Focused on Franchise Law - June 2014


FRANCHISOR 101: IFA Files Lawsuit Against Seattle

On June 11, 2014, the International Franchise Association (IFA), a Washington, D.C.-based trade group, and five franchisees sued in U.S. District Court in Seattle to block Seattle's recently enacted increase of the minimum wage in the city to $15 per-hour.


The law requires large businesses, defined as those with more than 500 employees, to raise the minimum wage they pay employees to $15-an-hour over three years.  Small businesses have seven years to phase in the wage increase.  Under the law, a franchisee with five employees or more is considered a large employer and must begin raising its wage base next April if the franchise system has more than 500 employees nationwide. 


On the other hand, an independent, non-franchise company with 499 employees or less will be considered a small employer and will have additional time to comply with the law.

IFA wants an injunction to prevent the new law from taking effect on April 1, 2015. The complaint alleges the law illegally discriminates against franchisees, improperly treating them not as small, locally-owned businesses, but as large, national companies, because they operate in a franchise network; and claims the law violates the Equal Protection Clause of the U.S. Constitution and the Washington State Constitution by arbitrarily discriminating against small businesses simply because they are franchises. IFA also launched, a website to encourage business owners to amend or overturn the law.
FRANCHISEE 101: Unsigned Franchise Agreement Binds Franchisee's Shareholder
Texas Appeals Court recently held in Pritchett v. Gold's Gym Franchising, LLC that a Texas forum-selection clause in a Franchise Agreement was incorporated by reference into a personal guaranty agreement and was binding on a franchisee's out-of-state shareholder who did not sign the Franchise Agreement.

Gold's Gym and its franchisee, Bodies in Balance, entered into a Franchise Agreement in 2008. Each of Bodies in Balance's three shareholders signed a Guaranty, agreeing to be "personally bound by each and every provision in the Franchise Agreement."

The Franchise Agreement contained a "Consent to Jurisdiction" provision saying Bodies in Balance and its shareholders agreed the courts in Dallas County had exclusive jurisdiction over all disputes. The Guaranty did not have a "Consent to Jurisdiction" provision. Pritchett, a 50 percent shareholder, argued that, despite the Consent to Jurisdiction provision in the Franchise Agreement, he could not be forced to litigate claims in Texas because he had not signed the Franchise Agreement.

The court ruled that to uphold terms incorporated by reference in an agreement, "it must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms." Since the Guaranty said "Guarantors do hereby agree to be personally bound by...each and every provision in the [2008 Franchise] Agreement...," the Court concluded that the parties to the Guaranty intended the entire Franchise Agreement, including its forum-selection clause, to be part of the Guaranty.

According to the Court, if Pritchett signed the guaranty, he was subject to the forum-selection clause in the Franchise Agreement and waived any jurisdictional objection to being sued in Dallas County.

Prospective franchisees should be cautious about, and fully understand the effects of, incorporation by reference clauses in their Franchisee Agreements.


Read the court opinion: Tim Pritchett, Appellant, v. Gold's Gym Franchising, LLC, Appellee


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.

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