Forward Franchising - Las Vegas, Nevada Franchise Attorney Matt Kreutzer

Franchisees Who Faked Evidence In Court Case Permitted To Continue Litigating

It should be obvious to anyone reading these words that it is never a good idea to lie to a court of law.  That's a pretty basic concept, right?  Lying in court documents is called "perjury," and it's a crime in every State in the union.  So it's always interesting to hear a story about someone who failed to grasp this fairly simple concept -- and how they got caught doing it.  This time it was the Husains, longtime McDonald's franchisees, who lied to a court in Northern California in litigation against their franchisor.

The decision in Husain v. McDonald’s Corp. was handed down by the California Court of Appeals on March 28, 2013.  The story goes something like this:

The Husains are longtime McDonald’s franchisees, having owned up to five different McDonald’s franchises located in northern California since the early 1980s.  In June 2005, the Husains entered into an agreement with a third party to purchase an additional 7 restaurants.  Of those, 3 of the franchise agreements were nearing the end of their 20-year franchise terms.  As part of the purchase, the Husains asked McDonald's whether it would agree to provide them with new 20-year franchise agreements when the 3 expiring agreements came to the end of their respective terms. 

McDonald's offered to extend the Husains' expiring terms by letter, which offer had to be countersigned and agreed to by the Husains to become effective.  McDonald’s claimed the offer was never accepted and expired on its own terms, leaving the Husains without renewal franchise agreements for the 3 expiring restaurants.  The Husains sued to enforce McDonald’s alleged promise to them. McDonald’s filed a cross-complaint to compel the Husains to relinquish the 3 restaurants to the company.

To "prove" that they had, indeed, accepted McDonald's offer to extend the expiring franchise terms, the Husains produced a certificate of mailing with a United States Postal Service postmark dated before the offer expired, alleging that the agreement had been properly accepted.  McDonald’s countered by producing evidence that the post office that had supposedly provided the certificate of mailing was closed on the date bearing the postmark, and that the postmark stamp on the certificate was not in use until 2008.

Based on this evidence, McDonald’s claimed that the Husains had committed perjury and fabricated evidence, and sought terminating sanctions -- in other words, McDonald's asked the Court to sanction the Husains by not permitting them to continue litigating their case.  The trial court denied the motion, finding that at most McDonald’s would be entitled only to dismissal of a cause of action the Husains had already dismissed, and that there was a factual dispute regarding the fabrication charges that could not be determined at the motion stage.

Fast Food Restaurant Strikes Spread To St. Louis, Detroit

Following on the heels of similar strikes in recent weeks in New York and Chicago, hundreds of St. Louis area fast food restaurant employees walked off the job May 9, which affected more than 30 area businesses including a number of fast food franchise businesses. The strikes spread to Detroit on May 10. These employees joined a growing wave of protests over wages and other terms and conditions of employment in what is one of the fastest-growing segments in the U.S. labor market. You may even remember similar actions by Wal-Mart employees on Black Friday in 2012.

Although strikes are often associated with labor unions, the workers involved in these impromptu strikes are not unionized.  Instead, the efforts are being supported by a coalition of organizations, including labor groups, nominally coined “alt-labor,” that are not legally unions. But this does not mean that their activities are not protected by U.S. labor laws, specifically the National Labor Relations Act (“NLRA”). Enacted in 1935, the NLRA protects the right of workers to join together to bargain collectively with their employer and  engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. The NLRA also protects the right of workers to refrain from any and all such activities.

Among other things, employees covered by the NLRA (which includes most, but not all, private sector employees) have the right to walk out or strike, even if they are not in a union. Many employers who are unfamiliar with unions or do not regularly deal with unionized workforces, can sometimes fall into a trap for the unwary by disciplining or discharging employees who are engaged in protected, concerted activities such as a strike. Even though failing to report for work or even walking out during the middle of a shift impacts an employer’s operations and may, in fact, violate an attendance policy, depending on the circumstances, an employer may actually be prohibited from disciplining them or questioning them about such protected activities.

In some cases, however, striking and picketing may not be protected. One such circumstance involves what is known as “recognitional picketing.” This occurs when employees, and perhaps non-employees, picket an employer with the goal of obtaining recognition. When employees (and non-employees) picketed Wal-Mart on Black Friday, Wal-Mart filed a charge with the National Labor Relations Board. This charge was ultimately resolved when the union involved agreed to cease organizing the employees.

