Source: http://www.briggs.com/insights-publications-Franchise-Antitrust-Distribution-and-Dealer-Newsletter.html
Timestamp: 2019-04-23 10:11:40+00:00

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Since July 2014, when the National Labor Relations Board (NLRB) issued a press release indicating that it would pursue unfair labor practices cases against McDonald’s, USA, LLC (McDonald’s), as a joint employer, the issue of joint employer liability has been an on-going discussion for commentators and authors in the franchise field. Our Franchise, Antitrust, Distribution and Dealer (FADD) group has tackled certain aspects of the topic in prior issues of this Newsletter. While opinions vary as to the likely result of the NLRB’s pursuit of claims against McDonald’s and the potential impact of the decision on the franchise world, the fact remains that the NLRB’s claims against McDonald’s are still unresolved and create a large degree of uncertainty in the franchise world.
A recent 3-2 decision issued by the NLRB may provide some further guidance as to where this issue may be headed, but, as will be discussed below, it still leaves lingering questions as to the potential impact on the franchise business model. The recently released decision was issued on August 27, 2015, in the Browning-Ferris Industries of California, Inc. (BFI) matter and can be found at 362 NLRB No. 186 (NLRB, Aug. 27, 2015). The case decided was not a franchise case, but it provides some valuable insight as to how the NLRB, based on its current membership, will view and apply the joint employer standard going forward.
The facts of the Browning-Ferris case are relatively simple. Leadpoint Business Services (Leadpoint) contracted with BFI to supply workers to sort garbage and recyclable materials at a recycling plant run by BFI. In the contract, Leadpoint was identified as the employer of the workers and was in charge of the hiring, firing and payroll for the employees. As part of the contract, BFI was entitled to established the work process/procedures, the operating or working hours of the plant and had some rights to reject workers provided by Leadpoint. Ultimately, the NLRB held that BFI and Leadpoint were joint employers and that if the workers voted to unionize as part of the union election, then both BFI and Leadpoint would be required to bargain with the union.
As articulated in the lengthy opinion, the NLRB rejected the joint employment standard that has existed for 30 years and returned to the traditional common law test of determining whether or not two companies are joint employers. The NLRB held that two or more entities are joint employers “if they are both employers within the meaning of the common law, and if they share or codetermine those matters governing the essential terms and conditions of employment.” According to the decision, such essential terms and conditions include hiring, firing, discipline, supervision, direction, wage and hour determinations, number of workers, scheduling, seniority, overtime, work assignments and the manner and method in which the work is performed. In the opinion, the NLRB made reference to the Restatement (Second) of Agency, Section 220(2), which sets forth the factors considered in determining the difference between employees and independent contractors, and noted that the joint employer analysis must look at which of those factors the putative joint employer may exercise control over by agreement of the parties.
This leads to the key portion of the opinion. The old joint employment standard held that to be a joint employer an entity must possess the authority to control employees’ terms and conditions of employment AND must exercise that authority directly, immediately and not in a limited and routine matter. Under the new standard issued in Browning-Ferris, a company can be held to be a joint employer simply if the company has the contractual right to control the employees’ terms and conditions of employment. According to the NLRB, whether or not a company actually ever exercises that right is irrelevant to the determination – the existence of the contractual right to exercise such power is in and of itself enough to establish joint employment. As part of its analysis, the NLRB expressly indicated that indirect control over employees may be sufficient to lead to a finding of joint employment, leaving little doubt of its intent to broaden the scope of joint employment. In issuing this decision the NLRB expressly overruled its prior decisions in TLI, Inc., 271 NLRB 798 (NLRB, July 31, 1984), Laerco Transportation, 269 NLRB 324 (NLRB, March 21, 1984); AM Property Holding Corp., 350 NLRB 998 (NLRB, Aug. 30, 2007) and In re Airborne Express, 338 NLRB 597 (NLRB, Nov. 22, 2002) to the extent they are inconsistent with the Board’s decision in Browning-Ferris.
