Baloney, Big Macs, the NLRB and Franchise Advocacy
A column last week in the Los Angeles Times, entitled “The NLRB-McDonald's Ruling Could Be the Beginning of a Franchise War” is another example of how top franchise industry ‘experts’ and ‘talking heads’ too frequently lack sufficient knowledge about the facts and theories they are discussing. Most notably, for example, contrary to the ‘fact’ set forth in the column, the NLRB matter was not a ‘ruling’ nor was it ‘issued’ by the NLRB. It was, instead, a policy decision made by a rank political appointee in the NLRB. This was nothing more than a personal choice made by the NLRB’s ‘in house’ counsel to include McDonald's as a named defendant in certain pending internal NLRB labor cases. This choice was not litigated before the ALJ, the NLRB or the courts.
The article also makes use of the theoretically tired, and incorrect, argument that franchisors can’t have it both ways – promulgate and enforce rules and regulations relating to franchise operations and at the same time not exercise direct ‘control’ over their franchisees’ employees. Instead, as the author, a Pulitzer Prize winner well knows, there can never be a ‘two plus two equals four’ principle applied to legal ‘control’ determinations. An examination of the historical and current context of ‘control’ disputes in the franchise legal realm shows that the inherent ambiguity is both intellectually-defensible and legally sound.
The tortured legal evolutionary paths of covenants not-to-compete and vicarious liability in the franchise area evidence this clearly. Indeed, as in many other areas of the law, the term ‘control’ in the franchise area can consistently and reasonably be given different meanings depending upon the context of the situation in which it is being applied. The newspaper article’s suggestion that to the extent that a legal term would be applied differently in different contexts – even where identical parties are involved – the legal term would be ‘transparently bogus’ is at best naïve and worst a misrepresentation.
Further, the suggestion in the article that the NLRB was simply ‘trying to adapt’ to the evolving nature of the restaurant industry’ also seems off-base. As noted above, the struggle regarding the determination of relative ‘control’ between franchisees and franchisors for non-NLRB purposes in the franchise area has been raging for the last 40 some-odd years. Like other concepts, it ebbs and flows. Franchising, including the omnipresent tension between its natural stakeholders -- franchisors, franchisees, employees, and consumers -- has ‘been around’ since the beginning of time. Nothing has suddenly changed structurally in the franchise area conceptually or financially that would justify the conclusion that some type of ‘evolution’ has occurred that requires an about-face on the control issue. Further, the legal question whether ‘franchisors control their franchisees’ has been and will always be a heavily fact-based determination that needs to be made on a case by case basis by finders of fact – not by rank political appointees with agendas borne out of having spent their entire work careers in one politically-biased institutional entity.
In addition, the Professor interviewee’s view regarding the ability of affirmative cost apportionment to ‘fix’ the negative impact of any increased costs that might be caused by the NLRB political appointee’s decision (“apportioning the cost is typically within the control of the franchisor, which can set the price of its product”), seems on its face to fly in the face of very many basic and fundamental economics and antitrust principles. There is little to no empirical evidence to support the conclusion that “the danger of the NLRB counsel's ruling is that while it might stick the big companies with responsibilities for workers, the big companies will stick the franchisees with the costs.” Indeed, theoretically, the ultimate allocation of costs of a ruling that would require unionization and modified labor practices (even assuming that it were to be upheld many years down the road by a court) is not within the complete economic control of any of the relevant stakeholders – manufacturers, mangers, franchisors, employers, franchisees, consumers, or suppliers. Ultimately, the incidence of the ultimate relative cost of the NLRB ruling on the stakeholders will depend upon prolific factors, including the elasticities of demand and supply for the labor, products and services of each franchise. The idea, suggested in the column, that franchisors may simply address ‘increased costs of the labor ruling by setting prices’ of franchise products and services is also in direct conflict with current antitrust decisions regarding vertical restraints. In this regard, although franchisors are immune from maximum price-fixing claims, they are active candidates for minimum price fixing charges. Last, although there is a dearth of empirical work regarding the pass-through ability of the increased costs of a cheeseburger, there are a few that suggest that it is in fact relatively small, at least as it is manifested in the final price of the food to the customer.
