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LEGAL UPDATES SINCE THE RELEASE OF THE BROWNING-FERRIS DECISION BY THE NLRB IN AUGUST 2015
In August 2015, the National Labor Relations Board (NLRB) issued the controversial decision in the Browning-Ferris matter. The decision dramatically changed the joint employment standard that had existed for over 30 years. The change potentially could have a major impact on the franchise world as we know it today. The lead article in Briggs and Morgan’s Franchise, Antitrust, Distribution and Dealer Newsletter (Fall 2015 edition) provided a thorough analysis of the Browning-Ferris decision and its potential impact on franchising. This article will provide an update on what has transpired since the Browning-Ferris decision regarding the issue of joint employment.
Browning-Ferris Appeals NLRB Decision
Following the Browning-Ferris decision in August, a NLRB election was conducted to determine whether the employees at the Browning-Ferris recycling plant in California would be represented by the Teamsters. The Teamsters ultimately prevailed in the election and were certified as the exclusive bargaining representative of the employees at the plant. Browning-Ferris failed to comply with the NLRB decision by refusing to deal with the Teamsters’ union for the workers at the plant, claiming it had no duty to do so despite the August ruling by the NLRB. The Teamsters filed an unfair labor practice charge with the NLRB.
On Jan.12, 2016, a three-member panel of the NLRB unanimously found that Browning-Ferris had violated federal labor law by refusing to negotiation with the union for the recycling facility in California. On Jan. 20, 2016, Browning-Ferris filed an appeal seeking a review of that decision with the federal appeals court in Washington, D.C. Based on this filing, the viability of the new NLRB joint employment standard set forth in the Browning-Ferris decision in August will now be reviewed by the courts. The appeal will likely be heard and decided later this year or early in 2017.
Legislation Attempting to Address Joint Employment Issue
On Sept. 9, 2015, only a few days after the NLRB’s decision in Browning–Ferris that changed the joint employer standard, Senator Lamar Alexander and Representative John Kline introduced in Congress new legislation entitled the Protecting Local Business Opportunity Act. (See S.2015 and H.R.3459.) Under the proposed legislation, Section 2(2) of the National Labor Relations Act would be amended to provide that an entity must have and exercise actual, direct and immediate control over the essential terms and conditions of employment in order to be considered to be a joint employer. This is an attempt by the legislature to restore the joint employment standard that existed for three decades prior to the NLRB’s decision in Browning–Ferris, issued in August 2015. The Senate bill has been referred to the Committee on Health, Education, Labor and Pensions, while the House bill has been referred to the Education and Workforce Committee.
Michigan has now joined three other states that have enacted legislation which provides that an employee of a franchisee will not be considered an employee of a franchisor. Senate Bill No. 492 approved on Dec. 23, 2015, and effective March 22, 2016, amends the Michigan Franchise Investment Law to provide that the franchisee shall be considered the sole employer of workers for whom it provides a benefit plan or pays wages except as otherwise specifically provided in the franchise agreement. Senate Bill No. 493 approved on Dec. 23, 2015, and effective March 22, 2016, amends the Michigan’s Worker’s Disability Compensation Act to provide that an employee of a franchisee is not an employee of the franchisor for purposes of the Act unless both of the following apply: (1) franchisee and franchisor share in the determination of matters governing the essential terms and conditions of the employee’s employment; and (2) the franchisee and franchisor both directly and immediately control matters relating to the employment relationship.
Previously, Tennessee, Texas and Louisiana had enacted similar legislation. Tennessee’s new statute provides that “neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purpose.” Tenn. Code §50-1-208 (effective April 10, 2015). Pursuant to the new statute in Texas, various sections of the Texas Labor Code were amended to provide that a franchisor is not considered to be an employer of: (1) a franchisee; or (2) a franchisee’s employees. Tex. Labor Code Ann. §21.0022(b) (effective Sept. 1, 2015). The statute, however, excludes from coverage of the Act any franchisor found by a court to have exercised a type or degree of control over the franchisee or its employees not customarily exercised by a franchisor for the purpose of protecting its trademarks and brand. Tex. Labor Code Ann. §21.0022(c). Louisiana’s new statute provides that neither a franchisee who is a party to a franchise agreement nor an employee of the franchisee shall be deemed to be an employee of the franchisor for any purpose. La. Rev. Stat. Ann. §23:921(F)(1)(d) (effective Aug. 1, 2015).
U.S. Department of Labor Issues Guidelines Regarding Joint Employment
The Wage and Hour Division of the U.S. Department of Labor has issued guidelines regarding joint employment under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). These guidelines can be found at Administrator’s Interpretation No. 2016-1 (the AI). Some of the key points of the guidelines are set forth below.
