Food and Beverage Law Update: March 2017

by Holland & Knight LLP

Holland & Knight LLP

Legalized Drug Use Impacts the Food and Beverage Industry

By Michael Prendergast

In the November 2016 general election, voters in Arkansas, Florida and North Dakota amended their state constitutions to authorize the use of marijuana for medical purposes, while voters in California, Nevada, Maine and Massachusetts expanded their tolerance for the use of marijuana to include recreational use. In Arizona, where medical use of marijuana already was legal, the electorate declined to allow recreational use. Presently, 45 states and the District of Columbia allow medical or recreational use of marijuana, leaving Idaho, Indiana, South Dakota, Texas and West Virginia as the only states not recognizing any lawful use.

In some states, the food and beverage industry has a duty to accommodate employee use of marijuana. For example, laws in 10 states (i.e., Arizona, Arkansas, Connecticut, Delaware, Illinois, Maine, Minnesota, Nevada, Pennsylvania and Rhode Island) contain language prohibiting discrimination against users of medical marijuana or requiring reasonable accommodation of employees who use medical marijuana or who have registered as an authorized medical user or "cardholder." By contrast, laws in three states (i.e., Georgia, Montana and Ohio) contain fairly strong language protecting employers from medical use lawsuits. The remainder of the states are either silent about employer's rights and obligations, or state laws — such as Florida's newly amended constitution, Fla. Const. Art. X, §29 — contain generic language referencing an employer's right to prohibit and/or lack of duty to accommodate medical use "in the workplace."

The food and beverage industry can expect courts to struggle with balancing medical use and discrimination statutes and other state employment laws, in the event employers take adverse action against employees based on marijuana use. See, e.g., Roe v. Teletech Customer Care Mgmt., 257 P.3d 586 (Wash. 2011): No evidence that Washington voters intended to provide employment protections or prohibit discharge for newly authorized medical marijuana use. Courts also will have to account for federal law. See, e.g., Coats v. Dish Network, LLC, 350 P.3d 849 (Colo. 2015): State's "lawful activities" statute did not prohibit termination for off-duty medical use, as it remains unlawful under the federal law.

The federal Controlled Substances Act continues to classify marijuana as a prohibited Schedule I drug, with no recognized medical or other lawful use. In addition, while not mandating drug testing, the federal Drug Free Workplace Act requires federal contractors and recipients of federal grants to prohibit use of illegal drugs — including marijuana — in the workplace. Moreover, the U.S. Department of Transportation takes the position that, even in states that allow medical marijuana, "[i]t remains unacceptable for any safety-sensitive employee subject to drug testing under the Department of Transportation's drug testing regulations to use marijuana." Furthermore, the Americans with Disabilities Act (ADA) specifically excludes an individual "currently engaged in the illegal use of drugs" from the Act's definition of a "qualified individual with a disability."

Employers should review and seek legal advice regarding their drug-free workplace policies. Employers who want to continue to ban all use of marijuana, including medical use made lawful under state law, should provide written notice to employees. In addition, employers should seek legal advice concerning the current state of the law prior to terminating employees or taking other adverse employment action based on medical or recreational marijuana use now considered lawful under their state's marijuana laws.

Latin America Trends in the Same Direction

By Jose Zapata

As in several states and other countries in Latin America, Colombia has legalized personal doses of drugs for recreational and other purposes. In November 2016, Ruling C-636 of the Colombian Constitutional Court declared constitutional Article 60.2 of the Substantial Labor Code of Colombia, pursuant to which workers are prohibited from arriving at work under the influence of alcohol or under the effects of any psychoactive substance. Provided that the declaration of constitutionality is conditioned upon the prohibition applying only when the consumption of psychoactive substances or alcohol directly affects the "performance" of the employee. The court allowed that, in certain cases, the use of psychoactive substances does not affect the safety of workers or the performance of their jobs.

Based on this reasoning, the court concluded that the prohibition set out in Article 60.2 of the Substantive Labor Code is too broad, and merits restriction of its scope in order to prevent an "unreasonable affection on employee individual autonomy." The ruling imposes an additional burden on employers to demonstrate that i) the worker was under the effects of psychoactive substances and ii) the worker's performance was directly affected as a consequence thereof. Employee conduct resulting from consumption of certain substances must be classified as serious misconductaffecting the corresponding task according to, inter alia, the internal rules of the workplace of the employer, the labor contract or the employer policies.

