Source: http://calawyers.org/Sections/Business-Law/Standing-Committees/Top-E-Bulletins-Franchise-Committee
Timestamp: 2018-04-21 11:46:12
Document Index: 375684442

Matched Legal Cases: ['§ 20040', '§ 31005', '§ 20001', '§ 31008', '§ 20004', '§ 31006', '§ 31107', '§ 20040', '§ 20040']

July 13, 2015: Does New NLRB Advice Memorandum Indicate That The Tide Has Turned For Joint Employer Liability In Franchising?
June 23, 2015: California Court Refuses To Enforce Texas Forum Selection Clause Without Guarantee Texas Court Would Apply California Law
April 21, 2015: Court Denies IFA’s Attempt To Block Seattle’s Expedited Minimum Wage Increases On Franchisees
January 12, 2015: Recent Case Demonstrates Importance Behind Properly Educating Courts On California’s Franchise Laws
January 7, 2015: Court Refuses To Extend Patterson and Juarez Protections To Quasi-Franchise Confronted With Employment Misclassification Claims
Below, we discuss the Associate General Counsel’s decision, including the relevant facts and application of those facts to the two different standards of joint employment currently before the NLRB. In conclusion, we identify several “best practices” that franchisors should employ in light of this new Advice Memorandum.
The conclusions reached in the Advice Memorandum are clearly a positive development for the franchise industry. The NLRB’s recent expansive view of joint employer liability has been viewed by many to seriously threaten the future of the franchise business model. If nothing else, Freshii represents a line in the sand on how far the NLRB is willing to push joint employer liability.
Whether the Associate General Counsel’s opinions will carry the day is yet to be seen. As mentioned above, the Advice Memorandum does not have the effect of creating law; leaving the ultimate ruling of the NLRB still open for debate. For now, however, franchisors can (and should) make necessary changes to their franchise systems in light of the opinions in Freshii.
For instance, franchisors should institute formal policies announcing their unwillingness to become involved in any unionizing activities of the franchisees’ employees.
Franchisors would also be wise to focus their training, inspections and advice on business operations and brand standards – not employment matters. While guidance on human resource matters can still be made available via an employee handbook or other means, it must be abundantly clear that each franchisee has the option to adopt the franchisor’s personnel policies and handbook or to employ their own.
June 23, 2015; California Court Refuses To Enforce Texas Forum Selection Clause Without Guarantee Texas Court Would Apply California Law
In these instances, California courts have found it “counterintuitive” to accept that California’s laws will be applied by an out-of-state forum resolving a dispute that involves a resident of that forum and a choice-of-law provision compelling the application of that forum’s laws. (Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 at *24 (citing America Online, Inc., supra, 90 Cal. App. 4th at 14). )
A party opposing enforcement of a forum selection clause typically bears the burden of showing that the clause is unfair or unreasonable. California courts, however, have reversed the burden – placing it on the party attempting to enforce the forum selection clause – when the underlying claims are predicated upon statutory rights the California Legislature has declared to be unwaivable. (Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 at *2.)
The Appellate Court reversed, holding that the party attempting to enforce a forum selection clause bears the burden to show enforcement of the clause is not unreasonable or unjust “when unwaivable statutory rights are involved because a forum selection clause otherwise could be used to circumvent those unwaivable rights.” (Id. at 10.) In reaching this conclusion, the Appellate Court explained that a forum selection clause carries the potential to contravene unwaivable franchisee protections in the CFIL by placing litigation in a forum in which there is no guaranty that California’s franchise laws will be applied.
Since Wimsatt, California courts have applied the same reversed-burden rational when confronted with forum selection clauses and other California unwaivable statutory rights. ( See, e.g., America Online, Inc. v. Superior Court, 90 Cal.App.4th at 14 (reversing burden of proof to claims under the California Consumer Legal Remedies Act).)
Relying upon Wimsatt and its progeny, the Verdugo court held that – because California Labor Code rights cannot “in any way be contravened or set aside by a private agreement” – the burden of proof shifted to Alliantgroup. (Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 at *13.)
