FRANCHISOR LIABILITY BASED ON ACTIONS OF FRANCHISEE OR FRANCHISEE'S EMPLOYEES
Franchisors are accustomed to dealing with certain legal issues while interacting with their franchisees. However, franchisors also face claims by third parties based on actions of their franchisees or the franchisee’s employees. Third-party plaintiffs view franchisors as the “deep-pocket” through which they might recover a big payday. Several recent decisions have provided additional guidance from the courts regarding the various theories upon which liability may be imposed on a franchisor: Orozco v. Plackis, No. A-11-CV-703 ML, 2013 WL 3306844 (W.D. Tex., June 13, 2013); Courtland vs. GCEP-Surprise, LLC, No. CV-12-00349-PHX-GMS, 2013 WL 3894981 (D. Ariz., July 29, 2013); Cha v. Hooters of America, LLC, No. 12-CV-4523 (DLI) (JMA), 2013 WL 5532745 (E.D.N.Y., Sept. 30, 2013); Nebraskaland, Inc. v. Sunoco, Inc., No. 10-CV-1091 (RJD) (CLP), 2013 WL 5656143 (E.D.N.Y. Oct. 11, 2013); Denny’s Inc. v. Barreras, No. Civ. 12-0605 JB/GBW, 2013 WL 6506319 (D.N.M. Nov. 13, 2013); Bartholomew v. Burger King Corp., No. 11-00613 (JMS/RLP), 2014 WL 1414975 (D. Hawaii, April 14, 2014).
One basis for liability often asserted by third parties against franchisors is the "joint employer" theory. Under this theory, the law provides that “[t]wo or more employers may be considered ‘joint employers’ if both employers control the terms and conditions of employment of the employee.”E.E.O.C. v. Pac. Mar. Ass’n, 351 F.3d 1270, 1275 (9th Cir. 2003). Most courts apply the “economic reality” test to determine joint employment. Reese v. Coastal Restoration and Cleaning Services, Inc., No. 1:10cv36, 2010 WL 5184841, at *3 (S.D. Miss. Dec. 15, 2010); Cano v. DPNY, Inc., 287 F.R.D. 251, 258 (S.D.N.Y. 2012). Some of the factors considered in making such a determination are: (1) the nature/degree of control and supervision of the workers; (2) the power to determine the pay rates or the methods of payment of the workers; (3) the right to hire, fire or modify the employment conditions; and (4) maintaining of employee records. Pac. Mar. Ass’n, 351 F.3d at 1275; Orozco, 2013 WL 3306844, at *2; Cano, 287 F.R.D. at 258.
Most courts have found that a franchisor will not be considered a joint employer of the franchisee’s employees. See Singh v. 7-Eleven, Inc., No. C-05-04534, 2007 WL 715488, at *3-6 (N.D. Cal. March 8, 2007); Reese, 2010 WL 5184841, at *3; Howell v. Chick-Fil-A, Inc., No. 92-30188, 1993 WL 603296, at *4-5 (N.D. Fla. Nov. 1, 1993). However, when a franchisor has significant involvement in the day-to-day management of employees some courts have held that a franchisor can be a joint employer and potentially liable to a perspective third party plaintiff. Orozco, 2013 WL 3306844, at *7-8; Torres-Lopez v. May, 111 F.3d 633, 639 (9th Cir. 1997); Cano, 287 F.R.D. at 253.
In Orozco, the court found that there was sufficient evidence to support a jury finding that the franchisor was a joint employer based on language in the franchise agreement which required the franchisee to comply with certain policies and procedures of the franchisor for the “selection, supervision, or training of personnel”. The jury’s finding was further supported by testimony from a representative of the franchisor that he had met with the franchisee to examine work schedules and had provided advice as to those work schedules to assist the franchisee. Orozco, 2013 WL 3306844, at *7-8.
In Courtland, the court found that the franchisor was not a joint employer of the plaintiff. The evidence showed that the franchisor had set forth in the franchise agreement certain guidelines, policies and procedures that franchisees were expected to follow in connection with operation of the franchise. However, contrary to Orozco, the court found that this general supervision was put in place to help protect, develop and maintain the goodwill associated with the franchisor’s system and was not sufficient, by itself, to support a finding of joint employment. In reaching this conclusion, the court noted that the franchisor: (1) did not have the right to hire, supervise or fire employees of the franchisee; (2) did not compensate the franchisee’s employees; (3) did not train non-managerial employees; and (4) did not provide assistance with respect to human resources matters of the franchisee, mandate HR training or monitor the franchisee’s HR policies. Courtland, 2013 WL 3894981, at *2-5. As noted above, most courts follow the Courtland line of thinking as to the joint employer analysis in a franchise context.