Likewise, the court emphasized that employer discipline cannot be exercised arbitrarily but strictly in accordance with the existing constitutional limits, such as employees' fundamental rights. In addition, this disciplinary power can only be exercised in the event of personal misconduct outlined in an employer's approved rules of conduct. The court's ruling is generating controversy throughout Latin America, but is likely to be adopted elsewhere in view of expanding rights there to consume personal doses of certain psychoactive substances.

Intellectual Property

Fast/Casual Mediterranean Restaurant Denied Protection for Name and Trade Dress

By Thomas Brooke

A federal jury in Maryland found that the logo used by a Mediterranean restaurant called Mezeh did not infringe the federally registered logo of its competitor, Cava Mezze Grill LLC. The two small restaurant chains operating in and around Washington, D.C., both have branched out to other locations and are popular in the fast/casual dining space. Both utilize an assembly-line concept in which restaurant patrons can customize their meals according to taste. The plaintiff, Mezze Grill LLC, and its related company, Cava Group, brought this action in 2014, alleging trade dress infringement, trademark infringement and related causes of unfair competition under both federal and Maryland law. The complaint was amended several times during the litigation, but at the heart of the matter were the trade dress claims and concerns over copying of the layout and operation of the restaurants themselves. The complaint included allegations that the defendants had infringed the plaintiff's trade dress by appropriating the image of the plaintiff's business.

The plaintiff was left with only a trademark claim after a memorandum opinion in July 2016 granted in part the defendant's motion for summary judgment. The court knocked out the plaintiff's trade dress claim on the grounds that the defendants did not have a clearly defined and inherently distinctive trade dress and for lack of evidence that the décor scheme of the plaintiff was "unique or unusual." Moreover, the court determined that the defendants do not use the same façade as the plaintiff, do not consistently have an open kitchen plan similar to that of the plaintiff and do not employ the same color scheme. The jury was not impressed with the plaintiff's remaining trademark claim. Weighing against it was the fact that the plaintiff made no claim to the exclusive right to the words "Mezze Grill," apart from the manner in which the mark was displayed in the registered logo. The word "mezze" can translate from different languages into English as "appetizer" or "taste."

Because the plaintiff did not have a consistent and clearly defined trade dress, the trade dress claims had no chance. More generally, this case demonstrates that it is difficult to protect a restaurant concept, such as an assembly line production of rice bowls, salad bowls or other Mediterranean-type dishes.

Labor and Employment

EEOC Age Discrimination Lawsuit Ends in Mistrial; Case Sent to Mediation

By Nathan Adams

The lawsuit of the Equal Employment Opportunity Commission (EEOC) against Texas Roadhouse Inc. for allegedly engaging in a nationwide pattern or practice of age discrimination between 2007 to 2014, one of several aimed at the restaurant industry, ended in a mistrial earlier this month after nearly a week of deliberation and a so-called Allen charge imploring it to come to a unanimous decision. EEOC v. Texas Roadhouse, Inc., Case No. 1:11-cv-11732 (D. Mass.). The EEOC introduced a human resources employee who testified that a high-ranking official at headquarters claimed "of course" the company had engaged in age discrimination. The EEOC showed the jury sticky notes on applications that said such things as "older," "super old," "old and chubby" and "old chick." A corporate photograph of "legendary" employees showed a group of mostly young employees. One applicant claimed that she was told the company preferred to hire "slim young blondes." The government claimed that the probability that so few people over the age of 40 would be hired was one in 781 billion.

Company attorneys cross-examined the human resources employee, had her admit that she had never hired anyone and asked why it had taken her two years to come forward. The company proffered policies that explicitly forbade asking about an applicant's age, except to be sure they were legally old enough to work. It argued that older employees preferred not to work for the company because its average bill was under $16 per person, it had no weekday lunch hours and it limited servers to three tables at a time. Therefore, the company discredited the EEOC's expert testimony comparing Texas Roadhouse to a country club or cafeteria. In contrast, the company's experts reported that it hired about as many older people as expected. Company attorneys drew into question several individual witnesses' stories. As examples, one of the EEOC's witnesses was actually offered a job; another decided against working at the steakhouse because the employee was a vegetarian; and another claimed that a manager who allegedly made a compromising remark wore khakis when jeans are part of the standard uniform.

U.S. District Judge Denise J. Casper ordered the case to mediation on April 4, 2017. A new trial date is set for May 15, 2017, but it is unclear whether the EEOC will proceed with the case under new management. Former General Counsel David Lopez has vacated his seat.


