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Renewed Efforts to End No Poaching Provisions

Franchisors need to review their franchise agreements and take immediate action in response to the recent onslaught of legal action over “naked no poaching” provisions in franchise agreements.

In a typical franchise agreement, a franchisor will prohibit a franchisee from poaching its or its other franchisees’ employees during the term of the franchise agreement and for a period of time after the franchise agreement ends. Until now, these provisions were fairly commonplace. Franchisors argue these provisions are protect each franchisee’s investment of time and money in its employees, including general managers who sometimes participate in extensive training programs.

Critics of such provisions argue that the practice keeps wages for these employees low and that this is a manipulation of the market. Worker advocacy groups have long pushed for an end to this alleged “anti-competitive” practice. Economists generally agree that no poaching provisions have a negative impact on low-level employee wages.

Moreover, in October 2016, the U.S. Department of Justice (“DOJ”) and the FTC issued guidance that naked no poaching agreements are “per se” illegal–meaning that their very existence violates the law and sets companies up for criminal charges.  The DOJ further stated that it intended to criminally prosecute companies employing naked no poaching agreements. While most observers expected that the DOJ under Attorney General Jeff Sessions would retreat from this position, it has not, citing pro-competitive concerns. In fact, in April 2018, the DOJ initiated a criminal complaint against a number of companies respecting naked no poaching agreements. While the case settled with only civil penalties imposed, the DOJ expressly stated that it was reserving the criminal question and planned to “zealously enforce” the law.

Major Brands Settle After Attorney General Files Suit

In July, seven international brands agreed to no longer enforce the no poaching provisions in response to a lawsuit being led by the State of Washington Attorney General’s Office.

In August, eight more large brands followed this trend. Additionally, several state attorneys general, led by  Massachusetts Attorney General Martha Healy but including the AGs of California, Illinois, Maryland, Minnesota, New Jersey, New York, Oregon and Pennsylvania, have sent investigation letters to eight large international franchisors regarding each of their no poaching agreements.

This is only the beginning of the attack on no poaching provisions. In the past year, civil antitrust actions have been filed by employees of franchisees of several large international franchisors.

The potential liability under these actions could be substantial because the class sizes could be immense with treble damages and attorneys’ fees potentially being awarded in any franchisee employee victory.

McDonald’s Loses Bid to Dismiss

McDonald’s’ recent motion to dismiss was denied so the case against that company will proceed. The outcome of this case will be closely watched as a test case for this issue overall. The need to act is further supported by the fact that Senator Elizabeth Warren (MA) and Senator Cory Booker (NJ) are strong advocates of removing the “no poaching” provisions and have introduced legislation to make these acts illegal.

And the DOJ is bringing a criminal antitrust complaint against franchisors for what they call vertically assisted, horizontal conspiracies to fix labor rates, allegedly in violation of Section 1 of the Sherman Anti-Trust Act.

The time to address naked no poaching provisions is now. Franchisors should not wait until the update of your franchise disclosure document in 2019. If you need any assistance navigating through this process, the franchise team at Fox Rothschild is more than happy to assist.

I attended the International Franchise Association’s Franchise Action Network (“FAN”) Annual Meeting last week in Washington D. C. Basically, this is an educational event culminating in the participants being sent out to the “Hill” to lobby their senators and representatives on issues effecting small businesses – and especially franchised businesses. Speakers from the Hill, this year including Donna Brazile, Michael Steele and Senator Rand Paul, spoke to the delegations about the state of politics and the issues we were presenting to our representatives. I was part of the Pennsylvania delegation and most of the attendees in my district were franchisees.

The issues we discussed with our representatives focused in the joint employer issue and tax reform. Though some headway has been made regarding the joint employer issue, there is still work to be done for those wishing to reverse the standard set forth in 2015 by the National Labor Relations Board (NLRB) in the Browning-Ferris Industries decision, which replaced the “direct and immediate control” standard with a test based on “indirect” and “potential” control. Many feel this shift will cause franchisors to be “joint employers” with their franchisees which could invalidate the franchise model’s goal of providing opportunities for small business owners to run their own independent business.

Recent headway on the joint employer issue has been the passage in 2017 by the US House of Representatives of the Save Local Business Act (HR 3441) to simplify the joint employer standard for franchised businesses. However, that legislation has stalled in the Senate. In addition, the NLRB has announced plans for rulemaking relating to the joint employer standards.