Vicarious Liability – Agency Relationship
A franchisor can be held vicariously liable on an agency theory if it is shown that the franchisor controls or has the right to control the daily conduct or operation of the particular instrumentality or the aspect of the franchisee’s business that is at issue or that is alleged to have caused the harm.Courtland, 2013 WL 3894981, at *5; Cha, 2013 WL 5532745, at *2-3; Gray v. McDonald’s USA, LLC, 874 F. Supp. 2d 743, 752 (W.D. Tenn. 2012).
For example, in discrimination/employment type cases, the court will look at the degree of control the franchisor has over the employees of the franchisee, including hiring, firing, training, day-to-day scheduling, etc. Courtland, 2013 WL 3894981, at *5,7; Gray, 874 F. Supp. 2d at 752. In Courtland, the court held that the franchisor did not have, or exercise, daily control over the hiring, firing, training and/or scheduling of the franchisees’ employees. The court noted that the franchise agreement provided, and the evidence showed, that the franchisee was solely responsible for employment matters. Furthermore, while the franchisor provided training for managers, the court found that the training was limited to the training necessary to protect the franchisor’s brand name and product presentation and did not pertain to employment or employee issues.
On the other hand, in Bartholomew, the court denied the franchisor's motion for summary judgment based on an actual agency theory. The court held that there were material facts in dispute regarding Burger King's control over preparation of the food at the franchisee's location. The court determined that a food preparation manual incorporated into the franchise agreement created an issue of fact because it provided detailed instructions to the employees as how to assemble sandwiches. Bartholomew, 2014 WL 1414975, at *5.
Most franchise agreements set forth certain operational guidelines for the franchisees and allow the franchisor to periodically inspect the franchisee to ensure compliance with those guidelines. Courts have held that such operational guidelines and inspection rights do not, by themselves, establish the control necessary to support a finding of vicarious liability based on an agency relationship and are viewed as necessary for a franchisor to establish uniformity for its franchise system and to protect the franchisor’s trademarks and goodwill. Cha, 2013 WL 5532745, at *3; Gray, 874 F. Supp. 2d at 752; Courtland, 2013 WL 3894981, at *6. There is often a fine line between a franchisor exercising enough control over its franchisees to maintain uniformity in its franchise system and protect its trademark, and a franchisor exercising too much control and potentially subjecting itself to claims and damages based on actions of its franchisee or the employees of its franchisee. See Denny’s Inc., 2013 WL 6506319, at *22.
Vicarious Liability – Apparent Authority
To establish vicarious liability through apparent authority, the words or actions of the franchisor, communicated to a third party, must present the appearance that the franchisee was acting as its agent. Cha, 2013 WL 5532745, at *3; Courtland, 2013 WL 3894981, at *9. Apparent authority cannot be established based solely on the acts of the franchisee. Courtland, 2013 WL 3894981, at *9. The party claiming apparent authority must show that it reasonably relied on the words or conduct of the franchisor in believing that authority existed at the time of incident or action giving rise to the claim. Courtland, 2013 WL 3894981, at *9 (subjective belief and objective reasonableness required); Cha, 2013 WL 5532745, at *3.
Most courts have concluded that the existence of a franchise relationship by itself does not establish apparent authority. Oberlin v. Marlin Am. Corp., 596 F.2d 1322, 1327 (7th Cir. 1979);Courtland, 2013 WL 3894981, at *9. Moreover, the use of signs, advertising and/or the franchisor’s trademark generally cannot, by itself, establish apparent authority. Colson v. Maghami, No. CV 08-2150-PHX-MHM, 2010 WL 2744682, at *13 (D. Ariz. July 9, 2010); Cha, 2013 WL 5532745, at *3.
