The Unintended Consequences to Franchising of the NLRB’s New Joint Employer Test Like all other government regulation, the new NLRB joint employer test has unavoidable unintended consequences. The Browning-Ferris joint-employer decision will likely send many franchisors back to the drawing board to find aspects of their systems about which they can relinquish legal and operational control and responsibility to their franchisees. Unfortunately, the increased costs that the new standard will impose on franchisors will be passed along, in large measure, to franchisees, some of which will be unable to maintain a profitable business. Of these, some will simply shut their doors, and others will be terminated. Last week, the National Labor Relations Board (NLRB) decided the Browning-Ferris decision, one that was long-awaited by the franchise industry. Although the case did not directly involve franchise industry parties, the decision did establish a new standard for determining whether an entity is an employer subject to the statutory obligation to engage in good faith collective bargaining with workers. Under the new standard, franchisors can be found to be employers, along with their franchisees, of their franchisees’ workers. The NLRB, in jettisoning the established test of “direct control” (e.g., hands-on efforts regarding hiring and firing), embraced a far more expansive test of “indirect control.” In so doing, the NLRB has exposed franchisors, which, although not the actual employers of their franchisees’ workers, nevertheless exert indirect control of their franchisees’ workers. As the dissent in the Browning-Ferris decision pointed out, for many years the NLRB did not […]

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Court Closes Dairy Queen Franchise in Franchise Termination   By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC jgoldstein@goldlawgroup.com (202) 293-3947 goldlawgroup.com   American Dairy Queen Corporation v. Wardlow, 2015 WL 5178454, United States District Court, D. South Dakota (September 4, 2015)   When a Dairy Queen franchisee failed to show up in federal court to defend against its franchisor’s (ADQ or Dairy Queen) emergency motion to enforce the franchisee termination by getting a court order to shut it down, the Judge, embracing a very traditional legal analysis, ordered that the franchisee cease operations. Not surprisingly, preliminary injunctions arising out of disputes in the fast food franchise industry are prolific.  The traditional test for determining whether to grant emergency relief to shut down a franchisee normally, in some fashion, encompasses four equitable issues, including: (1) the threat of irreparable harm to the movant; (2) the state of the balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest. Regarding the first point, the Court pointed out that irreparable harm occurs when a party has no adequate remedy at law, typically because its injuries cannot be fully compensated through an award of damages. Interestingly, rather than ruling that the franchisor would suffer per se damages as a result of the trademark infringement, the Court examined the factual basis underlying this claim. In so doing, the Court ironically further solidified the jurisprudential principle that […]

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Domino's franchise operators accused of uttering death threats will keep store… This is one way for a franchisee to hold down franchisee labor costs and at the same time side-step a franchise termination. Not sure, however, if the 'new big brothers' of franchisee organizations (big labor and the unions) would be happy with the result. JMG The operators of a Domino's Canada franchise in North Vancouver who were alleged to have exploited two former employees will keep their pizza store.  On Wednesday, CBC News learned a B.C. Supreme Court civil case, between brothers Keyvan Iranmanesh and Farhad Iranmanesh and Domino's Canada, was settled on Aug. 27, with the owners retaining the store.   The employees filed complaints with police and government, and also said at the time that they feared for their safety.  One of the franchisee employees told CBC News that his bosses said they would "cut his [Dearman’s] head off" and that "they're going to slit our throats and murder us." Domino's terminated the franchise, but the franchisees fought the termination in court. In so doing, the franchisee won a temporary injunction in BC Supreme Court to hold on to their business while the court case was pending. They also adamantly denied any assaults or threats.

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Gas Station Franchise Termination — In Swaziland Fuel Franchisor: “Your gas station franchise is terminated and you must vacate the premises immediately.” No; this was not a petroleum franchisor in the USA, but a gas distribution franchisor in Swaziland. After the gas station franchise termination in Swaziland, the franchisee lawyer for the gas station, in a discussion with the press and in his pleadings, made arguments almost identical to those that would have been, and are made, by franchise lawyers in the USA: “He is arguing that he feels like he has been given a raw deal in the sense that he is now made to lose the business and property without compensation.” “The Supreme Court merely made an assumption that the franchise agreement was for a three year term ignoring the words used in the clause and thereafter ordering the ejectment of the applicants without compensation.” The franchisee’s lawyer said in an affidavit: “The court failed to an interpretation of Clause 6.1 of the agreement.” “He spent E6.5 million in the business so he was pleading with the court to let him continue operating the filling stations. He said if the court ruled in favour of Galp Swaziland, he should be compensated or at least be given an opportunity to sell his businesses.” “He said the respondents of the matter displayed a lackadaisical attitude in this regard because they believed the applicants had no ownership over the business but they were just mere managers of the filling stations they operated.” […]