According to Verdugo court, the Texas court’s application of Texas law would not make Texas an unsuitable forum, and would not “necessarily” allow the California court to lift the stay and resume proceedings on Verdugo’s claims. (Id. at *38.) “If the trial court sought to resume proceedings every time the foreign jurisdiction made an adverse ruling, the unseemly conflicts among jurisdictions that the forum non conveniens doctrine is designed to eliminate would be commonplace.”
By thoroughly dissecting the operations manuals and then pleading each semblance of control reserved by the Licensors over Fresh Start in these documents, the Keller plaintiffs were able to overcome the Patterson plaintiff’s shortcomings and allege facts sufficient to support an agency relationship.
In light of Keller, franchisees should be encouraged to dissect all of the franchise system materials in search of any language that identifies control by the franchisor. Presenting this language to the court in a vacuum may be enough to overcome the Patterson decision.
Franchise and Distribution Law is one of a handful of legal specialties certified by the California State Bar. Franchising is recognized as a specialty largely in part to the complexities and nuances within state and federal franchise laws – most notably, California’s Franchise Investment Law and Franchise Relations Act.
Notwithstanding this recognized area of legal specialization, lawyers less familiar with franchising are still retained to litigate disputes arising out of franchise or quasi-franchise relationships. Too often, this lack of familiarity results in misapplication of the law and unfavorable outcomes for their clients.
A recent California District Court decision in the case of Estep v. Yung, 2015 U.S. Dist. LEXIS 4475 (E.D. Cal. Jan. 14, 2015), illustrates the importance of qualified franchise counsel to the outcome of a case. As discussed below, the parties’ failure to properly educate the Estep court on California’s franchise laws resulted in a flawed application of the law and adverse outcome for the subfranchisor.
The relevant factual background in this case is straightforward. Defendant HDYR, LLC (“HDYR”) is a Texas-based franchisor of the fast-casual, custom sushi restaurant concept “How Do You Roll?” There are currently twelve How Do You Roll? locations spread across six states – none of which are located in Northern California.
In June 2012, HDYR registered to sell franchises in California. The following year, HDYR entered into an Area Representative Service Agreement (the “AR Agreement”) with Mekadishkem-EBE, Corp. – a company owned and operated by Plaintiffs David and Deanna Estep. In exchange for a payment of $60,000, Plaintiffs’ company was granted the exclusive right to solicit qualified prospective franchisees in a territory comprising much of Northern California, and to develop, support, and provide services to any franchisees in that territory.
In June 2014, Plaintiffs initiated a lawsuit against HDYR and its owner, Yuen Yung, in California Superior Court in Solano County. In their complaint, Plaintiffs assert claims against the Defendants for fraud and breach of contract arising out of HDYR’s alleged (1) pre-sale misrepresentations concerning the activity and interest of California franchise prospects, and (2) breaches of the AR Agreement by failing to provide Plaintiffs’ company with “marketing material, access to sales, advertising and promotional materials.”
After being served with the lawsuit, Defendants timely removed the case to the District Court in the Eastern District of California on diversity grounds.
Forum Selection Clause Designates Out-Of-State Forum
Following removal, Defendants filed a motion to transfer the case to the Western District of Texas consistent with the AR Agreement’s forum selection clause. Specifically, the forum selection clause states that “the exclusive venue for disputes between [the parties] will be the state or federal district courts located in Austin, Texas, and each party waives any objection it might have to the personal jurisdiction of or venue in such courts.” (Def.’s Mtn. to Transfer, Ex. A, ¶ 17.1 (October 21, 2014)).
Plaintiffs opposed the motion to transfer on several grounds, most notably, on the ground that the out-of-state forum selection clause is void and against California’s “broad” public policy codified in the California Franchise Relations Act (“CFRA”) at Business and Professions Code § 20040.5 (“Section 20040.5”). (Pl.’s Oppo., p. 1:15-19 (November 20, 2014)).
Section 20040.5 provides that “[a] provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.”
Relying upon this language, Plaintiffs argued that – although the AR Agreement is not a “franchise agreement” – the AR Agreement still falls within the protections set forth in Section 20040.5 because it relates to franchise agreements.
