STATE LEGISLATURES ADDRESSING THE ISSUE OF WHETHER OR NOT FRANCHISORS ARE EMPLOYERS OF FRANCHISEES OR FRANCHISEE’S EMPLOYEES

The issue of whether or not a franchisor can be held liable as an employer of a franchisee or as a joint employer of a franchisee’s employees has been a hot topic in the franchise world over the past couple of years.  The issue was addressed in an article in the Fall 2014 edition of this Newsletter entitled “Franchisors as Employers/Joint Employers.”  The concern over this issue grew even more when on July 29, 2014, the Office of Public Affairs of the National Labor Relations Board (“NLRB”) issued a press release indicating that the General Counsel of the NLRB would pursue 43 unfair labor practices cases against both individual McDonald’s franchisees and the franchisor, McDonald’s.  The NLRB press release stated that McDonald’s would be “named as a joint employer respondent”.  This news sent a shockwave through the franchise community and spurned numerous articles, forum breakout sessions and CLEs discussing the legal analysis of such a conclusion and the potential impact on the current franchise business model.

Recently, state legislatures have begun to strike back at the NLRB announcement, enacting new statutes which attempt to protect franchisors from potential liability for employment claims arising from issues pertaining to employees of franchisees.  Within the past three months, three (3) states, Tennessee, Texas and Louisiana, each have passed short, straightforward legislation which expressly states that a franchisor will not be considered to be an employer of a franchisee or of a franchisee’s employees.

Tennessee appears to be the first state to address the issue head on.  On April 10, 2015, Governor Bill Haslam signed into law Senate Bill 475 which enacted a new provision to Chapter 1 of Title 50 of the Tennessee Code covering employer and employee relationships and practices.  The specific language of the newly enacted statute provides as follows: 

  1. Notwithstanding any voluntary agreement entered into between the United States department of labor and a franchisee, neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purpose.

Tenn. Code §50-1-208.  The law became effective on April 10, 2015.  The Tennessee law was supported and applauded by the International Franchise Association (“IFA”) and the U.S. Chamber of Commerce Workforce Freedom Initiative, with leaders from both groups expressly speaking out in favor of the new law and challenging the NLRB’s efforts to reach and/or issue a contrary conclusion.

On June 1, 2015, the Texas legislature amended certain sections of its Labor Code to add provisions which state that a franchisor is not considered to be an employer of a franchisee or of a franchisee’s employees.  Specifically, the following sections of the Texas Labor Code were amended:  Subchapter A, Sec. 21; Subchapter A, Chapter 61; Subchapter A, Chapter 62; Subchapter A, Chapter 411; Chapter 91; Section 201.021 and Subchapter B, Chapter 401.  Those sections of the Texas Labor Code  include, but are not limited to, the right to assert claims related to the Texas Minimum Wage Act, employment discrimination, wage and hour issues, professional employer organizations, unemployment insurance, workplace safety and the Texas Workers’ Compensation Act.  The sections were amended by adding a new provision in each section which sets forth essentially the same following language:

  1. For purposes of this chapter, a franchisor is not considered to be an employer of:

(1)  a franchisee: or (2)  a franchisee’s employees.

Tex. Labor Code Ann. §21.0022(b).

However, the Texas legislation does contain some exclusionary language which could potentially limited its applicability and impact.  Each section contains language which excludes from coverage of the act a franchisor:

who has been found by a court of competent jurisdiction in this state to have exercised a type or degree of control over the franchisee or the franchisee’s employees not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademarks and brand.

Tex. Labor Code Ann. §21.0022(c).  Given this exclusionary language, the real impact of this new statute is still in question.  The law will become effective on September 1, 2015. 

In June 2015, Louisiana became the third state to address this issue when the legislature passed House Bill 464. It was signed into law by the Governor on July 1, 2015, and became effective on August 1, 2015.  The new law provides as follows:

  1. Neither a franchisee who is a party to a franchise agreement regulated under the Federal Trade Commission Franchise Disclosure Rule, 16 CFR 436, nor an employee of the franchisee shall be deemed to be an employee of the franchisor for any purpose.  A voluntary agreement entered into between the United States Department of Labor and an employer shall not be used by a state department or agency as evidence or for any other purpose in an investigation or judicial or administrative determination, including whether an employee of a franchisee is also considered to be an employee of the franchisor.

La. Rev. Stat. Ann. §23:921(F)(1)(d). Similar to the Tennessee law, the IFA supported and applauded the Louisiana legislature for passing the new statute. The act received strong bipartisan support from both the Louisiana Senate and House.

