secrets;
  • refusing to enforce non-compete clauses against workers who are laid off or terminated without cause;
  • disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted;
  • requiring employers to give additional consideration (i.e., more than just continued employment) to workers who sign non-compete agreements;
  • encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work; and
  • encouraging the elimination of unenforceable provisions through the use of legal doctrines that make such provisions (or contracts containing them) void.
Copyright: bswei / 123RF Stock Photo
Copyright: bswei / 123RF Stock Photo

The statement follows the administration’s May 2016 report titled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses.” The administration stated that the May 2016 report was intended to address “issues regarding misuse of non-compete agreements and describe[] a sampling of state laws and legislation to address the potentially high costs of unnecessary non-competes to workers and the economy.”

The statement noted that the laws of three states (California, Oklahoma, and North Dakota) already contain significant restrictions on non-compete agreements signed by employees, and at least a dozen states have considered legislation in this area during the past year. To accompany the report, the White House also published a “state-by-state explainer” of existing state non-compete laws to help interested parties understand the restrictions that are already in place across the country.

Despite last week’s election, the Administration’s proposal is certain to attract a significant amount of attention, both pro and con. For one thing, there is an ongoing discussion in the economic and business press regarding whether non-compete agreements are good for the economy. Of particular importance for franchisors and franchisees, unless the Republican Congress and Trump Administration enact national non-compete laws and regulations, the focus of non-compete regulation is likely to shift to the individual states over the next four to eight years. Given the deep political divides present in the country, regional and national franchise systems could be facing a myriad and conflicting patchwork set of state regulations. Because of this, franchisors and franchisees should be careful to note that a particular form agreement may be fine for employees in some states but less-than-ideal for employees in a different state. The “explainer” document can be a helpful tool to help franchisors and their franchisees understand those differences when they hire new employees across the country.

Much of the text of this post was originally authored by Jim Singer and first appeared in a slightly different form on his IP Spotlight Blog. We thank Jim greatly for his permission to re-post it here in a slightly modified form.