The AI first looks at the broad scope of the definition of an employment relationship under the FLSA and the MSPA and then looks at the joint employment analysis based on the concepts of horizontal joint employment (employee has an admitted relationship with two employers who are sufficiently related/associated) and vertical joint employment (employee has relationship with one employer, but economic realities show another entity who contracts with the intermediary employer is involved in the employee relationship).
The AI states that under the FLSA and the MSPA the term “employment” includes “joint employment” and should be defined expansively. Joint employment and employment under the FLSA and MSPA, according to the AI, are broader than the common law concepts of those terms which focus solely on the amount of control exercised by the employer over the employee. The AI states that the scope of employment and joint employment under the FLSA and the MSPA is as broad as possible and is, in fact, different and broader than the test under the National Labor Relations Act and the Occupational Safety and Health Act. The test for joint employer under the FLSA and the MSPA looks at the broad economic realities of the relationship.
A horizontal joint employment determination depends on the degree of association between the two employers of the employee. The following facts may be relevant to determine the degree of association between the two employers: (1) who owns the potential joint employers; (2) do the potential joint employers have any overlapping officers, directors, executives or managers; (3) do the potential joint employers share control over operations; (4) are the potential joint employers’ operations inter-mingled; (5) does one potential joint employer supervise the work of the other; (6) do the potential joint employers share supervisory authority for the employee; (7) do the potential joint employers treat the employees as a pool of employees available to both of them; (8) do the potential joint employers share clients or customers; and (9) are there any agreements between the potential joint employers. Not all factors need to be present for joint employment to exist. Joint employment does not exist, however, if the employers are acting entirely independently of each other and are completely disassociated.
While the horizontal joint employer determination focuses on the relationship between the two employers, a vertical joint employment determination focuses on the relationship between the employee and the potential joint employer. The core question is whether the employee is economically dependent on the potential joint employer who is benefitting from the work.
If the intermediary employer (the known employer of the employee) is actually an employee of the potential joint employer then all of the intermediary’s employees are also employees of the potential joint employer and no vertical joint employment analysis is necessary.
The vertical joint employment analysis is not a control test, but rather focuses on the economic realities of the situation with an understanding of the broad, expansive definition of employment under the FLSA and the MSPA. Some factors to consider in making this determination are: (1) does the potential joint employer direct, control or supervise the work performed, either directly or indirectly; (2) does the potential joint employer indirectly or directly control employment conditions, including rate or method of pay; (3) the permanency and/or duration of the relationship; (4) the repetitive and rote nature of the work; (5) is the employees’ work integral to the potential joint employer’s business; (6) is the work performed on premises owned or controlled by the potential joint employer; and (7) does the potential joint employer perform administrative functions for the employee such as handling payroll, workers’ compensation insurance, etc. While courts in different circuits or districts may look to other or additional factors, the factors must address the ultimate inquiry of economic dependence.
NLRB Case Against McDonald’s
As to the unfair labor practice charges filed by the NLRB against McDonald’s, which was part of the starting point of the whole uproar regarding joint employment in the franchise world, the case continues to proceed. While generally cases before the NLRB do not involve pre-trial discovery, such discovery is allowed and has been conducted in the past by the NLRB. In the McDonald’s case, the presiding Administrative Law Judge (ALJ) granted the NLRB’s General Counsel request to have the ability to conduct pre-trial discovery. The General Counsel issued subpoenas to obtain documents from McDonald’s and several of its franchisees. The NLRB filed an action against McDonald’s in October 2015 in U.S. District Court for the Southern District of New York, seeking full compliance with the subpoenas. The fight over pre-trial discovery is on-going between McDonald’s and the NLRB, while the trial itself is put on hold until the discovery can be completed.
With the various proceedings pertaining to the joint employment issue progressing at the same time in various directions, it is important that franchisors stay on top of the ever-changing and developing concept of joint employment. Unfortunately, a final result providing any clarity as to the joint employment issue in the franchising context will likely not be seen for several months or even years. Franchisors must remain diligent in their relationships with their franchisees to protect against an unwanted finding of joint employment.
Michigan Passes Laws Addressing Joint Employer Issue
Michigan has now joined three other states that have enacted legislation which provides that an employee of a franchisee will not be considered an employee of a franchisor. Senate Bill No. 492 approved on Dec. 23, 2015, and effective March 22, 2016, amends the Michigan Franchise Investment Law to provide that the franchisee shall be considered the sole employer of workers for whom it provides a benefit plan or pays wages except as otherwise specifically provided in the franchise agreement.
