A bill introduced this month in the Florida Legislature threatens to fundamentally shift the balance of franchise relationships in the Sunshine State. SB 750, deceptively titled “Protect Florida Small Business Act,” represents the most expansive, invasive and burdensome franchise relationship law ever proposed in the United States, if not the world. Although it contains numerous provisions harmful to franchisors, franchisees and the public alike, the Act overwhelmingly subverts a franchisor’s ability to protect its brand and goodwill. Continue Reading
McDonald’s Corp. recently agreed to pay $3.75 million to settle a lawsuit filed by workers of one of its franchisees. Stop the presses! Isn’t that the opposite of what McDonald’s should be doing? Isn’t McDonald’s a leading player in fighting the idea that it is a joint employer of franchisee’s workers? Let’s back up a moment.
In 2014, employees of a California McDonald’s franchise sued both the franchisee and McDonald’s Corp. for labor violations alleging that, as joint employers, the franchisee and McDonald’s had failed to pay overtime, keep accurate pay records and reimburse workers for time spent cleaning uniforms. In late 2015, the franchisee settled with the workers for $700,000, leaving McDonald’s Corp. as the lone defendant in the case. During the case, the court had ruled that McDonald’s was not a joint employer, but that McDonald’s could be liable under the doctrine of ostensible (or apparent) agency, under which the workers must prove that they reasonably believed McDonald’s was their employer because, for example, they wore McDonald’s uniforms, served McDonald’s food in McDonald’s packaging, and received paystubs and orientation materials marked with McDonald’s name and logo. Few franchisee employees have prevailed on similar apparent agency claims. Continue Reading
On March 2, 2016, Wisconsin Senate Bill 422 was signed into law. This bill clarifies that a franchisor is not the employer of a franchisee’s employees under several areas of Wisconsin law: unemployment insurance, worker’s compensation, Wisconsin’s wage and hour laws and Wisconsin’s fair employment laws. Employer liability will attach to a franchisor as it relates to franchisee’s employees only where:
- The franchisor has agreed in writing to assume that role; or
- The franchisor has “exercised a type or degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purposes of protecting the franchisor’s trademarks and brand.”
The Department of Labor (“DOL”) has weighed in on the joint employer issue, releasing an Administrator’s Interpretation (“AI”) setting forth the DOL’s position as it relates to joint employment under the Fair Labor Standards Act (“FLSA”) and the Migrant and Seasonal Agricultural Worker Protection Act.
The joint employment concept under the FLSA is not new and the AI does not explicitly target franchising relationships, but it is important for franchisors to continue to review their relationships with franchisee’s employees in light of this latest foray (see our previous blog posts).
The DOL asserts that the AI is intended for a wide range of industries and is not focused on franchise relationships, stating:
The form of business organization, such as franchise, does not necessarily indicate whether joint employment is present. Indeed, the existence of a franchise relationship in and of itself, does not create joint employment.
Joint employment exposes a company to expansive liability. With wage and hour class actions on the rise, it would not be surprising if plaintiffs’ lawyers rely on this AI to name both the franchisee and franchisor as defendants in these types of lawsuits.
This new guidance is consistent with the aggressive joint employer positions taken by the NLRB and other branches of the DOL including OSHA. Ultimately, a determination of joint employment will be made on the specific factual situation. The DOL’s goal is to push the boundaries of joint employment and to hold companies that benefit from work performed by another entity’s employees equally responsible for employment and labor law violations.
While the overall goal of protecting abused employees and ensuring labor laws are not circumvented by indirect employment arrangements may certainly be laudable, the standards and analysis utilized are more likely to ensnare innocent businesses.
For a more detailed analysis, please see our client alert.
The National Labor Relations Board (“NLRB” or the “Board”) Region Five Director (located in Baltimore) was recently asked to decide whether an environmental remediation contractor was a joint employer with its employee staffing firm, in the Green JobWorks LLC case.
This is the first time that a Regional Director has looked at the joint employer issue since the Board’s controversial decision in Browning-Ferris Industries of California Inc. (“Browning-Ferris”), and applying the new broader joint employer test. The Regional Director found no joint employment relationship, and although this was not a franchise decision, there are important takeaways for those in the franchise industry. Despite the publicity over it, Browning-Ferris also did not involve franchising, but understandably raised concerns by franchisors and franchisees alike. Continue Reading
In today’s global economy, it is increasingly important for companies to strategically develop and maintain an international trademark portfolio. Effective trademark portfolio management is a key factor in maintaining the rights and value of an company’s intellectual property. An effective portfolio management strategy includes determining which marks are critical to the company’s business goals, and developing a strategy that dictates how, when, and where the company will acquire its trademark rights.
The timing of obtaining trademark protection on a global scale is vital. Some countries, such as the United States, follow a common law “first-to-use” system wherein trademark rights are acquired primarily through being the first to use the mark. Most other jurisdictions employ a “first-to-file” system wherein priority of trademark rights is obtained only by filing an application to register the mark. Accordingly, the timely filing of applications to register marks in first-to-file jurisdictions is essential in order to avoid losing priority.
When a trademark or service mark owner grants the right to use its mark to a third party, a license arrangement is typically created. The essential part of that arrangement is that the mark owner exercise quality control over the licensee’s use of the mark, so that the public can reasonably expect some consistent level of quality of the goods or services associated with the mark.