However, when the claims are asserted by a customer and the franchisor has not done a sufficient job of showing that the individual locations are owned and operated by independent franchisees, some courts have concluded that a franchisor can be vicariously liable under an apparent authority theory. Bartholomew, 2014 WL 1414975, at *6 (products liability); Nebraskaland, 2013 WL 5656143; Broock v. Nutri/System, Inc., 654 F. Supp. 7, 11 (S.D. Ohio 1986) (products liability);Crinkley v. Holiday Inns, Inc., 844 F.2d 156, 166-67 (4th Cir. 1988) (assault). In Crinkley, the franchisor was found to be vicariously liable under an apparent authority theory based on the franchisee’s use of Holiday Inns’ trademark; the franchisor’s national advertising; and a published directory which did not distinguish between company owned and franchised hotels. The court reached this decision despite the fact that the franchisee had a sign in the connected restaurant indicating that the motel was independently owned and operated by a franchisee pursuant to a franchise agreement.
In Nebraskaland, the court held that a question of fact can arise as to apparent authority if the franchisee uses signage and advertisements containing the franchiser's logo in the course of forming a contract with a third party. The court noted that there were issues of fact regarding the third party's reliance and that such reliance was objectively reasonable. Similarly, in Bartholomew, the court held that there was a question of fact regarding liability based on apparent authority given the whole record, including numerous signs outside and inside the restaurant bearing the color scheme and logo of Burger King. Bartholomew, 2014 WL 1414975, at *6.
In Courtland, the plaintiff claimed that she received a handbook with the franchisor’s logo on it; that she was repeatedly told that she was an employee of the franchisor; and that she was trained by people who identified themselves as trainers from the franchisor’s corporate office. In rejecting the plaintiff’s arguments for liability based on apparent authority, the court noted that the plaintiff’s assertions were not supported by the evidence; the assertions showed only her subjective belief; that plaintiff did not establish that those beliefs were based on representations or actions by the franchisor; and her employment forms clearly identified the franchisee as her employer. Courtland, 2013 WL 3894981, at *9-10.
Tips for Franchisors
As the potential “deep-pocket”, vicarious liability claims against franchisors are not going to go away. Franchisors must be prepared to fight legal theories asserted by third parties which attempt to hold them responsible for actions of their franchisees and/or employees of their franchisees. Here are some tips for franchisors to help try and protect themselves against potential vicarious liability claims:
- Require your franchisees to prominently display a sign in their store or place of business that clearly states that it is a franchisee and that it independently owns and operates the store/place of business.
- Be careful to not become too involved in the day-to-day operations of the franchise and/or the management of the franchisees’ employees and limit your involvement to advice and suggestions, not requirements.
- Use very precise and explicit language in the franchise agreement providing that the franchisee is an independent business and is solely responsible for control and management of its employees.
- Make sure that the franchise agreement requires the franchisee to maintain appropriate levels of insurance that names the franchisor as an additional insured.
- Make sure that the franchise agreement contains appropriate indemnification provisions to protect the franchisor.
STANDING TO ASSERT FALSE ADVERTISING CLAIMS UNDER THE LANHAM ACT IS CLARIFIED BY THE UNITED STATES SUPREME COURT
The U.S. Supreme Court issued two recent decisions which clarified when standing exists for false advertising claims brought under the Lanham Act. In the first decision, the Supreme Court clarified standing under the Lanham Act to comport with traditional tenets of settled trademark law. The decision broadened instances in which Lanham Act standing for false advertising claims could exist. In the second decision, the Supreme Court clarified that Lanham Act standing is autonomous.
Broadening of Lanham Act Standing
In Lexmark International, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014), a maker of component replacement parts (Static Control) alleged a Lanham Act false advertising claim against an original equipment manufacturer (Lexmark). After winding its way through the Sixth Circuit, the United States Supreme Court granted certiorari to resolve a split among the Circuits as to the test on whether a party has standing to assert a claim for false advertising under the Lanham Act.
The Circuit split underlying Lexmark arose against more than a half-century-long development of Lanham Act standing law. The Lanham Act was established by a 1946 Act of Congress to provide for federal-level protection from trademark infringement and acts of unfair competition. In the ensuing years, courts interpreted the Lanham Act to encompass claims for false advertising. See, e.g., Alberto-Culver Co. v. Gillette Co., 408 F.Supp. 1160, 1162–63 (N.D. Ill. 1976) (discussing cases). Today, the Lanham Act provides a civil remedy for a plaintiff who is injured by a defendant’s false or deceptive advertising.