As applied specifically to the facts of the case before the NLRB, BFI was held to be a joint employer because it exercised direct and indirect control over the essential terms and conditions of employment for the Leadpoint employees. The NLRB found that the parties’ agreement gave BFI the right to impose specific conditions on Leadpoint’s ability to make hiring decisions even though it did not participate in the day-to-day hiring process. Moreover, the NLRB determined that BFI had the contractual right to reject workers, even though the reality may have been that BFI never or rarely exercised that right. The NLRB also found that even though Leadpoint was responsible for selecting and assigning employees for each shift, BFI exercised control over the work processes in the plant and made all of the decisions relating to the number of workers required, the timing of employee shifts and when overtime was necessary. Final, the NLRB found that BFI prevented Leadpoint from paying its employees more than BFI employees were paid for performing comparable work. While Leadpoint ultimately determined the pay rate for its employees and administered all payments, payroll records and benefits for its employees, the NLRB found that the ceiling restriction on wages was an indirect control by BFI over the wages of the Leadpoint employees. Taken together, these facts where sufficient, in the eyes of the NLRB, to establish joint employment by BFI and Leadpoint.
The new standard as explained by the majority in the Browning-Ferris decision significantly broadens the potential scope of who could be determined to be a joint employer. The expanded joint employment standard could lead to a finding that a franchisor is a joint employer of the employees of a franchisee based on the simplest contractual language contained in a franchise agreement or an operating manual, even if that contractual right is never exercised by the franchisor. Harmless language in a franchise agreement that was never intended to provide any real power to the franchisor, may now be the lynchpin that supports a finding of joint employment against the franchisor, thereby significantly increasing potential liability and burdens on the franchisor.
Some commentators have suggested that the decision was politically driven. The three NLRB members in the majority are Democrats (Pearce, Hirozawa and McFerran), while the two members voting against the decision are Republicans (Miscimarra and Johnson). Miscimarra and Johnson wrote a long, detailed dissent, criticizing the decision reached by the majority and expressly indicating that the decision may cause significant problems to the franchise business model. Those expressing the viewpoint that the decision was politically driven see the NLRB seeking to keep and enlarge the number of unionized firms that can be controlled by the government. Union memberships have been declining over the past few years. If the Browning-Ferris decision allows unionizing among franchisee employees, thereby significantly increasing union memberships, it could provide more control and impact by the government, through direct NLRB oversight, which is currently controlled by the Democrats. Whether or not this analysis holds water is up for debate, but it does provide an interesting perspective as to what may be driving the NLRB towards this decision.
Regardless of the reason behind the decision, there is little doubt that the NLRB decision is a significant change to the law at this time. However, it is still far from final. At some point, the case will likely be appealed to a federal circuit court, but that could be many years down the road. Moreover, given the political nature of the NLRB, the outcome of the next presidential election could change the composition of the NLRB which may lead to a reversal of this decision or a limitation as to its application. At some point, these issues will be presented to judges in filed cases and the courts will be faced with determining how to apply the NLRB’s decision to joint employment issues raised in franchise and other cases. Moreover, before it even gets a chance to proceed completely through the NLRB and the court system, the legislature may jump into the fray to try to directly address the issue. In September, legislators introduced the Protecting Local Business Opportunity Act in an attempt to restore the joint employment standard that existed for three decades before the NLRB’s decision in Browning-Ferris. The proposed legislation seeks to amend the National Labor Relations Act to provide that an entity must have, and exercise, actual, direct and immediate control over the essential terms and conditions of employment in order to be considered to be a joint employer.
In terms of the potential impact on franchising, the language of the opinion and related actions can be interpreted to support either side of the argument. On the one hand, the broader and expanded joint employer standard clearly could be used, as argued by the dissent in Browning-Ferris, to hold franchisors as joint employers of employees of the franchisees. In addition, the NLRB has continued to aggressively pursue joint employment charges against McDonald’s. Despite requests from McDonald’s, the NLRB has refused to require the General Counsel to more precisely describe how it is contending that McDonald’s controls the employees of its franchisees. As such, it is difficult to ascertain if the allegations are unique to the McDonald’s system or may apply more generally to the franchising concept. Nevertheless, the continued pursuit of those claims suggest that the NLRB may ultimately conclude that a franchisor, such as McDonald’s, is a joint employer.
