Focused on Franchise Law - July 2012

by Lewitt Hackman
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BARRY KURTZ HONORED AS TRUSTED ADVISOR

On July 12, Barry Kurtz was selected by the San Fernando Valley Business Journal as one of the top 40 trusted advisors and attorneys in the San Fernando Valley. Barry will be formally recognized at an awards reception on August 8.Click here to see the event announcement.

FRANCHISOR 101:  THE COURT DELIVERS A LESSON TO FRANCHISORS

In Patterson v. Domino's Pizza, LLC, Ms. Patterson, an employee of a Domino's Pizza franchisee, alleged she was sexually assaulted by her store manager. She filed suit against the franchisor, Domino's Pizza, claiming Domino's was vicariously liable for the assault as her employer. Domino's argued that it was not Ms. Patterson's employer because the franchise agreement clearly stated that the franchisee was an independent contractor of Domino's and that Domino's was not involved in the "training, supervision or hiring of [the Franchisee's] employees." The Trial Court agreed with Domino's, finding that Domino's was not responsible for "supervising and paying the persons who work in the store." In an opinion many franchisors may find troubling, however, the California Court of Appeal recently disagreed.

The Domino's franchise agreement stated that the franchisee "shall be solely responsible for recruiting, hiring, training, scheduling for work, supervising and paying the persons who work in the Store and those persons shall be your employees, and not [Domino's] employees." However, other provisions in the franchise agreement vested Domino's with control over employee qualifications, demeanor, hiring and training. More importantly, though, the franchisee claimed that a Domino's area leader told him to fire the manager who had allegedly assaulted Ms. Patterson and threatened to put him out of business if he didn't follow other employment guidelines. According to the Court of Appeal, that was enough to amount to "substantial control."

Protection from liability to franchisees' employees is an important benefit franchisors have traditionally enjoyed from the independent contractor relationship.  But, as the Court in the Domino's case reminds us, these protections may be lost, regardless of the language in the franchise agreement, if the franchisor "assumes substantial control over the franchisee's local operation, its management-employee relations or employee discipline." 

Click here to see the Court's decision.

FRANCHISEE 101:  DOES THE FRANCHISOR HAVE A DUTY TO PROTECT AND ENHANCE ITS BRAND?

Brand strength is central to a franchisee's decision to invest in a franchisor's system. Sure, franchisees know that past performance is no guarantee of future success, but they hope and expect that their franchisor will take actions to support the brand and to stave off competition. Whether or not the franchisor has a duty to take such actions or risk being liable to its franchisees when their franchises fail was recently at issue in Bertico Inc. v. Dunkin' Brands Canada Ltd.-a case decided in Montreal, Canada, with reasoning that could provide precedent for U.S. Courts if they grapple with this issue in the future.

Beginning in 1961, Dunkin' Brands Canada Ltd. operated in the Montreal, Quebec area as a market leading franchisor selling a proprietary system under its trademark to its franchisees who paid franchise fees and advertising fees and purchased supplies and equipment from Dunkin'. In the late 1990's, Dunkin' faced stiff competition from Tim Horton's. Despite Dunkin's efforts to stave off Tim Horton's attack, including offering its franchisees an early renovation incentive program, Tim Horton's overtook Dunkin in the Quebec market. Dunkin assigned its rights in the franchise agreements to a master franchisor that "surrendered and terminated all its rights" in the franchise agreements within 4 years, leaving the franchisees high and dry. Twenty one former franchisees filed suit claiming Dunkin was liable for their loss of opportunity to sell their stores at traditional values due to the collapse of the Dunkin System in Quebec.

The Court rejected Dunkin's argument that the franchises failed because the franchisees were poor operators and held that Dunkin breached its express or implied obligations to protect the brand since Dunkin had assigned to itself the principal obligation of protecting and enhancing the brand in the franchise agreements. Blasting Dunkin, the Court stated: "Franchisees cannot succeed where the system has failed. A successful brand is crucial to the maintenance of healthy franchisees. When the brand falls out of bed [and] collapses, so too do those who rely on it." 

Click here to see the Court's decision.

BARRY KURTZ HONORED IN NATIONAL BAR REGISTRY

Barry Kurtz was included in Martindale Hubbell's 2012 National Bar Register of Preeminent Lawyers for the fifth consecutive year. The National Bar Register includes only select law practices that have earned the highest rating in the Martindale-Hubbell Law Directory and that have been designated by their colleagues as preeminent in their field.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Lewitt Hackman | Attorney Advertising

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