Senate Bill No. 493 approved on Dec. 23, 2015, and effective March 22, 2016, amends the Michigan’s Worker’s Disability Compensation Act to provide that an employee of a franchisee is not an employee of the franchisor for purposes of the Act unless both of the following apply: (1) franchisee and franchisor share in the determination of matters governing the essential terms and conditions of the employee’s employment; and (2) the franchisee and franchisor both directly and immediately control matters relating to the employment relationship.
Oregon Enacts Two Amendments Restricting Actions by Motor Vehicle Manufacturers
Through Senate Bill 713, Oregon added a section to its to its statute which prohibits motor vehicle manufacturers, distributors and importers from requiring or coercing dealers to advertise, promote, offer or sell extended service contracts, extended maintenance plans or similar products or services that the manufacturer, distributor or importer provides, originates, sponsors or endorses. The new section sets forth various prohibited methods of coercion, but does not prohibit a manufacturer from providing incentives to a dealer that voluntarily decides to advertise, promote, offer or sell these products/services. The new section can be found at Or. Stat. Chap. 524, Sec. 2.
Through Senate Bill 714, Oregon amended ORS §650.130 to add a section which prevents a motor vehicle manufacturer, distributor or importer from taking any adverse action against a motor vehicle dealer because the dealer sold a motor vehicle to a customer that exported the motor vehicle or resold the motor vehicle for export, unless the manufacturer provided the dealer with written notice of the prohibition and the dealer knew or reasonably should have known at the time the dealer sold the motor vehicle to that customer that the customer intended to export the vehicle or resell the motor vehicle for export.
Both amendments became effective Jan. 1, 2016
RECENT CASE LAW
Minnesota Court Dismisses Franchise Act Claim and Transfers Remainder of Case to California
The U.S. District Court in Minnesota dismissed a franchisee’s fraud/misrepresentation claims under the Minnesota Franchise Act (MFA) based on disclaimers in the franchise agreement and then transferred the remaining non-statutory claims to California pursuant to the forum selection clause in the franchise agreement. Plaintiff entered into a franchise agreement with defendant to open and operate a store in Bloomington, Minnesota. When the store did not perform as plaintiff expected, it filed a lawsuit against defendant for alleged misrepresentations regarding the location of the store and anticipated revenue, cash flow and operation profits. The claims asserted were for violation of the MFA, fraud, negligent misrepresentation, breach of contract and breach of the implied covenant of good faith and fair dealing. Relying on the decision in Ellering v. Sellstate Realty System Network, Inc., 801 F.Supp.2d 834 (D. Minn. 2011), the court held that due to the disclaimers in the franchise agreement, the plaintiff had admitted that it did not rely on any of the alleged misrepresentations, and if it was now claiming that it did, any such reliance would not have been reasonably given the disclaimers in the franchise agreement. With the MFA claim dismissed and only common law claims left, the court enforced the forum selection clause in the franchise agreement and transferred the remaining claims to California. The court expressly held that the anti-waiver provision in the MFA does not invalidate the forum selection clause as applied to the remaining common law claims. Moxie Venture L.L.C. v. The UPS Store, Inc., No. 15-CV-3704, 2016 WL 128136 (D. Minn. Jan. 12, 2106).
Minnesota Court Enters Default Judgment for Franchisor
A Minnesota U.S. District Court entered default judgment for a franchisor against a corporate defendant but refused to enter judgment against the individual defendants. Plaintiff entered into two franchise agreements with a third party, KM Cleaners, Inc. (KM). Without plaintiff’s knowledge or permission, KM sold the business to defendant BC Cleaners, LLC (BC). The individual defendants signed the purchase agreement with KM and signed promissory notes as guarantors for BC. BC did not sign a franchise agreement with plaintiff but used the plaintiff’s marks in operating their businesses at the two locations. When a cease and desist letter was ignored, plaintiff filed a lawsuit against BC and the two individuals. None of the defendants responded and plaintiff moved for default judgment. The court held that the two individual defendants were not liable and dismissed them from the action. The only party to the purchase agreement was BC and the individual defendants did not sign a personal guaranty with the plaintiff. The court found no basis to pierce the corporate veil and hold the individual defendants personally liable. The court found that BC was liable for trademark infringement under the Lanham Act and had violated the Minnesota Deceptive Trade Practices Act. The court found that BC was liable for the royalties and other franchise fees that BC would have owed plaintiff if it had entered into the franchise agreements. The court also issued injunctive relief to prevent BC from any further use of plaintiff’s marks and awarded plaintiff its costs and fees. Martinizing International LLC v. BC Cleaners, LLC, No. 15-CV-551, 2015 WL 8483280 (D. Minn. Dec. 9, 2015).