Over the course of time, three different tests to determine when a plaintiff has standing to state a false advertising claim under the Lanham Act emerged from various Circuit Courts. For example, the Third Circuit originally defined the “dispositive question” of a party’s standing as “whether the party has a reasonable interest to be protected against false advertising.” Thorn v. Reliance Van Co., 736 F.2d 929, 933 (3d Cir. 1984). The Third Circuit later developed that analysis and adopted the test for antitrust standing, as set forth by the Supreme Court in Associated Gen. Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983) as an appropriate method to determine a party's statutory standing under Section 43(a) of the Lanham Act:
- The nature of the plaintiff's alleged injury: Is the injury "of a type that Congress sought to redress in providing a private remedy for violations of the antitrust laws"?
- The directness or indirectness of the asserted injury.
- The proximity or remoteness of the party to the alleged injurious conduct.
- The speculativeness of the damages claim.
- The risk of duplicative damages or complexity in apportioning damages.
Conte Bros. Auto., Inc. v. Quaker State-Slick 50, Inc., 165 F.3d 221, 233 (3d Cir. N.J. 1998) (citingAssociated Gen. Contractors, Inc. 459 U.S. (1983)). In time, the Fifth and Eleventh Circuits followed. See, e.g., Phoenix of Broward, Inc. v. McDonald’s Corp., 489 F.3d 1156, 1168 (11th Cir. 2007); Proctor and Gamble Corp. v. Amway, 242 F.3d 539, 561–63 (5th Cir. 2001). To have Lanham Act standing, a plaintiff needed to have antitrust standing.
The Seventh, Ninth, and Tenth Circuits, on the other hand, used a categorical test and only permitted Lanham Act suits for false advertising by an actual competitor. See, e.g., Jack Russell Terrier Network of N. Ca. v. Am. Kennel Club, Inc., 407 F.3d 1027, 1037 (9th Cir. 2005) (holding that to establish “standing pursuant to the ‘false advertising’ prong of § 43(a) of the Lanham Act, a plaintiff must show: (1) a commercial injury based upon a misrepresentation about a product; and (2) that the injury is ‘competitive,’ or harmful to the plaintiff's ability to compete with the defendant”) (citation omitted); Hutchinson v. Pfeil, 211 F.3d 515, 520 (10th Cir. 2000) (holding that the plaintiff lacked standing because his hopes of eventually obtaining a product to compete with the defendant’s were too remote, and his inability to compete with the defendant was not a function of the defendant’s alleged misconduct); Johnny Blastoff, Inc. v. L.A. Rams Football Co., 188 F.3d 427, 438 (7th Cir. 1999) (holding that “a party must demonstrate that it has a reasonable interest to be protected against conduct violating the Act[,]” by asserting “a discernable competitive injury” (internal quotations omitted); Stanfield v. Osborne Indus., Inc., 52 F.3d 867, 873 (10th Cir. 1995) (holding that the plaintiff “must be a competitor of the defendant and allege a competitive injury”);L.S. Heath & Son, Inc. v. AT & T Info. Sys., Inc., 9 F.3d 561, 575 (7th Cir. 1993) (holding that “the plaintiff must assert a discernible competitive injury”); Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1109 (9th Cir. 1992) (same).
Finally, the Second and Sixth Circuit applied a reasonable interest approach, “under which a Lanham Act plaintiff had standing if the claimant could demonstrate: (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.” Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1385 (2014) (citation omitted). This test, unlike the Seventh, Ninth, and Tenth Circuits, did not require competition for standing. This test did, however, view competition as a strong indicator that standing existed. Famous Horse Inc. v. 5th Ave. Photo Inc., 624 F.3d 106, 113 (2d Cir. N.Y. 2010).
In Lexmark, the Supreme Court established a more basic analysis that comports with settled Lanham Act law. Under Lexmark, a plaintiff establishes standing with an alleged: (1) injury to a commercial interest in reputation or sales, that was (2) proximately caused by the deceptive advertising. This analysis fits neatly within the Lanham Act framework for damages recoverable in 15 U.S.C. § 1117, where a party is entitled to recover traditional commercial damages in the form of lost profits and/or damage to business reputation. This, moreover, fits neatly within the plain language of the relevant statute itself, which has no reference to antitrust or to the competitive stance between the parties. Indeed, 15 U.S.C. § 1125(a) provides a civil action for “any person.” That “any person” is the “plaintiff” in 15 U.S.C. § 1117 who is entitled to recovery (i.e., profits, damages and costs, attorneys fees) for a violation of rights.