On the other hand, despite the dissent’s contentious regard, the potential impact of the decision on franchising, the majority in Browning-Ferris made clear that the case was not a franchise decision. In distinguishing a Domino’s franchise case raised by the dissent (Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474 (Cal., Aug. 28, 2014)), the majority noted that the “particularized features of franchisor/franchisee relationships” were not present in the Browning-Ferris case. 362 NLRB No. 186, n. 94. In another footnote, the NLRB expressly stated that the franchisor-franchisee relationship was not before the Board as part of this case and it would not be addressed in a hypothetical manner. Id. at n. 120. In the past, the NLRB has generally held that franchisors are not joint employers with their franchisees. See Speedee 7-Eleven, 170 NLRB 1332 (NLRB, 1968); Tilden S. G. Inc., 172 NLRB 752 (NLRB, 1968); Love’s Barbeque Rest. No. 62, 245 NLRB 78 (NLRB, Sept. 20, 1979). In an amicus brief submitted in the Browning-Ferris matter, the General Counsel stated that the “Board should continue to exempt franchisors from joint employment status to the extent that their indirect control is related to their legitimate interest in protecting the quality of their product or brand.” See Amicus Br. at 15-16 n. 32.
In an Advice Memorandum issued on April 28, 2015, in the matter of Nutritionality, Inc. d/b/a Freshii Cases, the Associate General Counsel of the NLRB concluded that a franchisor, Freshii, was not a joint employer of the franchisee’s employees even under the broad joint employer standard ultimately adopted by the NLRB in the Browning-Ferris decision. The Associate General Counsel noted that the franchisor, despite providing training and operating manuals, was not involved in the hiring, firing, scheduling, setting hours or supervising of employees. The Associated General Counsel noted that Freshii’s actions as a franchisor were “limited to ensuring a standardized product and customer experience” and “protecting the quality of the product and brand” and did not support a finding of joint employment.
While the Advice Memorandum clearly does not have the weight or authority of an NLRB decision, the outcome expressed in the Freshii matter, the previous NLRB decisions, the language in the General Counsel’s amicus brief and the footnotes in the majority opinion of the Browning-Ferris matter all could be an indication that the NLRB recognizes the special nuances of the franchise business relationship and intends to treat it differently as it pertains to joint employment matters.
The bottom line is that franchisors will continue to face uncertainty as to how the NLRB’s position on determining joint employment will impact the franchising business. Franchisors should pay close attention to how this issue develops and look closely at the language contained in their franchise agreements and operating manuals as it pertains to employees of franchisees.
A question that vexes antitrust lawyers and businesses is the scope of Section 5 of the Federal Trade Commission Act. Section 5 declares “unfair methods of competition in or affecting commerce” to be unlawful. It is called the FTC’s standalone authority, because it is used by the FTC to pursue actions not explicitly illegal under the Sherman and Clayton Acts. For years, attorneys and commentators have suggested/requested that the FTC provide its interpretation of the parameters covered by Section 5.
These enforcement principles make clear that the FTC will bring standalone Section 5 actions only in cases in which consumer welfare is compromised and in which anticompetitive effects outweigh pro-competitive justifications. What remains unclear is how those principles will result in actions addressing conduct that is not illegal under existing antitrust caselaw. Defining where “the spirit of the antitrust laws” diverge from established antitrust caselaw led Commissioner Ohlhausen to conclude “the possibilities for expansive use of Section 5 under this policy statement appear vast.” On its face, the Statement of Enforcement Principles appears to be an attempt to confirm that the principles of standalone Section 5 enforcement used by the FTC over the past 10-20 years will continue. These enforcement principles, however, do not outline bright line rules for determining, on the margins, in what circumstances an action that could not exist under the Sherman or Clayton Act could exist under standalone Section 5 authority. It therefore provides less certainty in evaluating conduct that some had hoped for and looked for from the FTC. It remains to be seen whether the FTC will use this somewhat vague standard to attempt to expand the scope of standalone Section 5 actions, or whether this statement is meant as guidance that the scope of these actions will stay close to the scope of the antitrust laws.
