May 6, 2015 - Franchise Articles by |

A column last week in the Los Angeles Times, entitled “The NLRB-McDonald’s Ruling Could Be the Beginning of a Franchise War” is another example of how top franchise industry  ‘experts’ and ‘talking heads’ too frequently lack sufficient knowledge about the facts and theories they are discussing. Most notably, for example, contrary to the ‘fact’ set forth in the column, the NLRB matter was not a ‘ruling’ nor was it ‘issued’ by the NLRB. It was, instead, a policy decision made by a rank political appointee in the NLRB. This was nothing more than a personal choice made by the NLRB’s ‘in house’ counsel to include McDonald’s as a named defendant in certain pending internal NLRB labor cases. This choice was not litigated before the ALJ, the NLRB or the courts.

The article also makes use of the theoretically tired, and incorrect, argument that franchisors can’t have it both ways – promulgate and enforce rules and regulations relating to franchise operations and at the same time not exercise direct ‘control’ over their franchisees’ employees. Instead, as the author, a Pulitzer Prize winner well knows, there can never be a ‘two plus two equals four’ principle applied to legal ‘control’ determinations. An examination of the historical and current context of ‘control’ disputes in the franchise legal realm shows that the inherent ambiguity is both intellectually-defensible and legally sound. The tortured legal evolutionary paths of covenants not-to-compete and vicarious liability in the franchise area evidence this clearly. Indeed, as in many other areas of the law, the term ‘control’ in the franchise area can consistently and reasonably be given different meanings depending upon the context of the situation in which it is being applied. The newspaper article’s suggestion that to the extent that a legal term would be applied differently in different contexts – even where identical parties are involved – the legal term would be ‘transparently bogus’ is at best naïve and worst a misrepresentation.

Further, the suggestion in the article that the NLRB was simply ‘trying to adapt’ to the evolving nature of the restaurant industry’ also seems off-base. As noted above, the struggle regarding the determination of relative ‘control’ between franchisees and franchisors for non-NLRB purposes in the franchise area has been raging for the last 40 some-odd years. Like other concepts, it ebbs and flows. Franchising, including the omnipresent tension between its natural stakeholders — franchisors, franchisees, employees, and consumers — has ‘been around’ since the beginning of time. Nothing has suddenly changed structurally in the franchise area conceptually or financially that would justify the conclusion that some type of ‘evolution’ has occurred that requires an about-face on the control issue. Further, the legal question whether ‘franchisors control their franchisees’ has been and will always be a heavily fact-based determination that needs to be made on a case by case basis by finders of fact – not by rank political appointees with agendas borne out of having spent their entire work careers in one politically-biased institutional entity.

In addition, the Professor interviewee’s view regarding the ability of affirmative cost apportionment to ‘fix’ the negative impact of any increased costs that might be caused by the NLRB political appointee’s decision (“apportioning the cost is typically within the control of the franchisor, which can set the price of its product”), seems on its face to fly in the face of very many basic and fundamental economics and antitrust principles.  There is little to no empirical evidence to support the conclusion that “the danger of the NLRB counsel’s ruling is that while it might stick the big companies with responsibilities for workers, the big companies will stick the franchisees with the costs.” Indeed, theoretically, the ultimate allocation of costs of a ruling that would require unionization and modified labor practices (even assuming that it were to be upheld many years down the road by a court) is not within the complete economic control of any of the relevant stakeholders – manufacturers, mangers, franchisors, employers, franchisees, consumers, or suppliers. Ultimately, the incidence of the ultimate relative cost of the NLRB ruling on the stakeholders will depend upon prolific factors, including the elasticities of demand and supply for the labor, products and services of each franchise. The idea, suggested in the column, that franchisors may simply address ‘increased costs of the labor ruling by setting prices’ of franchise products and services is also in direct conflict with current antitrust decisions regarding vertical restraints. In this regard, although franchisors are immune from maximum price-fixing claims, they are active candidates for minimum price fixing charges. Last, although there is a dearth of empirical work regarding the pass-through ability of the increased costs of a cheeseburger, there are a few that suggest that it is in fact relatively small, at least as it is manifested in the final price of the food to the customer.

Even though I remain (truthfully) one of only a few national litigators representing exclusively franchisees, and not franchisors, I do not believe that my ‘side’ in the political franchise war is benefitted by those who spew sophomoric or unsupported theories and recommendations claiming them to be ‘facts’ and ‘dispositive.’ Now that it appears that ‘big labor’ could be climbing into bed with franchisees on labor and employment issues, it is likely that the already-questionable rhetoric essayed by many franchisee advocates will be parroted and mutated fallaciously by similarly knowledgeable labor advocates.  And, let’s not forget to add to this intellectually-noxious mixture the omnipresent prolific sophistry manufactured by franchisor lobbyists. My personal favorite is that ‘most franchisees don’t want new protective franchise legislation.’ Finally, the franchise cake would not be complete without mixing in the policymakers (e.g., state legislators, NLRB General Counsel) who seem to never be able to get enough of this hogwash from all sides. As with any other commodity in the free market, however, so long as there remains a strong demand for this factual and theoretical bunk, there will be an eternal robust supply of it.

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