Under Lexmark, consistent with traditional tenets of trademark law, neither actual competition nor antitrust standing is needed to establish Lanham Act standing for a false advertising claim.Lexmark should immediately broaden the instances in which Lanham Act standing is found.
Lanham Act Standing Is Autonomous
In Pom Wonderful LLC v. Coca-Cola Co., 134 S.Ct. 2228 (2014), a beverage manufacturer (Coca-Cola) raised the federal regulatory framework of the Food and Drug Administration to dispose of a competitor’s (Pom’s) Lanham Act false advertising claim. After a stop at the Ninth Circuit Court of Appeals, the United States Supreme Court granted certiorari to expressly clarify that a Lanham Act claim is allowed in cases where a product is subject to regulation under the Food, Drug and Cosmetic Act.
Looking back to the inception of the 1946 Lanham Act, the Supreme Court observed that the Lanham Act and the Food, Drug and Cosmetic Act had co-existed for many decades. With relatively short shrift, the Court noted that Congress intended the Acts to co-exist, and there is no reason to think differently. The Court observed that there exists “powerful evidence that Congress did not intend FDA oversight to be the exclusive means of ensuring proper food and beverage labeling,” as the Lanham Act and the FDCA have been subject to Congressional amendments and federal agency oversight for nearly seventy years.
The Pom ruling simply makes sense as a plain ruling of statutory interpretation. While the Lanham Act provides federal-level protection from trademark infringement and acts of unfair competition, the Food, Drug and Cosmetic Act provides protection for the public health and safety. The Lanham Act, practically speaking, is administered by courts of law, while the Food, Drug and Cosmetic Act is enforced by an established federal agency (i.e., the Federal Drug Administration).
The Pom opinion, like Lexmark, serves to clarify that more types of Lanham Act claims fall within the province of district court jurisdiction than previously recognized.
No lower court decision of great significance has come out after Lexmark and Pom. The Lexmarkand Pom decisions have been met with mixed reviews. How these decisions ultimately impact the filing of false advertising claims under the Lanham Act will become more clear over the next few years, but for now it is clear that the U.S. Supreme Court envisions a broader standing for asserting such claims.
Mississippi Amends Motor Vehicle Dealer Law
House Bill No. 581 was passed by the Mississippi legislature and will become effective on July 1, 2014. The bill amends certain provisions of the Motor Vehicle Dealer Law including expanding the list of unlawful conduct prohibited by a manufacturer. Some of the prohibited conduct which was added includes prohibiting a manufacturer from: (1) requiring a dealer to change its method of business if such a change would impose a substantial and unreasonable financial hardship; (2) conditioning the sale, transfer, relocation or renewal of a dealer agreement upon a site-control agreement; (3) assigning or changing a dealer’s market area arbitrarily or without due regard to the present or projected future pattern of motor vehicle sales and registrations without first providing proper notice; and (4) establishing a performance standard or program that may have a material impact on the dealer that is not fair, reasonable and equitable.
Kentucky Enacts New Recreational Vehicle Dealer Law
On April 7, 2014, the Kentucky legislature enacted a comprehensive law governing the relationships between recreational vehicle dealers and manufacturers. The law defines “recreational vehicles” to include motor homes, travel trailers and folding camping trailers. The new law requires: (1) manufacturers to provide 90 days written notice for termination and/or non-renewal; (2) precludes the termination and/or non-renewal of a dealer without good cause; and (3) requires that the dealer be given an opportunity to cure the alleged deficiencies. Under certain specified circumstances set forth in the statute, the notice requirement may be eliminated or reduced to 30 days and the dealer may not have an opportunity to cure. The law also provides that each dealer must be given an area of responsibility in a written dealer agreement and provides certain protections to the dealer for sales in that area of responsibility. The statute also sets forth rules, rights and restrictions pertaining to: (1) warranties; (2) transfer/sale of the dealership, and (3) unfair/prohibited practices. The new dealer law takes effect on January 1, 2015.
Mississippi Enacts New Recreational Vehicle Dealer Law
House Bill No. 742 was enacted by the Mississippi legislature to protect recreational vehicle dealers. Under the statute, recreational vehicles include: motor homes, travel trailers, fifth-wheel trailers, camping trailers, truck campers and park-model RVs. The new statute prohibits a manufacturer from terminating or non-renewing a dealer agreement without good cause and requires notice and an opportunity to cure. The statute requires repurchase of the dealer’s inventory under certain circumstances if the agreement is terminated or non-renewed. The statute also addresses warranty obligations, transfer issues and a dealer’s area of responsibility. The new dealer law takes effect on October 1, 2014.