On September 9, 2015, only a few days after the NLRB’s decision in Browning–Ferris that changed the joint employer standard, Senator Lamar Alexander and Representative John Kline introduced in Congress new legislation entitled the Protecting Local Business Opportunity Act. (See S.2015 and H.R.3459.) Under the proposed legislation, Section 2(2) of the National Labor Relations Act would be amended to provide that an entity must have and exercise actual, direct and immediate control over the essential terms and conditions of employment in order to be considered to be a joint employer. This is an attempt by the legislature to restore the joint employment standard that existed for three decades prior to the NLRB’s decision in Browning–Ferris, issued in August 2015.
In July 2015, the Fair Franchise Act (FFA) was introduced into Congress as an attempt to correct the perceived imbalance of power between franchisors and franchisees. (H.R. 3196.) The FFA attempts to address many aspects of the franchisor/franchisee relationships. It includes prohibitions and requirements as to pre-sale disclosures, some of which may reduce or eliminate the effectiveness of integration and/or merger clauses which a franchisor may use to avoid liability for alleged misrepresentations. The FFA also seeks to impose controls over the sale or transfer of a franchise, including limiting the grounds upon which a franchisor can deny a proposed transfer. The FFA also would establish requirements pertaining to renewal and termination, including mandatory notice and cure periods, compensation for a franchisee upon termination and waiver of non-compete restrictions. Finally, the FFA would give franchisees a private right of action for any violation of the act, including the right to recover attorneys’ fees and costs. While the legislation is still in its early stages, it could potentially have a major impact on the franchise world if it is ultimately passed in the form in which it was introduced.
On October 11, 2015, the Governor of California approved certain amendments to the California Franchise Relations Act. The amendments change the definition of good cause required for termination so that good cause is now limited to the failure of the franchisee to substantially comply with the lawful requirements of the franchise agreement. The notice period and opportunity to cure period was changed from 30 days to 60 days. Immediate or reduced notice of termination is allowed under certain circumstances such as bankruptcy; abandonment; mutual agreement; material misrepresentations by the franchisee relating to the acquisition of the franchise; franchisee’s failure to comply with any federal, state or local law after receiving 10 days’ notice; repeated failure to comply with requirement of franchise; franchisee is convicted of a felony; failure to pay franchise fees within 5 days of written notice; a determination that continued operation would result in imminent danger to public health or safety; and franchisee engaging in conduct that reflects materially and unfavorably upon the operation and reputation of the franchisor. The amendments also require a franchisee to obtain written consent from the franchisor to sell or transfer the franchise, but precludes a franchisor from preventing a franchisee from selling or transferring its franchise to another person if that person is qualified under the franchisor’s then existing and reasonable standards of approval. Subject to certain exceptions, the amendments require that upon termination or non-renewal, even if lawful under the act, a franchisor must repurchase from the franchisee at the value of price paid, minus depreciation, all inventory, supplies, equipment, fixtures and furnishings purchased or paid for under the franchise agreement. If the termination or non-renewal is in violation of the Act, then the franchisee would also be entitled to receive from the franchisor the fair market value of the franchise business and assets, along with any resulting damages. The amendments are applicable to any franchise agreement entered into or renewed after January 1, 2016, or to franchises of an indefinite duration that may be terminated without cause.