Our first task on the Hill was to ask our congress to sign onto letters written by their fellow congressmen and senators to ask Labor Secretary Alexander Acosta to begin rulemaking on the joint employer issue under the Fair Labor Standards Act, under which franchises have seen many joint employer lawsuits as it allows individuals to file private actions. The hope is that this would help standardize the varied rulings that are coming out of the different federal circuit courts on the issue.

The second issue on our list to discuss with our congressional representatives was also related to the joint employer issue. The Trademark Licensing Protection Act was recently introduced into the House of Representatives by Rep. Steve Chabot (R-OH) and Rep. Henry Cuellar (D-TX) to help resolve the conflict between federal trademark law and the rationale supporting claims of joint employment. Federal trademark law requires the owners of trademarks, in this case the franchisor, to maintain control over its trademark and to monitor its use. Franchisors do this by controlling the use of the mark, which could be wearing standard uniforms, use in advertisement or otherwise, and the quality of the products supported by the mark, as well as other controls. However, this control supports the claim that a franchisor is a joint employer of the franchisee, thus catching the franchisor in the middle of these two laws. The Trademark Licensing Protection Act is being proposed to clarify that franchisors who control the actions of franchised businesses to maintain their brand will not be considered “joint employers” as a result under federal law.

The last issue for discussion was tax reform, particularly focused on aspects impacting pass-through entities, like limited liability companies which is the dominant form of company franchisees employ. First, we asked to make the individual tax cuts permanent as they effect owners of pass-through entities. Second was to clarify the exemption relating to professional service entities from those tax cuts. Certain professions, such as attorneys, are exempt from the tax cuts, but due to the vagueness of the wording, other unintended businesses may be covered by the exemption such as home health services. The IFA has requested that the Department of the Treasury fix this so this may go forward without the need for congressional action. Finally, because of a purported error in the tax bill, the ability to depreciate certain property and capital expenses at an accelerated rate has been eliminated so that these assets depreciate over an extremely long period of time. This causes a great disincentive for businesses to renovate and buy new equipment. The final ask was to fix that error and allow bonus depreciation.

I have gone to the Hill to lobby for similar issues before. I enjoy the meetings with the Representatives because the groups are smaller and the Representatives and their staff seem to be more responsive. I have always met with staff members for the Senators, but it is important to communicate with the staff as they are the ears of the Senators. Of course, for issues that are not bipartisan, if the congressman or senator is of the other party, they are less likely to act. But this is an important part of our democracy and I encourage all to go to the Hill or your state capital to meet with your representatives on issues important to you.

 

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.

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.

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.

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.

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.

Today, we continue our look at proposed changes to Florida’s franchise laws, including proposed changes in transferring franchised businesses, franchisor repurchase obligations and other miscellaneous changes

TRANSFERRING FRANCHISED BUSINESS

The Act prohibits a franchisor from restricting a franchisee’s ability to transfer its franchised business if the franchisee complies with franchisor’s “reasonable” transfer conditions, and the potential purchaser meets the qualifications for new and renewing franchisees. The Act fails to define what a “reasonable” transfer condition would be. Further, a franchisor must make the list of qualifications available to the franchisee creating an additional, unnecessary burden on franchisors.

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Copyright: solerf / 123RF Stock Photo

REPURCHASE OBLIGATIONS

If a franchisor is ends a franchise relationship via termination, non-renewal or expiration, a franchisor must repurchase at fair market value all inventory, supplies, goods, fixtures, equipment and furnishings of the franchised business. A franchisor even has to compensate the franchisee for the “goodwill” of the franchised business. Nearly all franchise agreements expressly state that any goodwill derived from the franchised business is owned by the franchisor. The Act would turn this point on its head. Further, the Act fails to define how the goodwill of the franchised business will be quantified.

These provisions would also apply if a franchisee dies or is incapacitated during the term of the franchise agreement. The successor has one year to exercise this right. Furthermore, if a franchisor fails to purchase the items required to be repurchased, the franchisor is civilly liable for the entire value of those items plus the franchisee’s reasonable attorney fees and expenses. This is a steep penalty for failure to comply with this section.