RECENT CASE LAW
Franchisee’s Delay in Seeking Rescission Justifies Dismissal
A U.S. District Court in Pennsylvania granted summary judgment for the Defendant, a franchisor, as to all claims except Plaintiff’s breach of contract claim. Plaintiff had alleged that it was entitled to rescission of the franchise agreement because the franchisor had failed to disclose that the store was subject to frequent criminal activity. Prior to purchasing the store, the Plaintiff had asked if the location had experienced any problems with crime. Representatives of the franchisor said no. In the first week of operation, money orders were stolen by employees of the former franchisee; the new franchisee was robbed at gun point and a police officer informed the Plaintiff that the store had been robbed several times. Despite this knowledge, the Plaintiff continued to operate the store for two years. The Plaintiff did not seek rescission until the franchisor terminated the relationship more than two years later. The court held that the Plaintiff had a duty to pursue his rescission claim within a reasonable time and his decision to wait over two years after learning of the crime experienced at the location justified the dismissal of his claim. Albarqawi v. 7-Eleven, Inc., No. 12-3506, 2014 WL 616975 (E.D. Pa. February 18, 2014).
Court Grants Preliminary Injunction Enforcing Non-Compete Agreement Against Franchisee
A Minnesota U.S. District Court granted a franchisor’s Motion for Preliminary Injunction which enjoined the ex-franchisees from owning and operating two competing fitness centers. The franchisees had operated an Anytime Fitness center in Brooklyn Park, Minnesota, pursuant to a franchise agreement which contained a non-compete provision. The franchisees notified Anytime Fitness that they would not be renewing the franchise agreement when it expired. The franchisees became involved in a fitness center in Minnetonka and then began operating another fitness center, under the same name, in the same location as their Anytime Fitness center, after expiration of the franchise agreement. The court determined that Anytime Fitness had showed a likelihood of success as to the alleged breach of the non-compete provision and rejected the Defendants' argument that an amendment to the franchise agreement limited the application of the non-compete provision. The court determined that Anytime Fitness had shown irreparable harm in the form of loss of goodwill, loss of customers, loss of proprietary information and damage to the integrity and functioning of its franchise system as a whole. As to the last aspect of irreparable harm, the court held that if the non-compete provision was not enforced other franchisees in the system might believe that they can leave the system and start their own fitness center to avoid paying royalties. This is an important conclusion for franchisors to assist in enforcing non-compete provisions. Anytime Fitness was also awarded its costs and expenses, including reasonable attorneys’ fees, incurred in connection with bringing the motion. Anytime Fitness, LLC v. Edinburgh Fitness LLC, No. 14-348 (DWF/JJG), 2014 WL 1415081 (D. Minn., April 11, 2014).
Franchisor Faces Vicarious Liability Based on Actual and Apparent Authority Theories
The U.S. District Court in Hawaii denied a summary judgment motion brought by Defendant Burger King Corp. seeking dismissal of claims of liability based on foreign objects in food purchased by a customer from the franchisee. The court stated that a franchisor could be liable based on an actually agency theory if the franchisor had control of, or the right to control, the instrumentality that is alleged to have caused the harm. The court held that there were material facts in dispute regarding Burger King’s control over the preparation of food at the franchise location. The court reached this conclusion despite the fact that the franchise agreement expressly provided that the franchisee was responsible for the day-to-day operation of the business and that the franchisee was not an agent of the franchisor. However, the franchise agreement incorporated a manual which provided detailed instructions as to the method by which employees were to assemble sandwiches, including the sandwich in question which contained the foreign objects. This manual, the court concluded, created an issue of material fact regarding whether or not Burger King had the requisite control over the instrumentality that caused the harm. Under the apparent agency theory the court held that a franchisor could be liable “where a franchisor represents to consumers that a franchisee is the agent of the franchisor causing a consumer to justifiably rely upon the apparent authority.” The court said it was unclear if there was a sign in the restaurant regarding independent ownership of the franchise location. The court also stated that the existence of a sign in the restaurant notifying the public of the independent ownership of the franchise location may not be enough, in and of itself, to overcome the public perception of agency created by a national system of restaurants under the Burger King name. The court held that based on the whole record, including the numerous signs outside and in the restaurant bearing the color scheme and logo of “Burger King” there was an issue of fact regarding whether or not the plaintiffs justifiably relied upon an apparent agency relationship between the franchisee and Burger King. Bartholomew vs. Burger King Corp, No. 11-00613 JMS/RLP, 2014 WL 1414975 (D. Haw. April 14, 2014).