A federal court in Pennsylvania dismissed defendant Domino’s Pizza, Inc. (DPI) from a lawsuit brought by a potential employee of a DPI franchisee who claimed she was discriminated against when the franchisee refused to hire her as a driver because she was a woman. The plaintiff had filed claims under Title VII and the Pennsylvania Human Relations Act naming as defendants the individual franchisee owner, Mark Coskun (Coskun), the corporate franchisee, MDC Pizza, Inc. (MDC) and the corporate franchisor, DPI. The plaintiff had previously filed an EEOC charge asserting the claims. In the EEOC charge, the plaintiff had identified Coskun and “Domino’s Pizza” as the respondents. The charge did not identify DPI as a respondent. The plaintiff had listed the address of the franchise store for Domino’s Pizza. DPI had no knowledge of the EEOC charge or any of the allegations until it was served with the Complaint for the lawsuit. DPI moved to dismiss on summary judgment arguing that the plaintiff had not exhausted her administrative remedies as to DPI because DPI was not named as a party in the Charge of Discrimination filed with the EEOC. The court, relying on the decision in EEOC v. Simbaki, Ltd., 767 F.3d 475 (5th Cir. 2014), held that the use of a trade name in an EEOC charge does not per se satisfy the named-party requirement as it pertains to a franchisor or a parent corporation. The court held that to do so would undermine the named-party requirement of an EEOC charge. The court noted that the facts in this case were even stronger than those in Simbaki and more supportive of the conclusion. In Simbaki, the franchisor, while not named in the EEOC charge, was aware of the charge and communicated with the EEOC regarding the charge. Nevertheless, the 5th Circuit concluded that the plaintiff had not exhausted her administrative remedies as to the franchisor because the franchisor was not named in the EEOC charge. In this case, the court noted that DPI had no knowledge, or notice, of the EEOC charge and the charge filed by the plaintiff did not include any facts that distinguished the franchisee from the franchisor. The court went on to briefly discuss the Shafer/Glus exception to the named-party requirement for Title VII claims. The court quickly concluded that the Shafer/Glus exception did not apply because a threshold requirement of the exception is that the unnamed party receive notice of the EEOC charge, i.e. had “actual knowledge of the charge”. The plaintiff failed to present any evidence that DPI had actual knowledge or notice of the EEOC charge. As such, the court dismissed all claims against DPI due to the plaintiff’s failure to exhaust her administrative remedies. Owens-Presley v. MCD Pizza, Inc., Civil No. 14-6002, 2015 WL 4724804, (E.D. Pa., Aug. 10, 2015).
A South Dakota federal court granted Plaintiff American Dairy Queen Corporation’s (DQ) motion for preliminary injunction, enjoining the defendant franchisee from continuing to operate a DQ franchise that had been terminated. The franchisee had breached the franchise agreement by failing to submit the required reports and fees to DQ. After some negotiation, DQ and the franchisee entered into a Mutual Cancellation and Release Agreement (Cancellation Agreement) which allowed the franchisee to continue to operate the restaurant as a DQ for a limited period of time while the franchisee attempted to sell the restaurant to another DQ franchisee. The franchisee agreed to comply with the terms of the franchise agreement during this period. The franchisee breached the Cancelation Agreement by failing to submit the ongoing reports and fees to DQ. After several warnings, demands and notices, with no cure or compliance by the franchisee, DQ terminated the franchisee and demanded that the restaurant be closed. The franchisee ignored the demands and continued to operate the restaurant as a DQ which led to the filing of the lawsuit. Upon DQ’s motion for a preliminary injunction, the court found that all factors favored the issuance of an injunction. First, the court found that DQ would suffer irreparable harm if the injunction was not granted due to the potential loss of goodwill and harm to its reputation if the franchisee was allowed to continue to operate the restaurant as a DQ franchise without a franchise agreement in place that would ensure compliance with DQ’s standards. The court noted that the likelihood of confusion was particularly high in this case given that the franchisee was operating the restaurant in the same location. In looking at the balancing of harm factor, the court noted that any harm that would be suffered by the franchisee was self-inflicted and that the franchisee was given plenty of opportunities to cure the breach. As such, the balance of harms weighed in favor of granting the injunction. The court determined that based on the factual record, DQ had a strong likelihood to prevail on the merits of its claim that the franchisee had breached the Cancellation Agreement. Finally, the court concluded that the public interest factor favored granting of the injunction because the public has an interest in being able to rely on a franchisor’s marks when selecting a product and public interest disfavors those who do not comply with their contractual obligations. In granting the motion for preliminary injunction, the court concluded that DQ did not need to file a bond because given the factual record there was little risk that the injunction would cause any legitimate monetary damage to the franchisee. American Dairy Queen Corporation v. Wardlow, No. 4:15-CV-04131-RAL, 2015 WL 5178454, (D.S.D., Sept. 4, 2015).