For franchisors and franchisees, an ounce of prevention is truly worth a pound of cure. To lawfully confront the potential for such activities, wise and savvy employers need to train their supervisors and managers now, before any such activity begins. Trained managers and supervisors not only have the tools to respond effectively and lawfully should such an incident occur, but are vital to warding off such activities in the first place.

Armstrong Teasdale’s employment and labor attorneys can assist employers in preparing for, and responding to, organizing activity. Being prepared is vital to an employer’s success in the face of union or union-like activity.

When Are A Franchisor's Financial Performance Representations Actionable?

Under the FTC's Franchise Rule, a franchisor is permitted, but not required, to answer that all-important question asked by would-be franchise buyers: "how much money can I make?"  A franchisor that chooses to make a "financial performance representation" ("FPR") must put the representation in its Franchise Disclosure Document ("FDD"). The representation can take one of two forms.  It can be: (1) an earnings claim based on historical performance of operating units; or (2) a projection of possible future performance.  Allowing franchisors to make FPRs based on projections of future performance is still fairly new to franchising; the allowance of "future projections" was added when the Franchise Rule was amended in 2007. 

In either case, the touchstone requirement for an FPR is whether the franchisor has a reasonable basis for making it. As a related requirement, the franchise company must also be able to produce written substantiation for any claim to prove the "reasonable basis."

Since the Franchise Rule was amended in 2007, there hasn't been much litigation over financial performance representations.  Cases regarding representations of future performance are even more rare, which makes a recent Maryland court decision on the topic, Hanley v. Doctors Express Franchising, LLC, all the more noteworthy. A summary of the case is below (click to follow the link).

Franchising Bill Moves Forward In California

An update to my previous post regarding the "fair franchising bill" being considered in California's Senate: on Tuesday, April 16, 2013, the California Senate Judiciary Committee approved the proposed legislation (SB 610), which is being supported by the American Association of Franchisees and Dealers ("AAFD") and opposed by the International Franchise Association ("IFA"). 

If passed, SB 610 would make the following amendments to the California Franchise Relations Act ("CFRA"):

• The parties to a franchise relationship would be required to deal with one another in good faith (essentially, making the implied covenant of good faith and fair dealing an express statutory requirement); and
• Franchisors (or subfranchisors) would be prohibited from restricting a franchisee from joining or participating in an association of franchisees.

SB 610 would also amend the CFRA by permitting a franchisee to sue a franchisor or subfranchisor who violates the CFRA for damages, rescission, or other relief deemed appropriate by a court.  Moreover, SB 610 would authorize a court in its discretion to award treble (3 times) damages to the suing franchisee, as well as reasonable costs and attorney's fees. 

The AAFD, in support of the bill, argues that:

Modern franchise relationships are most always governed by one-sided "take it or leave it" adhesion contracts that elicit substantial monetary investment from franchise owners, provide substantial protection for franchisors, but severely limit a franchisee's rights in franchise relationship.  Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive manner.

The IFA, on the other hand, argues that the good faith requirement is problematic because "good faith" is:

[An] amorphous term to be applied to the franchisor in its relationship with the franchisee.  The  concept of "good faith" was created in the Uniform Commercial Code to fill in the blanks on short form contracts for the sale of goods.  However, it provides no benefit in the context of detailed franchise contracts which govern complex and ongoing business relationships.

The bill was passed in the California Senate Judiciary Committee with a vote of 5-2.  Next, the bill will be voted on by the full Senate.  If passed, it would go before the California Assembly for consideration.  

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California Senate To Consider Franchising Bill

The Senate Judiciary Committee of California is scheduled to consider a franchising bill at a hearing scheduled for Tuesday, April 16, 2013, at 1:30 p.m.  If passed by California's legislature (the State Assembly and Senate), SB 610 would amend the California Franchise Relations Act ("CFRA") as follows:

• The parties to a franchise relationship would be required to deal with one another in good faith (essentially, making the implied covenant of good faith and fair dealing an express statutory requirement); and
• Franchisors (or subfranchisors) would be prohibited from restricting a franchisee from joining or participating in an association of franchisees.

SB 610 would also amend the CFRA by permitting a franchisee to sue a franchisor or subfranchisor who violates the CFRA for damages, rescission, or other relief deemed appropriate by a court.  Moreover, SB 610 would authorize a court in its discretion to award treble (3 times) damages to the suing franchisee, as well as reasonable costs and attorney's fees. 

For more information about SB 610 and a copy of the full text of the bill, visit www.leginfo.ca.gov.  A live audio / video feed may be available during the hearing at http://www.calchannel.com/. 