Minnesota Court Finds No Personal Jurisdiction Over Franchisor’s Corporate Officers
The U.S. District Court in Minnesota held that a prima facie case of liability of three corporate officers under the Minnesota Franchise Act (“MFA”), Minn. Stat. § 80.C17, subd. 2, combined with the listing of those three corporate officers in the Franchise Disclosure Document (“FDD”) provided to Plaintiffs did not satisfy the minimum contact requirements necessary to meet standards of constitutional due process. Plaintiffs argued that the Court’s prior ruling in Dr. Performance of Minn., Inc. v. Dr. Performance Mgmt., LLC, No. 01-1524, 2002 WL 31628440 (D. Minn., Nov. 12, 2002) supported personal jurisdiction. The Court had held in Dr. Performance that “liability under the MFA, coupled with some singular contact with the forum state” was sufficient to establish personal jurisdiction. 2014 WL 1608301, at *2. The Court in this case distinguished the facts before it from the Dr. Performance decision in that the FDD merely listed the three corporate officers, the FDD was not signed by any of the corporate officers and there was “no allegation that Defendants … individually wrote, filed, or otherwise initiated contact with the forum.” 2014 WL 1608301, at *3. Therefore, the required minimum contacts with Minnesota were not established and the case was dismissed against the three corporate officers. Sanford. v. Maid-Rite Corporation, No. 13-2250, 2014 WL 1608301 (D. Minn. Apr. 21, 2014).
Michigan Court Holds That Minnesota Franchisee is Not Guaranteed to Have Dispute Litigated in Minnesota
The U.S. District Court for the Eastern District of Michigan denied a franchisee’s Motion for Change of Venue holding that the Minnesota Franchise Act (“MFA”) does not guaranty a franchisee that all of its disputes with the franchisor will be resolved in Minnesota. Here the franchise agreement had expired and the franchisee had continued to operate its business in the same location in violation of a non-compete provision. The franchisor filed a lawsuit in Michigan and the franchisee filed a motion to transfer venue to Minnesota based on the MFA. The franchise agreement contained a forum selection clause requiring all actions arising under the agreement to be filed in Michigan and further providing that the franchisee consented to jurisdiction in Michigan and waived any right to object to venue in Michigan. The franchisee argued that filing litigation in Michigan was “requiring litigation to be conducted outside Minnesota” and, therefore, violated Section 80C.21 of the MFA and Minnesota Rule §2860.4400. Following the §1404(a) venue analysis set forth by the U.S. Supreme Court, the Michigan Court denied the franchisee’s motion. The court held that nothing in the MFA precludes the parties from agreeing to a forum selection clause and that the anti-waiver language in §80C.21 is designed to prohibit the waiver of protections afforded to franchisees under the act and does not preclude a franchisee from having to litigate in a non-Minnesota forum. The court noted that the forum selection clause does not require the franchisee to waive any of the protections provided under the MFA. Finally, the court concluded that the MFA merely ensures that the franchisee will have the opportunity to litigate disputes in Minnesota if it chooses to file suit, but it does not guaranty that all disputes between a Minnesota franchisee and a non-Minnesota franchisor must be resolved in Minnesota. Allegra Holdings, LLC v. Davis, No. 13-CV-13498, 2014 WL 1652221 (E.D. Mich., April 24, 2014).