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Post-Term Franchise Noncompete Provision Succumbs to Franchisee’s Legal Attack By: Jeffrey M. Goldstein Goldstein Law Firm goldlawgroup.com (202) 293-3947 Jani–King of Omaha v. Anthony Waadah, 290 Neb. 629, Supreme Court of Nebraska. April 10, 2015 The infamous and ruinous post-term franchise noncompete clause reared its ugly head again, this time in the Nebraska Supreme Court. Although many post-term restrictive covenants (also known as franchise covenants not-to-compete or franchise noncompete clauses) in distribution and franchise agreements are upheld as valid and reasonable, some of them nevertheless remain vulnerable to successful legal challenge. In a recent case, the Supreme Court of Nebraska held that the noncompete clause in a professional cleaning and maintenance services franchise agreement was unenforceable against a former franchisee. As discussed more fully below, in the Nebraska case, the one-year noncompete covenant contained within the larger two-year noncompete clause in the franchise agreement was not severable from the different, two-year noncompete covenant, and thus the entire noncompete clause was ruled invalid. In this Nebraska case, in 2008, appellant, Unlimited Opportunity, Inc., doing business as Jani–King of  Omaha (“Jani–King” or the “Franchisor”), granted appellee, Anthony Waadah (“Waadah” or the “Franchisee”), a Jani-King franchise in Omaha, Nebraska. After the franchise agreement was ultimately broken, Waadah diverted a number of Jani–King’s Omaha customers to his new independent business. Jani–King thereafter sued Waadah for breach of the noncompete clause in the franchise agreement. The trial court held that the noncompete clause encompassed a sub-provision that was an unreasonable restraint on competition and refused […]

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Franchise Antitrust Claims Dismissed in Face of Defects in Pleading Antitrust Conspiracy By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC goldlawgroup.com jgoldstein@goldlawgroup.com (202) 293 3047   Insulate SB v. Advanced Finishing Systems, Inc., 2015 WL 4760287, United States Court of Appeals, Eighth Circuit, Aug. 13, 2015. Another franchise antitrust conspiracy claim smothered early in the case. This franchise antitrust putative class action suit involved claims by a purchaser of fast-set foam spray equipment against its manufacturer, the manufacturer’s subsidiary, and numerous distributors, including conspiracy in restraint of trade, conspiracy to acquire monopoly power, use of exclusionary contracts to lessen competition, and violations state consumer protection laws. The defendants moved to dismiss, and the motion was granted by the United States District Court for the District of Minnesota. In turn, the purchaser appealed to the United States Court of Appeals for the Eighth Circuit, which confirmed the lower court ruling. The facts of the case are as follows. Insulate SB, Inc. (Insulate), a purchaser of fast-set spray foam equipment (FSE), filed an antitrust class action alleging that FSE manufacturer Graco Inc. and its subsidiary Graco Minnesota Inc. (Graco) and a number of FSE distributors (Distributors) (collectively, appellees) conspired to restrain trade in violation of federal antitrust law, and numerous state antitrust and consumer protection laws. Insulate claimed that these anticompetitive conspiracies kept Graco’s competitors out of the market, allowing Graco and the Distributors to charge artificially high prices. Graco manufactured FSE and sold it to distributors, who then resold FSE on […]

