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DLA Piper’s Top 10 Franchise Cases of 2015

DLA Piper Franchise division, a leader in national and international franchise law, presented its Top 10 Franchise Cases for 2015 in a webinar session last month, providing franchisor clients with guidance as to "business considerations" and "rapidly growing trends." Franchisors are not the only one that should be taking note of these court cases and decisions. Franchisees and their attorneys should also be paying attention to what trends are shaping the future of the franchise industry.

The following is a short synopsis Part 1 of the DLA Piper presentation. The cases are not in order of priority:

Attorney Barry M. Heller (pictured at right) lead off with one of today's hottest topics, "Is a franchisor a "joint employer" of its franchisees' employees? First on the list were two National Labor Relations Act (NLRA) cases:

1.  Browning Ferris Industries of California, Inc. [FBI Newby Island Recyclery] and FPR-II, LLC d/b/a Leadpoint Business Services, and Sanitary Truck Drivers and Helpers Local 350, International Brotherhood of Teamsters, Petitioners (NLRB decision - August 27, 2015)

NLRB general counsel argued for a new test of "joint employer" stating an entity could be a joint employer if it exercised direct or indirect control over working conditions, had the exercised potential to control working conditions, or where "industrial realities" other made it essential to meaningful collective bargaining. The Wage and Hour Administrator of the Department of Labor has also taken the position that franchisors should be held jointly liable for labor and employment liabilities of their franchisees.

(Note: A trial in New York is currently in process before the National Labor Relations Board regarding 13 complaints filed in December 2014 and 6 others filed in February 2015, filed against McDonald's Corporation and its franchisees. The claim: Is McDonald's a joint employer with franchisees because of its control over franchisees' labor relations.

2. Nutritionality, Inc. d/b/a Freshii (April 28, 2015) determined not to be a joint employer

After NLRB issued an advice memorandum, it concluded that franchisor Freshii Development, LLC is not a joint employer with one of its franchisees under NLRB's then-current joint employer standard, and expanded standard proposed by NLRB's general counsel. The decision was based on the fact that Freshii played no role in its franchisee's decision regarding hiring, firing, disciplining or supervising employees. Nor is Freshii responsible for determining wages, raises or benefits of those employees. And, Freshii is not involved in franchisee's scheduling or setting work hours.

Freshii operations manual gave only recommendations to franchisees, and inspections by franchisor were only related to compliance with brand standards, not employment-related policies. Franchise agreement provides that Freshii "neither dictates or controls labor or employment matters for franchisees and their employees.

Takeaways for Franchisors: There is no clear safe harbor for franchisors. Keep in mind NLRB's statement: "The NLRB should continue to exempt franchisors from joint employer status to the extent that their indirect control over employee working conditions is related to the legitimate interest in protecting the quality of their product or brand." Another states that the relationship between franchisor and franchisee is defined as an independent contractor relationship. And franchisors should prohibit franchisees from using franchisor's name or trademarks in employment documents, including paychecks and evaluations.

Franchisors are also cautioned to consider making sure "company-owned" outlets are in material compliance with labor, employment and other laws. And they should instruct field representatives to refrain from directing franchisees in labor and employment matters. They should only offer recommendations and company-owned outlets as examples.

Attorney John F. Verhey (pictured at right) highlighted the third case on a related topic: Can a Franchisor Be Held Liable for Your Franchisees' Wage and Hour Violations?

3. Ochoa v. McDonald's Corporation (September 25, 2015)

Current and former employees of a McDonald's restaurant sued the franchisee and McDonald's Corporation in class action lawsuit for wage and hour violations of California Labor Code and common law negligence. Claims are premised on joint employer theory of liability.

The workers also sued under ostensible/apparent agency theory. The negligence claim was a "direct liability claim" against McDonald's arising out of the franchisee's use of McDonald's software for employee scheduling/time-keeping/payroll.

McDonald's sought summary judgment on all claims.