Franchisees' Fraudulent Conduct Leads to Breach of Franchise Agreement

By Nathan Adams

In Dunkin' Donuts Franchising LLC v. C3Wain, Inc, No. 16-1766, 2017 WL 464443 (3d Cir. Feb. 3, 2017), the court of appeal affirmed the district court's order granting summary judgment in favor of Dunkin' Donuts Franchising LLC on its breach of franchise agreement claim due to the franchisees' fraudulent misrepresentation about Moothedath Ramachandran Jr.'s involvement in another business. In response to questions from Dunkin' Donuts about whether he was developing a Red Mango store in Freehold Raceway Mall alongside Dunkin' Donuts or had an interest in such a store, Mr. Ramachandran repeatedly denied any involvement, despite the fact that he participated in establishing the Red Mango store by engaging with his wife in negotiations over its lease, personally guaranteeing the lease and providing the Red Mango store with a $150,000 loan. Mr. Ramachandran told the mall that Red Mango was solely the project of his wife. The franchisees knew that his partial disclosures conveyed misleading statements of material facts and that he made them "for the purpose of inducing" the franchisor to act thereon. Mr. Ramachandran explicitly told the mall real estate agent not to tell Dunkin' about the Red Mango store because he did not want Dunkin' to "cancel" the franchise agreement. Dunkin' relied upon the franchisees' representations as manifest by its emails to Mr. Ramachandran, stating that it would not enter into the franchise agreement if he was involved in developing a Red Mango store. The court of appeals concluded that the district court correctly determined that no reasonable jury could find that the franchisees did not fraudulently misrepresent Mr. Ramachandran's involvement in the Red Mango store, which thereby breached the franchise agreement.

Franchisee States Claim against Franchisor for Disapproving Purchase of Franchise, Then Offering Better Terms to Prospective Purchasers

By Nathan Adams

In Raheel Foods, LLC v. Yum! Brands, Inc., No. 3:16-CV-00451-GNS, 2017 WL 217751 (W.D. Ky. Jan. 18, 2017), the district court denied the franchisor's renewed motion to dismiss the plaintiff's claim for intentional interference with a prospective economic advantage, but granted dismissal of the balance of the franchisee's claims, including its claim that Yum! Brands is merely the alter ego of KFC Corporation. The franchisee alleged that the franchisor tortuously interfered with its contract for sale of its stores by disapproving the sale, then undercutting the plaintiffs by offering their proposed purchasers corporate-owned stores at below-market prices. The franchisor objected that it had the right to deny any sale proposed by the franchisee under its franchise agreement and had the right to compete with its franchisee. The court ruled, "The problem ... is that Defendants used their disapproval rights for an improper purpose – to take Plaintiff's buyers for themselves."

Furthermore, "[b]ecause Defendants were privy to the terms of the deals and allegedly used its contractual rights to handcuff Plaintiffs and purloin their potential purchasers, the claims here are distinguishable from those cited by Defendants involving ordinary competition." But the plaintiffs argued that KFC as franchisor and its parent Yum!, were both liable for KFC's wrongful conduct under a "piercing the corporate veil" theory. The franchisee claimed that Yum! has an "aggressive campaign to sell its corporate owned stores." The court rejected this idea based merely on common ownership and a unity of interest and for lack of evidence that continued recognition of the corporation would sanction fraud or promote injustice. The court also rejected the franchisees' i) negligent interference with prospective economic advantage claim for failure to establish a duty of care "not to use the information received from their franchisees regarding purchase transactions to derail those transactions for their economic benefit," and ii) unfair competition claims for lack of supporting precedent holding that actions such as that of the defendants' constitute unfair competition.

Regulation and Legislation

By Nathan Adams

The FDA comment period on the use of the term "healthy" in the labeling of food products is extended until April 26, 2017.

For tax year 2016, the due date for filing ACA-related Forms 1095-B and 1095-C with the IRS is March 31, 2017, for electronic copies.The IRS also has extended "good faith transition relief" for another year to employers for incorrect or incomplete forms, including missing and inaccurate taxpayer identification numbers and dates of birth, if they could show they made good faith efforts to comply with the reporting requirements.

Effective Jan. 22, 2017, Los Angeles County joined more than 150 other cities in 24 states that have enacted so-called "Ban the Box" ordinances, prohibiting employers from including any question on an application for employment that seeks the disclosure of an applicant's criminal history or asking job applicants about their criminal histories prior to making a conditional job offer and prohibiting them from refusing them employment, except in limited circumstances. The ordinance is called the "Fair Chance Initiative."

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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