Lack of quality control is known as a “naked license.” Naked licensing can sacrifice the owner’s rights in the mark, when sufficient quality control over the licensee’s use is not maintained.
However, while exercising sufficient quality control in a licensing arrangement (by agreement and by actual monitoring activity), the mark owner should take care not to exercise too much control over the licensee’s operations so as to create a de facto franchise where a franchise was not intended.
Franchisors should be aware of the “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act” that was issued in August, representing the first formal policy statement regarding the FTC’s standalone authority under the “[u]nfair methods of competition” prong of Section 5 of the FTC Act. Time will tell whether the policy statement merely reflects broadly accepted principles or whether it portends of an increased use of standalone Section 5 authority by the FTC.
Most in the franchise industry are aware that Section 5 of the FTC Act declares unlawful “unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. §45(a)(1). Indeed, a violation of the Franchise Rule also constitutes a violation of Section 5(a)(1) of the FTC Act. 15 U.S.C. §57a(d)(3). More than 30 years ago, the FTC issued policy statements regarding the concepts of unfairness and deception under Section 5 of the FTC Act. See Fed. Trade Comm’n, Commission Statement of Policy on Scope of the Consumer Unfairness Jurisdiction, 104 F.T.C. 1070, 1071 (1984) (appended to In re Int’l Harvester Co., 104 F.T.C. 949 (1984)); Fed. Trade Comm’n, Policy Statement on Deception (appended to In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174 (1984)). Those policy statements set forth a detailed analysis of the concepts addressed.
Section 5 of the FTC Act also prohibits “[u]nfair methods of competition in or affecting commerce.” This phrase has been generally understood to reach conduct beyond conduct that violates the Sherman Act or the Clayton Act. However, the question has been—how much broader is the FTC’s authority under Section 5? With a dearth of cases over the past five decades interpreting this aspect of Section 5, and with an expanding use of Section 5 by the FTC in recent years, an increased interest in guidelines regarding the FTC’s application of Section 5 arose, including among some of the Commissioners themselves. For example, Commissioner Joshua Wright proposed a policy statement in 2013 that was not adopted.
The Third Circuit Court of Appeals recently upheld the Federal Trade Commission’s power to regulate corporate privacy and data security procedures under the Federal Trade Commission Act. Wyndham Worldwide was hit by three separate hacker attacks in 2008 and 2009, which resulted in the loss of personal and financial data for more than 600,000 consumers. The FTC filed suit, alleging that Wyndham’s cybersecurity procedures, which had failed to protect this data, violated the FTC Act’s prohibition on “unfair” acts or practices by a business. See 15 U.S.C. § 45(a).
Wyndham, which franchises and manages hotels, and sells time shares, runs the property management system for the whole enterprise. This system collects and processes consumer information, including names, home addresses, email addresses, telephone numbers, payment card account numbers, expiration dates, and security codes. The FTC’s lawsuit alleges that Wyndham failed to implement reasonable data security procedures, including (1) allowing Wyndham-branded hotels to store payment card information in readable text; (2) allowing the use of easily guessable passwords; (3) failing to use firewalls and other readily available security measures; (4) allowing franchisees and others to connect to the network without appropriate precautions; (5) failing to adequately restrict access to its network and servers; (6) failing to utilize reasonable measures to detect and prevent unauthorized access; and (7) failing to follow proper incident response procedures.
Wyndham disputed the FTC’s lawsuit, arguing (1) the FTC had no authority to regulate cybersecurity as an “unfair” act or practice; and (2) it had not received “fair notice” of what the FTC was requiring. In its decision, rejecting Wyndham’s challenge, the Third Circuit held (1) that the FTC Act’s prohibition on “unfair” acts and practices is broad enough to grant the FTC authority over business data security practices, and (2) Wyndham, based on the plain language of the Act and FTC statements, did in fact receive “fair notice.”
The Third Circuit sent the case back to the trial court for a decision now on whether Wyndham’s data security practices were—as the FTC alleges—so lax as to be an “unfair” act or practice affecting commerce.
In the franchise world, the old adage “if you’re not moving forward, you’re falling behind” applies. Franchise systems cannot remain viable and healthy without consideration of new products and services which add additional opportunities for profit, thereby enhancing brand strength. In so doing, franchisors need to be careful that they step back in a timely fashion with a jaundiced look to analyze their systems to see if they are in compliance with their own rules, regulations, and policies. Also, franchisees’ compliance is critical and that monitoring can start at the franchisor’s home office and not with a site visitation.
We all know that annual disclosure updates are required. Also, we all recognize that if there are changes to management, serious litigation or critical reversals of fortune, we need to cease franchise sales. But in a healthy franchise system, there are so many additional moving parts. The concept of periodic legal audit has merit and should be considered.
Let me pose some examples. With respect to registration states, franchisors are mindful of the deadlines, but do they always file the quarterly sales information required by certain states? Do they update their disclosure document with necessary post-effective amendments? If they exceed the number of sales in any state they have indicated in a given year, do they adjust that number? If a Financial Performance Disclosure Representation is made, has anything occurred since the most recent filing that would make it arguably inaccurate and potentially misleading? Relative to their trademarks, are there any new products and services requiring new trademark applications to be prosecuted? Are the marks being adequately policed to protect against infringers?