Tests for joint employer liability:

The court ruled that there was no joint employer liability under any of the three tests:

Franchisee had sole authority to make hiring, firing, wage and staffing decisions; McDonald's extensive monitoring programs were not sufficient to give McDonald's power to cause franchisee's employees to work or prevent them from working; and McDonald's limited control over the wage payment and record-keeping aspects of franchisee's business was not sufficient under the Patterson v. Domino's Pizza common law employment test.

On the ostensible agency claim summary judgment was denied. "Employees had reasonable belief that McDonald's was their employer based on uniforms, pay stubs, and job applications through McDonald's website." On the negligence claim summary judgment was granted, "barred by exclusive remedy under California Labor Code.

Takeaways include:

  • Did McDonald's "directly or indirectly, or through agent, exercise control over wages, hours or working conditions of franchisee's employees?

    Franchisor's power to influence, but not directly control, these factors is insufficient.

  • Did McDonald's "suffer or permit employees to work"
  • Did McDonald's have a common law employment relationship with franchisee's employees (did it retain or assume control over factors such as hiring, discipline, discharging, day-to-day aspects of workplace behavior).
  • Patterson v. Domino's Pizza holding expanded to Labor Code violations
  • Franchisors have considerable leeway in providing technology and assistance to franchisee in employee scheduling, timekeeping, etc. Even mandatory use of payroll processing systems is okay
  • Continued viability of alternative theories of franchisor liability for franchisee misconduct, e.g., ostensible agency; direct negligence

Attorney John Verhey also presented a topic related to the fourth case: How Effective Is Your Contractual Disclaimer of Reliance Provision in Barring Fraud Claims?

4. Coraud LLC v. Kidville Franchise Company, LLC (June 12, 2015) 

Facts of the Case:

  • Prospective franchisee received false/misleading revenue and profit projections from franchisor.
  • Item 7 of FDD (franchise disclosure document) understated initial investment/opening costs by over 60 percent
  • Franchisor failed to disclose its lack of experience and affiliate closures in suburban New Jersey markets
  • Franchisee's claims: common law fraud, negligent misrepresentation; statutory fraud: New York Franchise Sales Act; and constructive termination;New -*Jersey Franchise Practice Act
  • Broad disclaimer of reliance in franchise agreement

The Disclaimer of Reliance franchisee was given:

"That except as may be provided in our Franchise Disclosure Document, you have not received from us, and are not relying upon, any representations or guarantees, express or implied, as to the potential volume, sales, income, or profits of a Kidville Facility . . ."

On Kidville's motion to dismiss the franchisee's common law fraud and negligent misrepresentation claims were dismissed because of franchise agreement disclaimer of reliance: - Disclaimer language "sufficiently specific" as to the particular type of fact misrepresented or undisclosed - No allegation in complaint that misrepresentations concerned facts "peculiarly within the franchisor's knowledge," – i.e., could not have been discovered by franchisee through exercise of due diligence.

On NYFSA (New York Franchise Sales Act) fraud claim: "anti-waiver provision in the Act (voiding any contract provision "purporting to bind any person acquiring a franchise to waive compliance with any provision of" the Act) prohibits enforcement of disclaimer-of-reliance provision.

"Disclaimer . . . accomplishes what [the anti-waiver provision] aims to prevent, namely, freedom from compliance with the NYSFA's anti-fraud provision" Opinion addressed conflict between NY state and federal court decisions on effect of disclaimers.

New Jersey Franchise Practices Act (NJFPA) constructive termination claim: dismissed on jurisdictional grounds because "gross sales of products or services between franchisor and franchisee" did not exceed $35,000 in prior 12 months.

Takeaways for franchisor clients:

  • Detailed disclaimer of reliance clauses is essential but not sufficient, at least for statutory fraud claims - N.B.– disclaimers not effective for misrepresentations in franchise disclosure document (FDD) itself.
  • Court's analysis likely to be adopted by other courts construing anti-fraud provisions in other state franchise statutes.
  • Disclaimer of reliance clause may be relevant on summary judgment motion or at trial.
  • NJFPA may have limited reach if franchisor/franchisee sales threshold not met and if royalties don't qualify.
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