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Top 12 Cases of 2012 through DLA Piper Eyes

WASHINGTON – Why should franchisees and their attorneys pay attention to the top 12 legal cases picked by one of the largest franchisor law firms?  Because these cases and rulings represent a growing trend in our business sector today, that which shapes the relationship between franchisor and franchisee. 

These 2012 court rulings shed light on a number of issues: Whether franchisors can control the prices of products store owners sell; whether companies can terminate franchisees for having a criminal conviction; and whether franchisors can be forced into a class arbitration. Another deals with franchisors exerting so much control over the franchisee’s business that they are ruled as an “employer” of franchisees under wage-and-hour statutes.

In their February webinar presentation, DLA Piper attorneys Barry Heller, John Hughes and John Verhey  presented their top 12 cases. Their criteria for their selection was to choose those that were decided in 2012, provided guidance as to business considerations for franchisors, and those that represented a growing trend in franchising. Cases were not presented in any order of priority.

Blue MauMau attended the webinar to provide its readers a sampling of the cases. While a few are highlighted below, all cases may be viewed in the webinar attachment.

Question: What can franchisors do to avoid being found as an “employer” of their franchisees and their employees?

Answer: Minimize involvement in franchisee’s hiring, firing, compensation, and in scheduling/evaluation/disciplinary matters. Limit access to franchisee’s information on employees; issue policy recommendations rather than mandates; justify franchisor’s controls as necessary to protect trademarks, goodwill, brand consistency.

  • Juarez v Jani-King was a favorable ruling for franchisors. This case involved four franchisees who brought a class action for California wage-and-hour violations, claiming Jani-King was their “employer.” Class certification was denied; Jani-King then sought summary judgment on wage-and-hour claims and won. Two tests applied as to whether franchisor had right to control the manner and means of accomplishing the result it desired; and whether the franchisor exercised control beyond that necessary to protect and maintain its interest in its trademark, trade name, and goodwill”
    Summary Judgment granted in favor of Jani-King. Court found that franchisor’s controls are limited to protecting its trademarks and goodwill; ownership of client contracts protects Jani-King’s customer relationships; right to terminate franchisee’s ability to service client protects Jani-King’s goodwill; handling of billing/collection/accounting functions maintains consistency across franchise system; and handling of customer complaints directly ensures customer satisfaction.
  • Patterson v. Domino’s Pizza, was unfavorable to franchisors. A franchisee’s employee brought sexual harassment claims against Domino’s and the franchisee based on conduct of franchisee’s assistant manager. Domino’s was alleged to be “joint employer” along with franchisee and liable under agency theory. Franchisee declared bankruptcy. He then testified that Domino’s told him to fire the assistant manager and another employee, and that Domino’s field inspectors closely monitored his operations.
    Trial court ruled in favor of Domino’s on summary judgment. Appellate Court ruled franchisee’s testimony “raised a reasonable inference of a lack of local franchisee management independence.” Summary judgment for Domino’s reversed; remanded for trial. California Supreme Court granted permission for immediate appeal.

Question: Can franchisors terminate a franchisee based on a criminal conviction?

Answer: Do not assume that any sort of criminal conviction will provide adequate grounds for termination. When terminating a franchise agreement, franchisors must be mindful of termination provisions in the contract and in applicable relationship statutes.

  • International House of Pancakes v Parsippany Pancake House Inc. In this case a New Jersey franchisee’s president pled guilty to a felony charge of endangering the welfare of a child. As part of the requirements to terminate under New Jersey Franchise Practices Act it states, “if grounds for termination are the conviction of an indictable offense directly related to the business conducted pursuant to the franchise, a franchisor may terminate effective immediately without prior notice.”

IHOP terminated immediately. Franchisee continued to operate. IHOP sought preliminary injunction. Court found that the conviction of the franchisee’s president was not directly related to the business . . . and the termination did not comply with state franchise law.  IHOP then served an amended notice of termination, giving the required 60 days notice. Franchisee continued to operate after termination date, and IHOP filed for preliminary injunction.

In the end, court ruled IHOP was likely to prevail on merits of the case, that IHOP was a family-friendly establishment, and that the convicted president would be going to prison for at least three years and couldn’t participate in the day-to-day operations. Preliminary injunction was entered by the court in favor of IHOP.

Question: Can your marketing efforts result in substantial liability?

Answer: Yes. Franchisors should avoid robo-calls and text messages unless they have a prior relationship with the recipient. They should also instruct franchisees of the Federal Telephone Consumer Protection Act (TCPA) requirements, although they risk vicarious liability. And before recommending a telemarketing firm, franchisors should ask whether they are knowledgeable concerning TCPA requirements.

  • Carolyn Anderson v Domino’s Pizza where a franchisee hired a telemarketing firm to make “robo-calls,” meaning pre-recorded messages. The recipient of robo-calls filed suit under Washington State version of the Federal Telephone Consumer Protection Act. It states, “No person may use an automatic dialing and announcing device for purposes of commercial solicitation,” meaning “the unsolicited initiation of a telephone conversation for the purpose of encouraging a person to purchase property, goods or services.”

While Domino’s allowed the telemarketing firm to exhibit at its convention, helped grow its business with franchisees, and required the use of its “PULSE” software in Domino’s system, the court ruled in the franchisor’s favor. “The plaintiff could not prove that Domino’s had “used” the automatic dialing device, and it was not enough that Domino’s benefited from the calls.”

  • Agne v Papa John’s International, Inc. was the second case cited under the same heading of marketing efforts resulting in substantial liability. The case has been court certified and the potential exposure is over $250 million.

Other Top 12 Cases Cited

In addition to the five cases above, DLA Piper attorney address the following, to be found in the attached presentation:

Does presumption of irreparable harm still exist in trademark infringement cases in the franchise context?

  • Case:  7-Eleven, Inc. v. Dhaliwal

Can franchisors control the prices of the products franchisees sell?

  • Case: Stuller, Inc. v. Steak ‘N Shake Enterprises, Inc.

Are Franchise Agreements of perpetual duration? 

  • Case: H&R Block Tax Services LLC v. Franklin, et al.

How can franchisors maximize the chances of enforcing your post-term non-compete covenant?

  • Case:  Tutor Time Learning Centers v KOG Industries Inc.

Can franchisees avoid their arbitration agreements by suing through a franchisee association?

  • Case: EA Independent Franchisee Association v Edible Arrangements International

Does the California Franchise Relations Act trump an out-of-state forum selection clause?

  • Case: Hoodz International v Toschiadd

Do franchisors have a legal obligation to increase (or at least maintain) the value of their franchise system?

  • Case: Bertico Inc v Dunkin’ Brands Canada Ltd

Will franchisors face a class action in arbitration?

  • Case: Fantastic Sams Franchise Corp v FSRO Association

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About Janet Sparks

Janet Sparks's picture

Public Profile

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.