New Jersey Court Transfers Franchise Case to Minnesota
The U.S. District Court in New Jersey enforced the forum selection clause in a licensing agreement and required the plaintiff to pursue its claims in Minnesota. Plaintiff entered into a licensing agreement with defendant allowing it to manufacture, market and sell footwear using defendant’s trademark license. Defendant terminated the agreement and plaintiff filed suit in state court in New Jersey asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing and a violation of the New Jersey Franchise Practices Act (the NJFPA). Defendant removed the matter to federal court and filed a motion to transfer to Minnesota pursuant to 28 U.S.C. §1404(a). The focus of the court’s opinion was on the enforceability of the forum selection clause in the license agreement which required any dispute to be resolved in Minnesota. Plaintiff did not contend that the forum selection clause was the result of fraud, was over-reaching or was unreasonable, but instead claimed that it was invalid under the NJFPA and contrary to public policy. The court held that in order for the NJFPA to apply, the plaintiff must satisfy the three requirements of the NJFPA. The second requirement of the NJFPA states that the “gross sales of products or services between the franchisor and franchisee covered by such franchise shall have exceeded $35,000 for the 12 months next preceding the institution of suit pursuant to this act.” The court held that the plaintiff had not satisfied this second requirement because while it showed gross sales in excess of $35,000, it did not show that those sales were between the defendant and the plaintiff. As the NJFPA did not apply, the court found that the exclusive forum selection clause was enforceable and that none of the other §1404(a) factors weighed in favor of ignoring the forum selection clause. As such, the motion to transfer was granted and the case was transferred to the District of Minnesota. B-Jays USA, Inc. v. Red Wing Shoe Company, Inc., 15-CV-02182, 2015 WL 5896151 (D. N.J. Oct. 6, 2015).
South Dakota Court Denies Manufacturer’s Motion for Summary Judgment
The U.S. District Court in South Dakota denied the manufacturer defendant’s motion for summary judgment as to all claims finding that there were issues of fact regarding the termination of the plaintiff’s distributorship. Plaintiff Northern Truck Equipment Co. (Northern Truck) distributed products of defendant Omaha Standard, LLC (Omaha) in South Dakota and North Dakota for almost 20 years. The parties exchanged letters that set forth the terms of the parties agreement as to the distribution of Omaha’s products. In 2013, Northern Truck entered into an agreement to distribute Knapheide products in Sioux Falls. Knapheide is a direct competitor of Omaha. Upon learning of this agreement, Omaha notified Northern Truck that it was terminating its relationship with Northern Truck. The termination letter indicated that the decision was made due to the lack of purchases and market penetration by Northern Truck and the reorganization of Omaha. Northern Truck sued asserting claims for breach of contract, unjust enrichment and unfair cancellation in violation of South Dakota Codified law 37-5-3 (the Act). The Act precludes cancellation of a dealership without just provocation. Omaha moved for summary judgment. The court denied summary judgment as to the claim for violation of the Act holding that whether there is just provocation to terminate a distributor generally presents a question of fact. While the court found that the letters exchanged by the parties were sufficient to form a distribution contract, the court refused to grant summary judgment on the breach of contract claim holding that there were issues of fact as to the precise and complete terms of the agreement and as to whether or not a breach had occurred. As to the unjust enrichment claim, while the court acknowledged that unjust enrichment is unwarranted when the rights of the parties are controlled by an express contract, it determined that it was premature to dismiss the unjust enrichment claim until there was a full understanding by the court of the complete terms of the agreement between the parties. Northern Truck Equipment Co., v. Omaha Standard, LLC, 13-CV-04088, 2015 WL 7274357 (D.S.D. Nov. 16, 2015).