The passage of these acts provide some protection for the preservation of the franchise business model as we currently know it.  However, it is unclear at this point what impact the legislation may ultimately have on a potential contrary decision by the NLRB in connection with the McDonald’s investigation.  It will be worth watching to see what happens with the NLRB investigation, how many other states follow the lead of Tennessee, Texas and Louisiana and how courts interpret and apply this new legislation.  While commentators and experts do not necessarily agree on the ultimate impact an adverse NLRB determination may have on the franchise business model, there is no dispute that this issue will continue to be a hot topic of discussion over the next few years.

LEGISLATIVE UPDATES

Tennessee, Texas and Louisiana Pass Laws Addressing Franchisor-Employer Issue

As is discussed in more detail in the article set forth above, Tennessee, Texas and Louisiana have all recently passed legislation which provides that a franchisor shall not be considered an employer of a franchisee or the franchisee’s employees.  These new laws are effective as follows:  Tennessee (SB 4575) – effective April 10, 2015; Texas (SB 652) – effective September 1, 2015; Louisiana (HB 464) – effective August 1, 2015.

Oregon Amends its Motor Vehicle Franchise/Dealer Law

The Oregon legislature passed two separate bills that provided amendments to its motor vehicle franchise/dealer law.  Senate Bill 713 added a provision to the current law which now prohibits a manufacturer from directly or indirectly coercing or attempting to coerce a dealer to advertise, promote, offer or sell an extended service contract, maintenance plan or similar type arrangement that is provided, originated, sponsored or endorses by the manufacturer.  However, the amendment does provide that a manufacturer can provide incentives to a dealer who voluntarily decides to advertise, promote, offer or sell such products or services.  Senate Bill 713 also amended some of the payment obligations required by a manufacturer upon termination, cancellation or non-renewal of a franchise, including requiring the manufacturer to pay the lesser of one year’s lease payments or the reasonable amount remaining due on a lease for a management computer system required by the manufacturer that the dealer will no longer use.  The amendment also specifically provides that a manufacturer is not required to compensate the dealer if the dealer terminates, cancels, fails to renew or discontinues the franchise.  Finally, Senate Bill 713 also requires the manufacturer, under certain circumstances, to compensate the dealer for costs incurred in remodeling, constructing or altering the facility to meet the manufacturer’s requirements.  Senate Bill 714 amended the act to provide that a manufacturer cannot take any adverse action against a dealer because the dealer sold a motor vehicle to a customer who exported the motor vehicle or resold the motor vehicle for export.  Both amendments will become effective January 1, 2016.

Connecticut Amends its Motor Vehicle Franchise Law

Through House Bill No. 6820, the Connecticut legislature amended its motor vehicle franchise law to expand and clarify the compensation required to be paid by a manufacturer when it terminates, non-renews or cancels a franchise.  The amendment provides that compensation for new current model year motor vehicles and prior model year motor vehicles (meeting the requirements of the act) shall not be less than the dealer’s net acquisition price, including all transportation or destination charges, less all allowances paid by the manufacturer to the dealer.  The amendment also provides that the compensation for supplies, furnishings and special tools and equipment shall be in an amount equal to the dealer’s cost less a thirty-three percent straight-line depreciation for each year following the dealer’s purchase of the items.  Finally, the amendment provides that a manufacturer must compensate a dealer in an amount equal to the amount remaining on the dealer management computer system lease or contract or one year of lease payments, whichever is less, if the manufacturer required the purchase of the system and it will no longer be used by the dealer.  The amendments become effective October 1, 2015.