MISCELLANEOUS OBLIGATIONS

Additionally, the proposed law requires franchisors to fully indemnify franchisees against any loss or damage arising out of any claim involving misrepresentation, breach of warranty, negligence, strict liability, manufacture, assembly or design of goods or any other function which is beyond the control of franchisee. This indemnification seemingly has no limits and would likely unnecessarily burden the franchisor.

Lastly, the Act prohibits certain conduct including: (i) any effort to sell or establish more franchises than is reasonable for the market area; (ii) coercing a franchisee to enter into an agreement by threatening to cancel the franchise agreement; (iii) using false or misleading advertisement; (iv) willfully discriminating against a franchisee; (v) requiring a legal release from claims under the Act; or (vi) “competing” with a franchisee within its exclusive territory. One of the problems with these prohibitions is that the Act fails to provide a definition of what it means to “compete” with a franchisee by failing to take alternative channels of distribution into consideration.

PENALTIES AND CONCLUSION

Not only are the substantive provisions of the Act onerous and unreasonably restrictive, the penalties for failure to comply with the Act are significant. Specifically, a franchisee can receive a judgment of all of the money it invested in the franchised business, including losses and damages, as well as attorneys’ fees, if it is successful in its lawsuit under the Act. Additionally, the Florida Department of Legal Affairs may institute an action under the Act and impose fines.

If the Act is signed into law as currently written, it will likely cause a substantial influx of franchisee lawsuits.  Additionally, fewer franchisors will offer and sell franchises in Florida. The Act is in its early stages of development so it is yet to be seen what, if any at all, portions of the law will pass in Florida.

Two state legislators from Florida recently introduced a bill entitled “Protect Florida Small Business Act” (the “Act”), which could actually have the exact opposite effect on franchise relationships in Florida. While many states regulate the franchisor-franchisee relationship through franchise registration and restrictions on termination and non-renewal rights, this proposed legislation would implement some of the most extensive regulations on the franchise relationship in the United States.

APPLICABILITY

First, the Act is not explicitly clear about what agreements and parties it applies to. The Act states that it applies to all Florida residents, those domiciled in Florida, and those whose franchised business is, has been, or will be operated in Florida. However, the Act states that it also applies to any franchisor who “engages in an agreement within Florida.” This means that it may apply to all franchisors headquartered in, or operating out of, Florida.

Additionally, the Act states that it applies to any franchise entered into, renewed, amended or revised after the Act is instituted but also provides that it applies to any written or oral agreement between the parties as well as any existing franchise of infinite duration. These ambiguities leave franchisors in the dark and make the Act ripe for controversy.

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Copyright: captainvector / 123RF Stock Photo

TERMINATION AND NON-RENEWAL

Second, the Act prohibits a franchisor from terminating a franchise agreement except for good cause. Good cause is defined as the failure of a franchisee to substantially comply with the reasonable and material requirements of the franchise agreement. Unfortunately, the Act does not provide any guidance as to what would be considered a “substantial” noncompliance or a “reasonable and material” provision, which could result in an increase in frivolous lawsuits.

Further, the Act requires that a franchisor give a franchisee no less than 90 days’ notice of termination and at least a 60-day cure period to cure almost all defaults. This is longer than nearly any cure period imposed by contract or state law. As with other state franchise statutes, there are some exceptions to this 60-day cure period due to franchisee’s abandonment, bankruptcy, failure to comply with any law or regulation, felony conviction and certain other suits or actions against the entity.

Under the Act, a franchisor may not refuse to renew a franchise agreement unless the franchisor provides the franchisee with at least 180 days’ notice. Further, termination of the franchise must be proper under the Act or the franchisor must be completely withdrawing from distributing its products or services in the geographic market. The Act does not provide any definition as to what would constitute “completely withdrawing” from the region, leaving more room for interpretation and litigation. It also does not contemplate any alternative channels of distribution for products and services.

Additionally, the franchisor has to waive its right to enforce any non-competition covenant against a franchisee if it refuses to renew the franchise agreement. Furthermore, if a franchisee receives a notice of non-renewal, it may request an arbitration during that 180-day notice period for a determination as to whether such non-renewal is proper. The franchise agreement remains in effect until the determination is made. This could stall the expiration of a franchise agreement and future re-sales in that geographic region if the arbitration takes additional time.