Focused on Franchise Law - September 2013

by Lewitt Hackman
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WWW.BEERDISTRIBUTIONLAW.COM IS NOW ONLINE!!!

Kurtz Law Group advises brewers, importers and distributors on beer distribution law as part of its 30+ year focus on franchise law. Our new website, www.beerdistributionlaw.com, is dedicated to beer distribution law and is now online. We thank Sheri Adams of Adams Consultants (sheri@adamsconsultants.com), and Brandon Kurtz of PrintRunner, Inc. (brandon@printrunner.com) for creating the website and urge our Newsletter readers to visit the site and give us your comments.  

 

FRANCHISOR 101: FRANCHISOR NOT LIABLE FOR ACTIONS OF FRANCHISEE'S MANAGERS

Cortland, a former bartender, sued GECP-Sunrise, LLC, a Buffalo Wild Wings franchisee, and its franchisor, Buffalo Wild Wings, Inc., claiming that she had been demoted due to her pregnancy and was sexually harassed by a manager and assistant manager at the franchisee's restaurant during her employment. Although Cortland and the managers were employed by the franchisee and the franchise agreement clearly stated that the franchisor and the franchisee were independent contractors, Courtland alleged that the franchisor was liable for the managers' wrongful acts under the "joint employer" and "vicarious liability" legal theories.

 

The U.S. district court in Arizona rejected the joint employer claim, stating that "a franchisor is not a joint employer unless it has significant control over the employment relationship [between the franchisee and its employees]." In the court's mind, since the franchisor did not have the right to hire, supervise, or fire employees; deal with payroll, scheduling, or employee recordkeeping; or compensate employees, but merely had the right to terminate the franchise relationship, a joint employment relationship did not exist.

 

The court also rejected Cortland's vicarious liability claim, holding that the franchisor could not be held vicariously liable in this matter under an agency theory because the franchisor did not exercise control over the managers. Although the franchisor trained the franchisee's managerial staff, it did so only to promote system uniformity, protect its brand name and dictate product presentation. However, since the franchisor did not exert daily control over the hiring, firing, and supervision of the franchisee's employees, did not mandate employee-related policies, was not involved in the daily management of the staff or the business, and did not address employee grievances, the court concluded that Cortland failed to demonstrate that anything other than an independent contractor relationship existed between the franchisor and the franchisee. To read the full case, click here. 

 

FRANCHISEE 101: STEAK N SHAKE FRANCHISEE WINS ROUND 1, BUT IS TKO'D IN ROUND 2

In Steak n Shake Enterprises, Inc. v. Globex Co., LLC, two franchisees (Globex) learned the hard way that franchisors may terminate franchise agreements and enforce post termination obligations against franchisees who fail to implement franchisor specified promotions and pricing policies when required to do so under their franchise agreements.

 

In 2011, Globex and Steak n Shake entered an Area Development Agreement (ADA) for 12 restaurants. In May 2013, Steak n Shake began a $4 summer promotion and sent $4 menus and promotional materials to its franchisees, including Globex. Globex was required to participate in the promotional program at its 3 operating restaurants under its franchise agreements. However, Globex did not implement the promotional program or utilize the $4 menus. Steak n Shake ultimately terminated Globex's franchise agreements because Globex did not participate and then filed suit in the U.S. district court in Colorado to enjoin Globex from continuing to use its trademarks and to enforce the post-termination obligations, including a 2 year non-compete covenant in the ADA, franchise agreements, and the personal guarantees signed by Globex's principals.

 

Globex claimed that it participated in the promotional program and argued that its termination was wrongful. The court initially agreed and issued a temporary restraining order in favor of Globex that prevented Steak n Shake from denying Globex access to its POS system, other internet and intranet systems, and proprietary foodservice delivery and discounts and allowed Globex to continue to operate the restaurants under the Steak n Shake trademarks. However, after further review of the agreements and other evidence, the court changed its ruling a month later and issued a preliminary injunction in favor of Steak n Shake. The court rejected Globex's claim that it participated in the promotion, and, in reversing itself, found that Steak n Shake demonstrated, among other things, a substantial likelihood that it would prevail on the merits and that Global was infringing on Steak n Shake's trademarks by continuing to operate as-is. The court ordered Globex to immediately cease and desist operating the restaurants, using Steak n Shake's trademarks and trade secrets and holding themselves out as Steak n Shake franchisees, and instructed Globex to comply with the post-termination obligations in the ADA and franchise agreements, including the 2 year covenant not to compete anywhere within the development area-a steep price to pay for its refusal to implement Steak n Shake's $4 summer promotion. To read the full case, click here. 

 

UPDATE: PROPOSED AMENDMENT TO CFRA WITHDRAWN FROM CONSIDERATION 

SB 610, which passed the State Senate in May, would have amended the California Franchise Relations Act (CFRA) to, among other things, require parties to franchise agreements to deal with each other in good faith, bar franchisors from preventing franchisees from participating in franchisee associations, provide additional legal remedies to damaged franchisees and extend anti-waiver protections. As in 2012, opponents are again satisfied with the outcome. Supporters insist, as they did in 2012, that the bill is not dead.

 

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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