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A Case Analysis Showing the Importance of a Good Franchise Lawyer Coraud, LLC v. Kidville Franchise Company, LLC, et al., 2015 WL 3651423 United States District Court, S.D. New York (June 12, 2015) In this franchise fraud case, a childcare center franchisee sued its franchisor and franchisor’s employees, alleging claims for fraud, negligent misrepresentation, violation of the New York State Franchise Sales Act (NYFSA), and violation of the New Jersey Franchise Practices Act (NJFPA). The United States District Court for the Southern District of New York slammed the door on the franchisee’s claim for common law franchise fraud by finding that the contractual disclaimer precluded the franchisee from establishing the necessary reliance element for its fraud and negligent misrepresentation claims. However, the Court did support the franchisee on its contention that NYFSA’s anti-waiver provision prohibited the Court from applying the contractual disclaimer as waiver of franchisee’s fraud claims under the NYFSA. Because the Court was ruling on a motion to dismiss, in its decision, described in part below, it assumed the accuracy of the well-pled facts in the plaintiff’s complaint.  Kidville operates and franchises facilities used for the “care and development” of young children. In August 2011, husband and wife Paul and Catharine Wilder, the founders of plaintiff Coraud, contacted Kidville about becoming a franchisee, and after a series of conversations and meetings with Kidville, purchased a franchise in April 2012. The Wilders’ primary contact at Kidville was defendant Joe Sexton, Kidville’s Senior Manager of Franchise Development. Significantly, Sexton worked […]

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http://consumerist.com/2015/08/14/chick-fil-a-franchise-owner-pays-employees-during-5-month-renovation/ Labor costs no different than franchise remodel. Chick-Fil-A Franchise Owner Pays Employees During 5-Month Renovation — When there’s a good location and strong market demand even counterintuitive business decisions are possible. In the land where franchisee costs are rendered irrelevant; this is sort of a self-imposed franchise remodel. If a franchisor had foisted this labor cost increase on franchisees, they would scream more loudly than they would if they were forced to carry out a franchise remodel. 

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Steak n Shake Franchisor Fraud: Franchisor Shakes Down New Franchisee by Fraudulently Hiding Costs By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC goldlawgroup.com (202) 293 3947 jgoldstein@goldlawgroup.com   Cornerstone Investment  Partners, LLC v. Steak N Shake Enterprises, Inc., 2015 WL 4094630, United States District Court, D. New Jersey (July 6, 2015)             Franchise fraud again. Not surprisingly, another franchisee carcass was spotted lying outside the federal district court in New Jersey last week. The franchisee plaintiff, Cornerstone Investment  Partners I, LLC (“Cornerstone”), sued its franchisor, Steak n Shake Enterprises, Inc., the defendant. The franchisor moved to dismiss the franchisee’s case, and the Court granted the motion. In deciding the motion, the Court, as required, relied exclusively upon the allegations of the franchisee in its Complaint; a summary of these facts is set forth below as part of the analysis.             Defendant Steak n Shake operates and grants franchises for restaurants offering burgers and milkshakes. Cornerstone initially sought information about one of Steak n Shake’s traditional “Classic” restaurants, which notably operate twenty-four hours a day for seven days a week, feature a full menu, contain typically between 3000 and 4000 square feet of space, and offer dine-in, drive-thru, and carry-out service. Beginning January 2011, defendant began to also offer franchises for “Signature” restaurants, which, in contrast to the Classic restaurant, are smaller and offer a more limited menu.   Defendant opened its first Signature restaurant in New York City on January 12, 2012, and this unit […]

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Franchise Termination Upheld: Federal Court Harshly Spanks Terminated Immigrant Childcare Franchisees By: Jeffrey M. Goldstein Goldstein Law Firm, PLLC (202) 293 3947 goldlawgroup.com jgoldstein@goldlawgroup.com   Creative American Education, LLC, v. The Learning Experience Systems, LLC, 2015 WL 4655087, United States District Court, S.D. Florida. (July 31, 2015) Reading between the lines of this franchise termination case, it appears that the franchisees in this case were doomed from the very moment they uttered their first words at the trial. The scathing and lengthy decision was a victory for the Defendant, the franchisor, The Learning Experience (“TLE”), which had terminated the Plaintiff, the franchisee, Creative American Education (“CAE”). The individuals who had created and managed the Plaintiff business entity were Bernard Loganathan and his wife, Katijah Alaudeen–Loganathan (collectively referred to as the Loganathans).             The case pivoted off of two agreements including a Franchise Agreement and a Management Agreement. CAE expectedly contended that TLE breached these agreements through TLE’s failure to provide appropriate training, advice, and guidance and through an improper seizure of the CAE franchise. TLE argued that CAE breached the agreements through a failure to comply with TLE standards and state regulations. The Loganathans were citizens of Singapore, and in June of 2011 the Loganathans began to explore a plan to immigrate to the United States. Because Ms. Alaudeen–Loganathan had some experience in the childcare industry in Singapore, she began to research childcare franchises in the United States. The Loganathans believed that a childcare franchise would be a good vehicle […]

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