Even though I remain (truthfully) one of only a few national litigators representing exclusively franchisees, and not franchisors, I do not believe that my ‘side’ in the political franchise war is benefitted by those who spew sophomoric or unsupported theories and recommendations claiming them to be ‘facts’ and ‘dispositive.’ Now that it appears that ‘big labor’ could be climbing into bed with franchisees on labor and employment issues, it is likely that the already-questionable rhetoric essayed by many franchisee advocates will be parroted and mutated fallaciously by similarly knowledgeable labor advocates. And, let’s not forget to add to this intellectually-noxious mixture the omnipresent prolific sophistry manufactured by franchisor lobbyists. My personal favorite is that ‘most franchisees don’t want new protective franchise legislation.’
Finally, the franchise cake would not be complete without mixing in the policymakers (e.g., state legislators, NLRB General Counsel) who seem to never be able to get enough of this hogwash from all sides. As with any other commodity in the free market, however, so long as there remains a strong demand for this factual and theoretical bunk, there will be an eternal robust supply of it.
Jeffrey M. Goldstein
Goldstein Law Firm, PLLC
202 293 3947
Nothing has changed?
"Nothing has suddenly changed structurally in the franchise area conceptually or financially that would justify the conclusion that some type of ‘evolution’ has occurred that requires an about-face on the control issue." - Goldstein
Mr. Goldstein, can you break down the financial franchising margins of a few of the major brands to support your thought that not much has changed financially?
I'd also be grateful if you could post a 50 year franchise contract of say, McDonald's or KFC, for us to look at and compare to see if any evolution has occurred?
What do you make of the increase in interconnected POS, payroll and surveillance systems in stores? As they increase, does liability increase?
Have things suddenly changed? Maybe not. I think it can reasonably argued that this response over increasing control of franchises by franchisors has been a long time in the making.
Something might be changing in franchising
because the US Congressional Budget Committee is asking the SBA WHY they are approving loans for franchises that have such high failure rates. It is the securitization of franchisors and future royalties ---whole business securitization like Quiznos ----that has produced some bad paper that has hurt investors that ultimately may bring real changes to franchising.
Maybe Peter Lagarias' view that the courts and public policy do not require the franchisors to be competent has opened a crack and the light will shine through. Bubbles and unsustainable growth can't go on forever, can they?
PoS lead to wage liability for zor
"What do you make of the increase in interconnected POS, payroll and surveillance systems in stores? As they increase, does liability increase?"
Good point. That is the essence of what the NY Attorney General argued with regard to the Papa John's wage investigation. And some zors are now requiring use of specified payroll/timekeeping software, and some zors require specific practices such as the use of E-verify.
You may not agree with the trend to hold zors liable for FLSA and state violations, but there certainly has been an evolution in franchisors having both actual and constructive knowledge of the employment and pay practices at their franchised locations.
Shine The Light Of Truth
It may be the government may do what no one else has been able to do; hold the Schadens accountable for Quiznos. Uncle Sam has the resources to dig deep into the Q ponzi scheme and as we've seen with the insider traders, the tenacity to stay at it when others look to settle. The losses to the SBA are in the hundreds of millions of dollars and there are thousands of franchisees and suppliers so the feds have a financial and public relations interest in seeing this through.
SBA lost hundreds of millions?
Where do you get that from?
Normally the borrower puts up collateral, including personal assets. So if the SBA gets a claim for $100 and pays the lender, the SBA will then go after the borrower's collateral.
Nobody has shown how much the SBA even paid out on Quizno loan defaults, let alone how much the SBA could not recoup from collateral.
What is the evidence for your assertion?
Off topic: comment moved
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Jeffrey, well done. A concise and succinct explanation minus the emotion.