Minnesota Court Finds Harm to Franchisees if Franchises Were Terminated Does Not Outweigh Harm to Franchisor if Franchisees Were Allowed to Continue to Operate
A Minnesota U.S. District Court denied a motion for preliminary injunction seeking to enjoin the termination of two Minnesota held franchises. Defendants sent notices of termination of two franchises pursuant to Minn. Stat. § 80C.14, subd. 3(d) (2013) asserting it had good cause to terminate the franchises because of Plaintiffs’ repeated failure to pass quality assurance inspections. The Court focused on the two key factors of a preliminary injunction motion: likelihood of success on the merits and the balance of harms. The Court found that although Plaintiffs had submitted evidence sufficient to create a prima facie claim, Plaintiffs had not established likelihood of success on the merits. The more important aspect of this opinion, however, is its determination that the harm that would be suffered by Plaintiffs for termination of its two franchises did not outweigh the harm to Defendants of being prevented from terminating the franchises until a final hearing on the merits. The Court held that although Plaintiffs would suffer irreparable harm from termination of the franchises, that Defendants also would suffer irreparable harm due to the continued use of its trademarks at properties associated with substandard quality hotels. The Court concluded the balance of harms did not tip decidedly toward the moving party. Pooniwala v. Wyndham Worldwide Corp., No. 14-778, 2014 WL 1772323 (D. Minn. May 2, 2014).
Eighth Circuit Reinstates Antitrust Case Based Upon Territorial Allocation Claim
The Eighth Circuit Court of Appeals reversed the grant of summary judgment in favor of Defendants C&S Wholesale Grocers, Inc. and SuperValu, Inc. and sent the case back to the trial court on the issue of whether the two competitor Defendants violated federal antitrust laws with a territorial allocation scheme dividing up the Northeast and the Midwest. Plaintiff alleged that the two largest grocery wholesalers in the United States, C&S and SuperValu, had agreed to divide up the two territories as part of an elaborate agreement. Plaintiff argued that this allocation occurred as a result of an agreement in which C&S acquired SuperValu’s operations in New England and SuperValu acquired C&S’s operations in the Midwest. As part of that agreement, the parties executed reciprocal non-compete agreements in which each party agreed not to sell to former customers in their former territory for two years and to not solicit those customers for five years. Plaintiff alleged that the real result or purpose of the deal was that each wholesaler would not compete with the other in its territory and that both wholesalers would close the operations they had acquired through the deal. Thus, according to Plaintiff, C&S would close the SuperValu operations in New England that it just purchased and would not compete against SuperValu in the Midwest, while Supervalu would close the C&S operations in the Midwest that it had just purchased and would not compete against C&S in New England. The Eighth Circuit concluded that viewing the evidence in a light most favorable to the Plaintiff, the record contained enough evidence upon which a reasonable jury could conclude that what the wholesalers actually agreed to was a naked division of territory and customers. The Court held that if proved at trial, such an agreement would constitute a per se and rule of reason violation of Section 1 of the Sherman Act. D & G, Inc. v. SuperValu, Inc., _ F.3d _, 2014 WL 2109122 (8th Cir. May 21, 2014).
Non-Compete Agreement Voided for Lack of Consideration
The Minnesota Court of Appeals upheld a trial court’s determination that as a matter of law an employment non-competition clause was void because all of plaintiff’s employees were not required to sign the non-compete clause. In an unpublished decision, the Court reviewed a situation in which Plaintiff, a supplier of fluid-power components and systems, sought to require all of their existing salespeople to enter into new non-competition agreements restricting their ability to work for a competitor for two years. For a non-compete agreement to be valid under Minnesota law when signed by an existing employee, the new non-compete must be supported by independent consideration (a new benefit conferred in exchange for the employee agreeing to the non-compete). Plaintiff offered all of its salespeople a new compensation package as consideration for the new non-compete. All of Plaintiffs’ salespeople, including Defendant, eventually signed the non-compete, but for one senior sales person. That senior sales person also received the new compensation package, despite refusing to sign the non-compete. In a 2-1 decision, the Court of Appeals held that there could be no consideration if “both signers and non-signers of a non-compete agreement receive the same benefits under an associated compensation plan…” Because the one sales person received the new compensation plan but was not required to sign the non-compete, the Court held that there was no independent consideration for the non-compete and therefore affirmed the decision of the trial court voiding the non-compete. This opinion arguably puts a burden on any employer seeking to institute a new non-competition agreement to obtain 100% compliance by all employees in executing the non-compete, if all employees receive the consideration. Without 100% compliance, an employer risks having all of the non-competes voided for lack of consideration. The dissent in the case cautioned that “a holding that one-hundred percent of all similarly situated employees must execute a non-compete agreement for its viability is not commercially practical in a free and competitive society.” Nott Company v Eberhardt, Nos. A13-1061, A13-1390, 2014 WL 2441118 (Minn. Ct. App. June 2, 2014).