Defendants disagreed, arguing that Plaintiffs could not rely upon Section 20040.5 because the statute has limited applicability to “franchise agreements,” and that the AR Agreement “is not a ‘franchise agreement.’” (Def.’s Reply Brief, pp. 2:8-10, 5:1-3 (November 24, 2014) (emphasis added)).
The Courts Finds That Section 20040.5 Does Not Apply To AR Agreement
At the onset of its analysis, the court explained that under Ninth Circuit law, contractual forum selection clauses are “presumptively valid” unless: (1) the clause was the result of fraud, undue influence, or overweening bargaining power, (2) the selected forum is so gravely difficult and inconvenient that Plaintiffs would essentially be denied their day in court, or (3) enforcement of the clause would contravene a strong public policy of the forum in which the suit was brought. (Estep, 2015 U.S. Dist. LEXIS 4475, *3, citing R.A. Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 325 (9th Cir. 1996), and Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 (9th Cir. 2006) (“California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and enforcement would not be unreasonable”)).
Then, turning its attention to the applicability of out-of-state venue prohibition in Section 20040.5, the court found that the AR Agreement “is not a franchise agreement; it is a contract between a small company and a sophisticated area representative who would oversee the solicitation of 30 franchisees.” (Estep, 2015 U.S. Dist. LEXIS 4475, *3 (emphasis added)).
Based on this finding, the court granted Defendants’ motion to transfer holding that “[t]he California Franchise Relations Act is not on point and it is not enough to outweigh California’s stated policy of favoring contractual forum selection clauses.” (Id. at *3-4.)
The AR Agreement Is A “Franchise Agreement” Under California Law
Any franchise lawyer presented with this fact pattern is likely to scrutinize the court for “getting it wrong.” However, review of the parties’ briefs suggest that the blame should not fall to the court, but instead, to the parties for failing to properly educate the court on California’s franchise laws.
In particular, the parties failed to enlighten the court on the statutory definitions of “franchise” and “subfranchise” – two definitions that cover the AR Agreement and likely would have resulted in a dramatically different decision by the court.
The term “franchise” is defined by both the CFRA and CFIL as:
The franchisee is required to pay, directly or indirectly, a franchise fee. (Corp. Code § 31005(a); Bus. Prof. Code § 20001(a).)
Under this definition, the term “franchise” is synonymous with “franchise agreement.” This is important as Section 20040.5 contains only the term “franchise agreement,” and not “franchise.”
Without going into any significant detail, the terms of the AR Agreement appear to satisfy each of the three prongs defining a “franchise” – i.e., Plaintiffs were granted the right to sell and provide support for How Do You Roll? franchise businesses under the direction of HDYR and in exchange for a fee of $60,000. Thus, the court should have found the AR Agreement to be a franchise under the franchise law.
Moreover, the CFIL and CFRA have expanded the definition of “franchise” to include “subfranchisor” – i.e., “any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor.” (Corp. Code § 31008-31010; Bus. Prof. Code §§ 20004-20006.) Because the AR Agreement is a contract granting the Plaintiffs’ business the right to sell franchises in Northern California, it falls within the definition of “subfranchisor.”
Under either definition – i.e., “franchise” or “subfranchise” – the AR Agreement constitutes a franchise agreement under the franchise laws.
Instead of bringing these definitions to the court’s attention, Plaintiffs couched their argument entirely within the language of Section 20040.5, and Defendants’ papers did little more. (Id., p. 4:16-19 (Defendants cited generally to the definitions of “franchisee” (“a person to whom a franchise is granted”), and “franchisor” (“a person who grants a franchise”) under Cal. Bus. & Prof. Code §§ 31006 and 31007 (erroneously referred to in the brief as § 31107)). These obvious mistakes by counsel led to the court’s erroneous finding that the AR Agreement is not a franchise agreement and, therefore, not protected by Section 20040.5.
Outside Factors Potentially Influencing The Court’s Decision
To be fair, lack of education alone may not have been the only factor influencing the court’s flawed ruling. Rather, the court’s order suggests that it also may have been influenced by questionable conduct by Plaintiffs’ counsel.