California Court Addresses Arbitrability Issues in Franchise Context
Plaintiffs were a purported class of franchisees in California who brought suit against defendant Dickey’s Barbeque (Dickey’s) asserting claims of fraud and violations of the California Franchise Investment Law and California’s unfair competition law. After the lawsuit was filed, Dickey’s moved to compel arbitration pursuant to the arbitration provision in the franchise agreement. Plaintiffs challenged the enforceability of the arbitration provision. The U.S. District Court in California divided the plaintiffs into two groups based on the language of the arbitration provision in the franchise agreement. The first group had an arbitration provision which specified that the validity of the franchise agreement, or any provision thereof, was required to be arbitrated. The court held that whether a court or the arbitrator decided arbitrability should be decided by the court unless the parties clearly and unmistakably provide otherwise. As to the first group, the court held that the language of the franchise agreement clearly and unmistakably provided that the parties had agreed to have the arbitrator determine the issue of arbitrability. The second group did not contain the specific provision regarding determining the validity of the arbitration provision but rather had general broad language that all disputes “arising out of or relating to” the franchise agreement must be arbitrated. The court held that while this was a broad delegation, it was not clear and unmistakable evidence of delegation of the issue of arbitrability to the arbitrator. Dickey’s argued that the arbitration provision incorporated the rules of the American Arbitration Association (AAA) and that was sufficient to satisfy the clear and unmistakable evidence requirement. The court acknowledged that case law existed which would support that determination, but also noted that case law also held that such a determination was not proper when the party opposing the assertion was not as sophisticated as the party seeking the determination. The court held that the franchisees were more like consumers and did not have the business sophistication as Dickey’s and therefore the incorporation of the AAA rules did not satisfy the clear and unmistakable evidence requirement. As such, the court held that it must determine the enforceability of the arbitration provision for the second group of plaintiffs. Applying Texas law the court held that the arbitration provision was not procedurally unconscionable, despite the disparity in the bargaining position between the parties, because the arbitration provision was not hidden, plaintiffs are presumed to have read the contract they sign and there was no evidence that the plaintiffs were incapable of understanding the arbitration provision or that Dickey’s misrepresented the existence of the provision. The court similarly held that the arbitration provision was not so one-side so as to be substantively unconscionable even though the provision allowed Dickey’s to avoid arbitration and proceed in court as to certain claims. As a result, the court granted Dickey’s Motion to Compel Arbitration and ordered both groups of plaintiffs to pursue their claims in arbitration. Meadows v. Dickey’s Barbecue Restaurants, Inc., No. 15-CV-02139, 2015 WL 7015396 (N.D. Cal. Nov. 12, 2015).
South Dakota Court Applies South Dakota Law Only as to Dealer Act Claim
The U.S. District Court in South Dakota held that South Dakota law will apply to the dealer act claim asserted by the plaintiff, but that all other claims should be governed by Ohio law pursuant to the choice-of-law clause in the dealer agreement. Plaintiff and Defendant entered into a distribution agreement which gave plaintiff the right to sell defendant’s products in South Dakota and Nebraska. When plaintiff refused to enter into a new agreement with restrictions on plaintiff’s marketing, sales and repair work outside of Rapid City, defendant refused to renew the agreement. Plaintiff filed a lawsuit asserting claims for violation of South Dakota’s Regulation of Vehicle Dealers Act found at SDCL 32-6B-45 (the Dealer Act), breach of contract, breach of good faith and fair dealing, preliminary injunction, deceit, restraint of trade and violation of the Robinson Patman Act. The court refused to grant defendant’s motion to transfer the case to Ohio. Defendant moved for an order stating that Ohio law would govern the dispute, while plaintiff moved to amend the Complaint to add a claim under the Nebraska Motor Vehicle Dealer Act. In determining which law applied, the court reviewed three factors as to each claim: (1) whether application of Ohio law was contrary to the public policy of South Dakota; (2) whether South Dakota has a materially greater interest than Ohio; and (3) would South Dakota law govern the dispute if the parties had not agreed to a choice-of-law provision. As to the claim under the Dealer Act, the court held that South Dakota has a strong public policy interest in enforcing the Act and that the Dealer Act specifically provides that parties are unable to contract around the protections of the Dealer Act. The court further held that because the protections of the Dealer Act would be lost if Ohio law applied, South Dakota has a materially greater interest than Ohio in determining this matter. Finally, the court found that based on the language of the Dealer Act, if the parties had not agreed to an Ohio choice of law clause, the Dealer Act clearly would have required the application of South Dakota law. As such, the court found that South Dakota law would govern as to the claim for violation of the Dealer Act. As to the claims for restraint of trade, deceit, breach of contract and breach of good faith and fair dealing, the court found that there was no material difference between Ohio law and South Dakota law and, thus, the Ohio choice-of-law clause as to these claims would be upheld and enforced. The court denied plaintiff’s motion to amend the Complaint to assert a claim under the Nebraska Motor Vehicle Dealer Act holding that South Dakota does not have a public policy interest in enforcing Nebraska law and, thus, pursuant to the choice-of-law provision, Ohio law would control would extinguish any claim under the Nebraska Motor Vehicle Dealer Act. As such, plaintiff’s motion to amend was denied as futile. Black Hills Truck & Trailer, Inc. v. MAC Trailer Manufacturing, Inc., 13-CV-04113, 2015 WL 8483353 (D.S.D. Dec. 9, 2015).