A federal court in California dismissed on summary judgement certain claims against McDonald’s Corporation, McDonald’s USA and McDonald’s California (jointly hereinafter “McDonald’s”), including alleged labor violations under California state law, finding that McDonald’s did not directly employ the plaintiffs and, thus, could not be held liable as joint employers. However, the court did not give McDonald’s a complete clean bill of health, holding that there were issues of material fact as to whether or not McDonald’s could be held liable as a joint employer under an ostensible agency theory. The case involved a proposed class action of employees who worked for a McDonald’s franchisee. Most of the asserted claims were based on alleged violations of the California Labor Code. McDonald’s moved for summary judgment arguing that they could not be held as joint employers of the franchisee’s employees. Although the decision was dated after the NLRB’s decision in Browning-Ferris, neither the new standard nor the Browning-Ferris decision was discussed by the court. Instead, relying on the California standard for determining joint employment as set forth in Martinez v. Combs, 49 Cal. 4th 35 (Cal., May 20, 2010), the court found that McDonald’s did not exercise sufficient direct control to be considered a joint employer. The court noted that while McDonald’s had the ability to exert pressure on and influence the franchisee, including through potential termination of the franchise agreement, the facts clearly showed that all authority relating to hiring, firing, wages and staffing decisions of employees rested with the franchisee, not McDonald’s. The fact that McDonald’s made recommendations to the franchisee, trained the franchisee and monitored the franchisee’s actions, did not change the fact that the franchisee was ultimately in control of hiring, firing, rate of pay, work hours and work conditions for the employees. While the court dismissed claims alleging that McDonald’s was a direct joint employer of the plaintiffs, it refused to dismiss claims that McDonald’s may have employer liability on ostensible agency grounds. The court held that there were issues of fact as to whether or not the employees reasonably believed that McDonald’s was their employer. Citing to other cases in which ostensible agency was found based on similar facts, the court concluded that it could not dismiss this theory of liability as a matter of law. If the franchisee is determined to be McDonald’s ostensible agent, the court stated, then McDonald’s would be liable to the franchisee’s employees. Ochoa v. McDonald’s Corp., No. 14-CV-02098-JD, 2015 WL 5654853 (N.D. Cal., Sept. 25, 2015).
A federal district court in California denied a franchisee’s motion to remand holding that the language of the forum selection clause in the franchise agreement permitted the case to proceed in either state or federal court. Plaintiff, a franchisee of the defendant, filed an action in Los Angeles Superior Court asserting claims of breach of contract, breach of implied covenant of good faith and fair dealing, promissory fraud and tortious interference. The franchisor removed the case to federal court based on diversity jurisdiction. The franchisee did not dispute that diversity jurisdiction existed, but argued that the language of the forum selection clause in the License Agreement required the case to be in state court. The relevant language stated that all actions “shall be litigated in the appropriate district court in the city or county of Los Angeles, California”. The court stated that it must look at the plain language of the forum selection clause. Relying on prior case law, the court held that a forum selection clause which uses language such as “the courts of” a state refers to state courts only because “of” is a term “denoting that from which anything proceeds; indicating origin, source, descent, and the like”. State courts derive their power and authority from the sovereignty of the state, while federal courts do not. On the other hand, the court stated, a forum selection clause that uses the phrase “courts in” a state imposes a geographic restriction, not a sovereignty restriction, and, thus, includes any court located in the state, regardless if it is at the state or federal level. As the language of the clause at issue in this case used the phrase “courts in” Los Angeles, the case could properly be heard in either federal or state court. Moreover, this interpretation was consistent with a subsequent provision in the License Agreement which referred to filing cases in any state or federal court of California. Jenhanco, Inc. v. Hertz Global Holdings, Inc., No. 2:15-CV-04191-ODW(PJW), 2015 WL 5444666 (C.D. Cal. , Sept. 16, 2015).

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