RECENT CASE LAW

Wisconsin Court Addresses Application of the WFDL’s Statute of Limitations

A state appellate court in Wisconsin recently upheld a finding that CNH America, LLC (“CNH”) had violated the Wisconsin Fair Dealership Law (“WFDL”) by terminating its dealer, Chili Implement Company, Inc. (“Chili”) without good cause.  CNH appealed a jury verdict arguing that the court should have granted CNH’s motion for summary judgment because Chili’s claim was barred by the statute of limitations and that the evidence presented at trial was insufficient to support the jury’s finding that the termination was without good cause.  CNH had sent a notice to Chili dated March 1, 2010, stating that Chili was in default of the dealer agreement because it had failed to achieve a satisfactory market share and that it failed to stock sufficient inventory conducive to achieving a satisfactory market share.  The notice gave Chili one year to cure the deficiencies. CNH argued that Chili’s WFDL claim was barred because it was not brought within one year of when Chili received the March 1, 2010, notice.  The issue before the court was when did the cause of action accrue to start the one-year limitations period.  Relying on the decision in Les Moise, Inc. v. Rossignol Ski Co., 361 N.W.2d 653 (Wis. 1985), CNH argued that the one year period started when Chili received the notice.  The court held that the Les Moise decision was distinguishable because it pertained to a dealer’s claim based on a defect with the notice.  In this case, the court held, Chili’s claim was based on actions or omissions of the manufacturer after the termination notice.  The court held that the Les Moise opinion that the one-year period starts upon receipt of the notice of termination does not apply to all WFDL claims, but rather only applies when upon receipt of the notice the dealer is immediately capable of determining all of its claims against the manufacturer.  Here that was not the case as Chili could not determine all of its claims under the WFDL at the time it received the notice. The court held that denial of summary judgment was proper because CNH failed to show that Les Moise supported a conclusion that Chili’s WFDL claims were barred by the statute of limitations. The court also addressed CNH’s claim that there was insufficient evidence to support the jury’s conclusion that CNH lacked good cause under the WFDL to terminate the relationship.  The court, in upholding the jury’s conclusion, stated that a good cause showing required CNH to not only show that the dealer agreement had been breached, but to also show that the term that was breached was essential and reasonable.  The court stated that there was sufficient evidence to support the jury’s conclusion that good cause did not exist because the evidence supported a conclusion that the requirement or term which was allegedly not met was not essential and reasonable because it was not uniformly applied to all dealers and arguably discriminated against Chili as compared to other dealers.  Chili Implement Company, Inc. v. CNH America, LLC, 2015 WI App 43, 362 Wis.2d 540 (2015).

Court Dismisses WFIL Claim For Failure to Plead a Material Violation of the Act

A federal court in Texas granted a franchisor’s motion to dismiss, holding that the dealer had failed to plead sufficient facts to establish a material violation of the Wisconsin Franchise Investment Law (“WFIL”).  Plaintiff, Braatz, LLC (“Braatz”) entered into a franchise agreement with defendant, Red Mango FC, LLC (“Red Mango”), to own and operate a Red Mango franchise.  In connection with executing the franchise agreement Braatz also completed a franchise questionnaire.  In response to two questions regarding whether or not Braatz had received representations regarding expected costs, profits, likelihood of success, etc. other than those set forth in the franchise disclosure document, Braatz indicate that they had received financial projections and a potential profits analysis from a regional franchise director for Red Mango.  Red Mango sent the questionnaire back and told Braatz that it had to respond to those two questions by indicating that it had not received any financial representations other than those in the FDD, otherwise it could not open a Red Mango store. Braatz immediately submitted a new questionnaire with the answers required by Red Mango.  After two years, Braatz closed the Red Mango store due to financial struggles and filed this lawsuit seeking rescission of the franchise agreement.  The critical question before the court was whether or not Braatz had adequately pled a material violation of Section 553.27(4) of the WFIL.  This section precludes the sale of a franchise unless a copy of the FDD is provided 14 days before execution of the franchise agreement or payment of any consideration for the franchise.  Braatz argued that Red Mango was required to provide another 14 day period after sending and requesting a revised franchise questionnaire.  The key issue was whether or not the technical violation of the WFIL was a “material” violation sufficient to give rise to a claim.  The court held that it must examine the actions of Braatz specifically and not a hypothetical objectively reasonable person in determining whether there was a material violation. The court determined that in immediately returning the questionnaire with the revised answers and paying the second part of the required fee, it showed that changing the answers to the two questions at issue was not “material” to Braatz.  Moreover, the court noted that a similar representation regarding receiving no financial projections was in the franchise agreement and Braatz admitted that it had more than 14 days to consider that representation.  As a result, the court dismissed the complaint without prejudice and provided Braatz with leave to amend the complaint to cure the deficiencies, if possible.  Braatz, LLC v. Red Mango FC, LLC, No. 3:14-CV-4516-G, 2015 WL 1893194 (N.D. Tex., April 27, 2015).