Italian Franchisee Loses Lawsuit Brought Under The Laws Of . . . California?

Here's an interesting case I recently came across.  It features a franchisee based in Italy suing its California-based franchisor in California, alleging violations of California's franchise laws.

If you've ever bought a diamond ring, you are doubtlessly familiar with GIA, or the Gemological Institute of America, Inc. GIA, which was the defendant in the case, is a precious gem grading company with a principal place of business in Carlsbad, California. 

The plaintiffs were longtime employees of GIA who, in December 1991, entered into an employment agreement with the company to relocate to Vicenza, Italy to open what would be GIA’s first European location.  Plaintiffs did relocate from the U.S. to Italy in 1992, and opened and operated a gem grading school on behalf of GIA there.  GIA Italy became the hub of all of GIA’s activities in Europe, graduating around 60 gemologists per year. 

In 2007, GIA entered into an agreement with the Florence Chamber of Commerce to relocate GIA Italy to Florence and construct a GIA lab and gem drop-off service there.  In exchange, the Chamber would provide GIA Italy with substantial financial support. 

Later in 2007, GIA ended plaintiffs’ employment agreement and entered into a franchise agreement with them, giving them ownership of GIA Italy as franchisees.  The franchise agreement included the following provision:

3.6 No Gem Grading or Identification Services. Licensee, its affiliates, owners, managers, members, agents, and employees will not operate any trade-service laboratory for the purpose of diamond grading, colored stone grading, or gem identification, without the prior written consent of GIA in each instance.

In March 2011, GIA sent the Florence Chamber of Commerce a letter indicating that GIA would no longer allow the construction of the lab and drop-off facility in Florence.  Later that year, the Chamber informed the franchisees that it would no longer support GIA Italy because the Florence lab had not been opened despite the passage of several years. 

Plaintiffs filed suit, contending (among other things) that GIA had defrauded them into signing the franchise agreement based on its representations in 2007 that it would continue to support the Florence gem lab, which representations were false.   Plaintiffs argued that one of the key reasons they signed the franchise agreement was because of their understanding that they would be able to open the Florence lab (based on oral representations from GIA’s President).  Plaintiffs also claimed that GIA violated the California Franchise Investment Law (“CFIL”) (California Corporations Code §31119) by failing to provide them with a franchise disclosure document and register its franchise offering as required by law.

Nevada Franchise Business Network Spring 2013 Meeting: Top 10 Labor And Employment Issues

For franchisors, it is important to stay on top of new developments in the world of labor and employment law that may significantly affect their business.  The next meeting of the Nevada Franchise Business Network will address some of these new developments.  Join us for an interactive discussion with Michael Kass, a labor an employment partner at Armstrong Teasdale, who will be speaking to the group on the topic "Brave New World: Top Ten and Employment and Labor Issues to Know in 2013." The meeting is scheduled to occur on Thursday, April 25, 2013 at Panevino Ristorante, 245 Via Antonio Avenue, Las Vegas, NV 89119. This program will be a valuable forum both for operators who are considering franchising as a possible avenue for growth, and owners of companies that have already developed into mature systems.

The Nevada Franchise Business Network is hosted by Armstrong Teasdale as an adjunct program of the International Franchise Association. For more information about the purpose and history of the Franchise Business Network, please visit the IFA's website.

Registration will begin at 11:45 A.M., with the program scheduled to start at 12:00 P.M. Lunch will be served. The meeting is open to all members of the franchise community. There is no cost to attend, but please RSVP in advance to Mary Rodell at (800) 243-5070 ext. 7489, or mrodell@armstrongteasdale.com. 

 

Supreme Court Rules Class Action Plaintiffs Cannot Use Damage-Limiting Stipulations To Avoid Federal Court

In a landmark decision in the area of class action litigation, a unanimous U.S. Supreme Court held that plaintiffs cannot use damage-limiting stipulations to prevent their cases from being removed from state to federal court.  In its March 19, 2013, ruling in Standard Fire Insurance v. Greg Knowles, the nation’s highest court found that pre-certification stipulations purporting to limit damages in class actions do not eliminate a federal court’s jurisdiction under the Class Action Fairness Act (CAFA).

The Standard Fire decision is a significant ruling for class action defendants as it largely eliminates a procedural tactic frequently used by plaintiffs to thwart federal jurisdiction and keep class actions in plaintiff-friendly state courts. 