For instance, the court pointed out that, “[c]onveniently, Plaintiffs left off the page of the [AR] Agreement containing [the forum selection clause] in the version of the [AR] Agreement they attached to their Complaint.” (Estep, 2015 U.S. Dist. LEXIS 4475, *2, fn 2.)
The Court also found Plaintiffs to have “inexplicably sued their own company” as part of what appears to be a failed attempt to defeat diversity jurisdiction. (Id. at *2, fn 1.)
Finally, the Court was not pleased with Plaintiffs’ argument that the motion to transfer was untimely – noting that the Plaintiffs had “completely ignore[d]” the timing requirements of Federal Rule of Civ. Proc., Rule 81.
Notwithstanding the court’s evident frustration with Plaintiffs, the court would have been hard-pressed to grant the motion to transfer had the court been properly educated on the relvant franchise laws.
For decades, it has been commonplace for non-franchise businesses using a quasi-franchise business model (i.e., any business format license) to distinguish themselves from franchisors in order to avoid the arduous California franchise laws. A recent California district court case suggests that this may be changing – at least when confronted with employee misclassification claims.
In Ambrose v. Avis Rent a Car Sys. (Ambrose v. Avis Rent a Car Sys., 2014 U.S. Dist. LEXIS 170406 (C.D. Cal. Dec. 8, 2014)), the defendants – owners of an independent operator business model – argued that their business model was “functionally indistinguishable” from a franchise in an attempt to secure the same protections the California Supreme Court recently extended to franchisors in Patterson v. Domino’s Pizza, LLC (Patterson v. Domino's Pizza, LLC, 60 Cal.4th 474 (2014)) .
As detailed below, while the district court ultimately refused to extend Patterson (and other franchise cases) to the quasi-franchise business model at issue, Ambrose presents a rare instance in which the putative franchisor argues that its business model is indistinguishable from a franchise, while the licensee vehemently opposes the franchisee designation. At the very least, this shift in arguments suggests that the laws facing franchisors doing business in California are becoming less tendentious.
In 2006, Tammy Dotson (“Dotson”) entered into an Independent Operator Agreement (the “Operator Agreement”) with Budget Rent A Car System, Inc. (“Budget”) for the operation of a Budget Rent A Car business in Riverside, California. As a prerequisite to the commencement of her relationship with Budget, Dotson was required to (and did) form a limited liability company in which to operate her new business. The Operator Agreement identified Dotson’s newly formed entity, Visions Unlimited, LLC, as the “Operator” of the business and made clear that the “Operator is an Independent Contractor” of Budget – and “not a franchise.”
In a further attempt to avoid the franchise designation, the parties expressly acknowledged that Dotson had not “paid [Budget] a fee for the right to enter into this Agreement.”
In addition to Dotson’s contractual obligations, Budget also maintained other significant controls over Dotson’s business. For example, Budget (1) owned and insured all of the rental vehicles, (2) determined which vehicle groups would be made available, (3) supplied Dotson’s business license, (4) leased the Riverside business location, (5) set the minimum rental vehicle rates, (6) paid for the utilities of the business, (7) provided all uniforms for the business, (8) provided a majority of the furniture, computers, office supplies and equipment at the location, (9) provided the software platform needed to process rental reservations, and (10) had authority to accept or approve of Dotson’s advertising practices.
Between November 2006 and January 2011, Dotson operated the Budget rental car business. During this time, Dotson determined the work hours and rate of pay for her employees and contracted with a third-party payroll provider to handle payroll.
Although the Operating Agreement did not have an expiration date, it granted both parties the right to terminate without cause upon at least 90 days’ prior written notice. In June 2010, Budget issued two notices to Dotson – a notice of default for “poor performance,” and a termination warning for employee misconduct. Thereafter, providing the required 90 days’ notice, Budget terminated the Operating Agreement, effective January 31, 2011.
In consideration for the termination, the parties negotiated, and Dotson received, $17,000 – a figure that represented three months’ worth of commissions for the rental car business.
During the initial stages of litigation, all of the plaintiffs – with the exception of Dotson – settled and voluntarily dismissed their claims.