Court Overturns Jury Verdict Awarding $1.16 Million to Franchisee

A state court in New Jersey determined that the trial court erred by denying a franchisor’s motion for directed verdict on a claim for rescission based on fraudulent inducement.  In July 2001 the franchisees, Michel and Lorraine Reymond (the “Reymonds”), met with the franchisor, Legacy Academy, Inc. (“Legacy”) to discuss opening a Legacy franchise. During the meeting, the Reymonds claimed that representatives of Legacy made various representations regarding historical earnings of franchisees and expected net income.  At a second meeting the Reymonds received an offering circular and a franchise agreement.  The Reymonds signed the franchise agreement the same day without reading it.  They claimed that they were pressured into executing the agreement because Legacy claimed that if they did not, another franchisee would take their location.  Ten years later, the Reymonds filed this lawsuit seeking rescission and damages, asserting claims of fraud, negligent misrepresentation and violations of Georgia statutes, including the state RICO act.  The trial court denied Legacy’s motion for summary judgment and the jury awarded damages to the Reymonds in the amount of $1.16 million.  On appeal the state supreme court determined that a party who refuses or fails to read an agreement before signing it cannot assert a fraud or misrepresentation claim when the provisions in the agreement directly contradict the alleged misrepresentations.  The court held that the Reymonds were not prevented from reading the agreement, but rather they simply elected not to and relied on the statements of the representatives of Legacy.  The court noted that had the Reymonds read the agreement they would have been aware of the provisions in the agreement that stated that Legacy had made no representations regarding potential volume, profit, income or success of the franchise and by signing the agreement the Reymonds were acknowledging that no such representations had been made by Legacy.  As a result, the supreme court held that Legacy was entitled to a directed verdict on the rescission claim.  The court went on to hold that given that there was no valid claim for rescission of the franchise agreement, the merger clause in the franchise agreement barred the claims for fraud, negligent representation and RICO violations.  The court concluded that the merger clause bars any claim that is based on prior representations that are contradicted by the terms of a written contract.  The court ultimately reversed the entire jury verdict and remanded the case for a new trial because the jury verdict form was unclear as to whether the jury found in favor of, and awarded damages for, the Reymonds’ claim for violation of Section 51-1-6 of the Georgia statutes.  Legacy Academy, Inc. v. Mamilove, LLC, 297 Ga. 15, 771 S.E.2d 868 (2015). 

Third Circuit Upholds Dismissal of Franchisees’ Claims

The Third Circuit recently upheld a decision by the District Court of New Jersey dismissing through a 12(b)(6) motion all of the plaintiffs’ claims.  Plaintiffs are franchisees of Doctors Express and sued DRX Urgent Care, LLC, the franchisor, asserting various claims arising out of the franchise relationship between the parties.  The circuit court upheld the dismissal of the breach of contract claims, determining that the plaintiffs had failed to cite to a single provision of the franchise agreement that had been breached.  In upholding the dismissal of the claim for beach of the implied covenant of good faith, the circuit court noted that Maryland does not recognize such an independent cause of action and an essential element of such a claim under New Jersey law requires a showing of bad motive or intention, which plaintiffs failed to allege.  The circuit court also upheld the dismissal of the fraud and misrepresentation claims relating to financial projections of future success by holding that predictions or promises regarding future events are not actionable.  The circuit court recognized that predictions or promises as to future events could be actionable if at the time they were made the party making them knew they were false. However, in this case, the court held, the franchisor made it very clear and explicit that the projections were estimates only.  Moreover, the court noted that the financial projections contained clear qualifying language that there was no guaranty or promise that the plaintiffs could achieve these financial estimates. Plaintiffs also asserted a constructive termination claim under the New Jersey Franchise Practices Act, asserting that the franchisor had made material changes to the business model that had harmed, rather than helped franchises.  The circuit court held that the claim was properly dismissed because there were no allegations or assertions that the franchisor had committed acts with the intent to cease doing business with the plaintiffs to the benefit of another franchisee.  In fact, the court noted, the plaintiffs themselves allege that the continue to make weekly royalty payments and are in “good standing”.  Finally, the circuit court dismissed the claims under the Maryland Franchise Registration and Disclosure law because the claims were barred by the statute of limitations as they were not brought within three years after the grant of the franchise.Fabbro v. DRX Urgent Care, LLC, No. 14-1734 and 14-1735, 2015 WL 1453537 (3rd Cir. April 1, 2015).

 New Jersey Court Refuses To Issue Injunction to Enforce Non-Compete Against Former Franchisee

The U.S. District Court in New Jersey denied Executive Home Care Franchising, LLC’s (“Executive Care”) motion for a temporary restraining order which sought to enforce the non-compete provision in its franchise agreement against former franchisees, Clint and Greer Marshall (the “Marshalls”).  The Marshalls entered into a franchise agreement with Executive Care in 2013.  In 2015, the Marshalls informed Executive Care that they were terminating their relationship with Executive Care and immediately ceasing operations due to a decline in their business.  Upon termination, the Marshalls continued to operate the same business as an independent entity under a different name, in direct contradiction to the non-compete agreement set forth in the franchise agreement.  Executive Care filed the lawsuit and sought a TRO to enforce the non-compete and to prohibit the Marshalls from operating their business.  In denying the TRO motion, the court focused on one factor:  Executive Care’s failure to establish that it will suffer irreparable harm without an injunction.  While recognizing that the franchise agreement contained a provision through which the parties agreed that Executive Care would suffer irreparable harm if the non-compete was violated, the court held that the provision, by itself, was insufficient to establish the existence of irreparable harm to support an injunction.  The court noted that the Marshalls had returned all proprietary and confidential information to Executive Care, were not using Executive Care’s trademarks or symbols, had transferred the phone number to Executive Care, were not using the same office in which the franchise was previously located and had notified existing clients that they are no longer associated with Executive Care.  As a result, the court concluded that the Marshalls were not creating or using any confusion with Executive Care to operate their business and any business lost due to violation of the non-compete provision could be compensated through damages.   Executive Home Care Franchising LLC v. Marshall Health Corp., No. 15-760 (JLL), 2015 WL 1422133 (D.N.J. March 26, 2015).