Under CAFA, a state court class action can be removed to federal court if there is “minimal diversity” between the parties and where the jurisdictional amount exceeds $5 million.  To prevent removal under CAFA, the plaintiff in Knowles filed a stipulation that he “will not at any time during this case…seek damages for the class…in excess of $5,000,000 in the aggregate.”  Based solely on the stipulation, the trial court found that the amount in controversy fell below the jurisdictional threshold required under CAFA and remanded the case to state court.   The Supreme Court granted defendant’s writ of certiorari to address “divergent views” among lower courts as to the jurisdictional impact of damages-limiting stipulations in the class action context. 

The Court based its Standard Fire decision on the grounds that pre-certification stipulations cannot “legally bind members of the proposed class before the class is certified.”  According to the Court, “[b]ecause [plaintiff’s] precertification stipulation does not bind anyone but himself, [he] has not reduced the value of the putative class members’ claims.” 

If you have any questions regarding this decision or regarding any matters relevant to class actions generally, please contact Armstrong Teasdale attorneys Brant Laue, Bill Corrigan, or David Jermann.

International Franchise Association Urges Massachusetts To Change Laws To Clarify That Franchisors Are Independent Contractors

Last week, the International Franchise Association's Franchise Congress conducted a number of meetings with lawmakers in Massachusetts to discuss legislation that would clearly state that franchisees are independent contractors, and not employees. If adopted, the law would address the problem that manifested itself in Massachusetts two years ago, when the United States District Court for Massachusetts caused shockwaves through the franchise world when he called franchising a "modified Ponzi scheme."  In that case (Awuah v. Coverall North America), which I discussed in more detail in my blog posts here, here, and here, the Court found that the franchisees of Coverall (a janitorial service company) were employees, and not independent contractors.  

As the law currently exists under the Massachusetts Independent Contractor Act (the “Act"), an individual performing a service is considered an employee unless:

1. the individual is free from control and direction in connection with the performance of a service;
2. the individual performs a service that is outside the usual course of the employer’s business; and
3. the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The court in Awuah found that the Coverall franchisees were not independent contractors under this test because the second prong of the test was not met, noting that “franchising is not in itself a business, rather a company is in the business of selling goods or services and uses the franchise model as a means of distributing the goods or services to the final end user without acquiring significant distribution costs.”  

To address the problem, the IFA seeks legislation in Massachusetts that would clarify that franchisees are independent contractors, and not employees.  The IFA expects that the Massachusetts legislature will hold hearings on the proposed legislation within the next few months.



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New York Renews Its Limited Franchise Trade Show Exemption

Anticipating the return of the International Franchise Exposition ("IFE") to New York City this summer, the State of New York has just renewed the limited exemption to its Franchise Sales Act (N.Y. Gen. Bus. L. § 680 et. seq.) (the "Act").  The three-day exemption will allow franchisors that are not registered with the State to participate in a this year's IFE under certain circumstances.  The exemption, which was first enacted by the State last year, would allow an eligible franchisor to exhibit and offer for sale, but not to sell, franchises at the IFE.  Before a company can actually sell a franchise covered under the Act, the franchisor would still have to register with the state as provided under New York law.  

Ordinarily, an unregistered franchisor that exhibits at a trade show in a franchise registration state would potentially violate that state's registration law, because the simple act of exhibiting at the show is arguably the making of an unregistered "offer to sell" a franchise.  For this reason, franchise companies have argued that state franchise registration laws unnecessarily discourage (and perhaps prevent) companies from participating in franchise expos, even where those companies do not plan to make franchise sales without complying with applicable state law.  

Essentially, franchisors (and companies that are interested in franchising) contend that participating in trade shows can provide a valuable opportunity for them to "test the waters" to determine the market demand for their concepts.  According to their argument, if they are allowed to participate in trade shows without having to first register in the host state, they would be able to gain valuable insight from comments and suggestions made by prospects, other franchisors, and even attending consultants. 

From the franchisee's perspective, greater trade show participation by franchisors will increase the availability of information about a variety of concepts and give them the opportunity to obtain information, one-on-one, from representatives of those concepts – an opportunity that is unique to the franchise expo format.  Further, franchisees contend that more educated franchise companies make better franchisors, and will result in higher-quality Franchise Disclosure Documents and a better overall franchise system. 

To take advantage of New York’s exemption, a franchisor is required to complete and submit an application exemption form and supporting materials to the Office of the New York Attorney General.  Follow the link: application form for U.S.-based franchisors / application form for international franchisors.

Please note that exemptions are not automatic; the Attorney General's office will review applications and reserves the right to deny any request.  For this reason, it's important for franchisors planning to take advantage of the exemption to file well in advance of this year's IFE.

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