On October 29, 2014, after agreeing that the critical facts were not in dispute, the parties filed competing motions for summary judgment. In her motion, Dotson sought summary judgment on her claim for declaratory relief – seeking a judicial declaration that she was an employee of Budget. Alternatively, Defendants sought summary judgment of Dotson’s entire action arguing, among other things, that the undisputed evidence demonstrated that Dotson was an independent contractor and not an employee.
At the onset of their motion, the Defendants directed the court to Patterson v. Domino’s Pizza (Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474 (2014))and Juarez v. Jani-King of California, Inc.(Juarez v. Jani-King of California, Inc., 2012 U.S. Dist. LEXIS 7406 (N.D. Cal. 2012))in an attempt to convince the court to abandon the common law test for an employment relationship when analyzing a licensor/licensee business model.
In Patterson, the California Supreme Court found that franchisor Domino’s Pizza could not be held vicariously liable for the workplace injuries allegedly inflicted by one employee of a franchisee on a subordinate employee. In reaching this conclusion, the court acknowledged the economic realities and mutual benefits conferred by franchising and found that “any other guiding principle would disrupt the franchise relationship.” (Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th at 498.)
By extending Patterson and Juarez to the operator relationship between Dotson and Budget, the Defendants argued that the court would avoid the “false positives” that might result from the court’s application of the common law test for an employment relationship.
Dotson Contests Defendants’ “Attempt To Re-Cast This Issue Into Something It Is Not”
Dotson argued that the franchise cases of Patterson and Juarez are distinguishable from this case as her Operator Agreement expressly denounced the existence of a franchise relationship and made clear that Dotson did not pay a franchise fee.
Instead, Dotson relied upon the unpublished Ninth Circuit decision in Adees Corp. v. Avis Rent A Car Sys., Inc. ( Adees Corp. v. Avis Rent a Car Sys., 157 Fed. Appx. 2, 2005 U.S. App. LEXIS 19956 (9th Cir. Cal. 2005)
– which included a similar (if not identical) Operator Agreement to the one at issue in this case. In Adees Corp., an independent operator sought franchisee status in an attempt to avail himself to the protections of the California Franchise Relations Act as it relates to the defendant’s’ termination of the Operator Agreement without good cause. Rejecting the independent operator’s argument, the court found that the governing Operator Agreement did not create a franchise relationship in the absence of a franchise fee.
Relying upon the Ninth Circuit’s findings in Adees Corp., Dotson argued that she should not be treated as a franchisee where she “does not have the rights and remedies a ‘franchisee’ would have in relation to its ‘franchisor.’” In other words, Defendants should not be able to have their cake and eat it too.
Although acknowledging that the California Supreme Court may someday extend the reasoning of Patterson to the quasi-franchise relationship, the court refused to apply the decisions inPatterson and Juarez to the business format license at issue in this case.
The court found it to be “undisputed” that Dotson was not availed to the rights and remedies available to a franchisee under the law. Though the court found the payment of a franchise fee to be a “mere formality,” this formality implicated the parties’ substantive rights and served as the basis for the court to refuse to treat Dotson as a franchisee. (Ambrose v. Avis Rent a Car Sys., 2014 U.S. Dist. LEXIS 170406 at 19*.)
In light of the competing inferences, the court refused to conclude, as a matter of law, that the Defendants did or did not exercise “all necessary control” over Dotson. (Id.) The parties’ competing motions for summary judgment – to the extent they were based on the issue of whether Dotson was an employee – were denied.
Pepe’s moved to dismiss on grounds of forum non conveniens or, in the alternative, to transfer the case to London. Replying upon the forum selection clause in the MFA, Pepe’s argued that London was the only proper forum for the lawsuit. Frango opposed the motion on the grounds that the out-of-state forum selection clause is invalidated by the CFRA at Bus. & Prof. Code § 20040.5. (Cal. Bus. & Prof. Code § 20040.5 provides that, "A provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.)
In light of these facts – and some circular reasoning in its analysis – the court found that Pepe's “failed to make ‘a strong showing of inconvenience to warrant upsetting [Frango’s] choice of forum.’”