Texas State Court Overturns Jury Verdict Holding Franchisor Vicariously Liable 

A Texas court of appeals overturned a jury verdict against a franchisor determining that the evidence was legally insufficient to support the jury’s findings that the franchisor controlled or had the right to control the injury producing acts of an employee of the franchisee.  An employee of a Domino’s franchisee lost control of his vehicle while delivering pizza and struck a vehicle, injuring one person and killing another.  A jury found that Domino’s was vicariously liable for the injuries suffered.  Domino’s appealed.  On appeal the court noted the following facts: (1) the franchise agreement defined the relationship between the franchisee and the franchisor as an independent contractor; (2) the franchise agreement required the franchisee to submit various business records and reports to Domino’s; (3) the franchisee was required to participate in various training programs provided by Domino’s; (4) the franchisee had to abide by all specifications, standards, operating procedures and rules set forth by Domino’s relating to the operation of the franchise; (5) Domino’s had full access to all of the franchisee’s computer data and records, including the PULSE computer software which handled orders and evaluated delivery times; and (6) Domino’s conducted regular reviews and audits of the performance of the franchisee.   The court nevertheless determined that Domino’s did not control the activities that caused the injury and, thus, was not vicariously liable.  In reaching this decision, the court noted that while Domino’s set minimum guidelines to follow, the franchisee controlled the means, methods and details of implementing those guidelines and was free to expand or increase those guidelines.  The court also noted that the employees at the franchised location were employed by the franchisee, not Domino’s; that Domino’s had no legal right to direct the employees; and that the franchisee was solely responsible for recruiting, hiring, training, scheduling, supervising and paying employees.  Based on these facts, the court concluded that the evidence was legally insufficient to support the jury’s finding that Domino’s controlled or had the right to control the acts/omissions of the employees of the franchisee that caused the injury and, thus, could not be held vicariously liable for the injuries.  Domino’s Pizza, L.L.C. v. Reddy, No. 09-14-00058-CV, 2015 WL 1247349 (Tex. App. – Beaumont March 19, 2105).

Florida Court Dismisses Fraud Claims Based on Disclaimers

The U.S. District Court for the Southern District of Florida dismissed a franchisee’s claims for fraud and misrepresentation holding that the specific disclaimers in the franchise agreement precluded the franchisee from making such claims.  Plaintiff, Creative American Education, LLC (“CAE”) entered into a franchise agreement with the defendant, The Learning Experience Systems, LLC (“TLE”).  Various issues arose with the operation of the franchise and eventually TLE took over operation of the franchise.  CAE filed a lawsuit asserting various claims.  The Franchise Agreement contained an integration clause and several disclaimers, set forth in all caps, which provided that no representations were made other than those in the FDD and that CAE acknowledge and agree that it had not received and was not relying on any such promises or representations. Relying on Florida case law, the court held that disclaimers in the franchise agreement were sufficiently specific to preclude the misrepresentation and fraud claims asserted by CAE.  The court held that reliance is a necessary element of a fraud/misrepresentation claim and when a contract contradicts an alleged representation (as the disclaimers did in this case), the plaintiff cannot rely on the misrepresentation. As to the other asserted claims, the court refused to dismiss plaintiff’s rescission claim, stating that there was a question of fact as to whether the parties’ performance under the franchise agreement had become impossible. The court also refused to dismiss the plaintiff’s claims under the Florida Deceptive and Unfair Trade Practices Act (the “Act”) to the extend they pertained to performance under the relevant agreements, but did dismiss claims under the Act to the extent they pertained to extra-agreement representations.  The court also found that there were material issues of fact as to CAE’s breach of contract claims and refused to dismiss them on summary judgment.   Creative American Education, LLC v. The Learning Experience Systems, LLC, No. 9:14-CV-80900, 2015 WL 2218847 (S.D. Fla. May 11, 2015).