Over the last several months we have been posting about updating   the franchise disclosure document.  For many franchisors, the time to update the franchise disclosure document was April 30^th.  With the deadline for updating the franchise disclosure document past, it is now time to re-focus on the franchise sales.

 

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What happens?  Consumer trips and falls at a franchise store.  Home owner complains that the franchisee’s work is shoddy and wants his money back.  Franchisee’s employee alleges a failure to pay overtime.

 More times than not, the franchisor gets sued along with the franchisee for these issues.  It happened at the franchise location, but customers, employees, and others try to hold the franchisor responsible.   This is referred to as vicarious liability.  The franchise concept is vulnerable to vicarious liability, because;

•  The franchisor provides franchisee training about how to operate the business

• The franchisor publishes an operations manual that has guidelines about operating the franchise business

• The franchisee reports to the franchisor monthly

• The franchisor provides the franchisee on-going consultation

• The franchisor gets royalty on the franchisee profits

• The Franchisee uses the franchisor’s software

• The franchisor is usually bigger and has more money than the franchisee

 What defenses does the franchisor have?  Is it really equitable to hold the franchisor liable?  If the consumer falls, should the franchisor pay?  If the franchisee did a bad job, should the franchisor pay?  If the franchisee does not pay its workers, should the franchisor pay?

 In the case is Robert Leach et al v. Rafail Kaykov and J. Fletcher Creamer & Son, Inc., & Royal Dispatch Services, Inc., the court said NO, the franchisor was not liable.  Rafail was a franchisee of the Royal Dispatch Services.  He was a taxi driver.  Mr. Leach had called Royal Dispatch Services for a tax ride.  Rafail accepted the dispatch from Royal Dispatch Services.  During the tax ride, an accident occurred.

 The passenger, Mr. Leach, wanted to blame the franchisor Royal Dispatch Services.  After all he called Royal Dispatch Services for the tax ride.  And, Rafail was Royal Dispatches Services’ franchisee.  And, Royal Dispatch Services, provides training to its franchisees, gives its franchisees a operations manual or rule book to follow, Royal Dispatch Services’ computer equipment is installed in  franchisee taxis, the franchisees pay a commission to Royal Dispatch Services, and Royal Dispatch Services inspects the taxis.

The court said that’s nice, but Rafail is an independent contractor.  Royal Dispatch is not liable.  Rafail is free to accept dispatches from other persons.  Rafail had to secure his own license and permits.  Rafail did not have to accept the dispatch from Royal Dispatch Services.

 It comes down to independence.  Franchisees are independently owned and operated businesses.  This is called out specifically in the franchise agreement.  So long as the independence is respected and recorded, the vulnerability to vicarious liability is greatly diminished.

 Lesson from the Court:  Independence can free you from liability!

 How does your franchise model recognize the franchisee independence?  Are franchisees required to post that they are an independently owned and operated business?  Are franchisees free to accept or reject consumer sales?

But what if the inverse happens? What if the franchise products are deemed unlawful, deceptive, and unfair? That is want happened in the case of THE PEOPLE v. JTH TAX, INC. [“Liberty Tax”], et al.,. Liberty Tax, as part of the franchise model, advertised and offered short term loans to the franchisees’ consumers. The California Attorney General took exception to the advertising content of the Liberty Taxes’ short term loans. And, the court agreed. The court imposed 135,886 in restitution to affected customers, and permanently enjoined certain aspects of Liberty Taxes’ practices.

Not only is this bad the pocket book, this can have reverberating negative impact across the franchise systems. The public rarely separates one bad actor from another. The system as a whole will be tarnished, cast in the same swath.

We have introduced several consumer law cautionary tales on the Gettins’ Blawg. Are you a consumer based franchise model? Tell us what you do to ensure that your service and product offering meet standards.

Back in October, we posted about the case of Eagle v. Edcomm, Inc. Here is the second recap of the facts: Eagle was founder and executive at Defendant Edcomm. Edcomm fired Eagle. Edcomm changed Eagle’s LinkedIn password and temporarily re-routed Eagle’s LinkedIn account to the newly appointed president of Edcomn. The court has now rendered its decision in this case. And, we wanted to share it with you!

Eagle sued Edcomn for what you ask – everything and nothing. Read the list of the claims:

• Unauthorized Use of Name in Violation of 42 Pa.C.S. § 8316

• Invasion of Privacy by Misappropriation of Identity

• Misappropriation of Publicity

• Identity Theft

• Conversion

• Tortious Interference with Contract

• Civil Conspiracy

• Civil Aiding and Abetting

• Misappropriation

• Unfair Competition

Basically the game plan appeared to be suing for everything under the sun and seeing what sticks. Well, a few things stuck. This is the court’s conclusion:

The court said yes, Eagle proved her claim for:

• Unauthorized use of name in violation of 42 Pa.C.S. § 8316,

• Invasion of privacy by misappropriation of identity, and

• Misappropriation of identity,

3 out 10: A 30% result. Not a homerun. Eagle proved her case on these three, but could not prove her damages of how she was harmed by the unauthorized use of her name, invasion of her privacy, and misappropriation of her identify. How do you put a price on that? Well, she couldn’t. End result: Edcomm was proven a wrongdoer, but no damages!

What is just as interesting is the court’s dicta. The court remarked that Edcomn had no policy saying that employee LinkedIn accounts were the property of Edcomm, the employer. The court opened the door. What if there were such a policy? What if there were a policy that said employee LinkedIn accounts were the property of the Employer? Can you do that? Can an employer declare an account with the employee’s name on it theirs? The court said, “Whether such a policy would be legally valid under the contract created between LinkedIn customer and an individual user is obviously not an issue before the Court in light of the finding made in this case that no such policy existed.” Absurd idea or good business maneuver?

Tell us what you think? Leave a comment or email us: mbgettins@gettinslaw.com

When can a franchisor terminate a franchise? It says it right in the franchise agreement. Probably, toward the back of the franchise agreement, it says the franchise agreement may be terminated if….. These reasons for terminations in legal vernacular are called defaults. There are defaults that can warrant the franchise agreement being terminated immediately. And, there are defaults that allow a time for correction or a cure period. If a correction or cure period is stipulated, then the franchise may not be terminated until the cure period or correction period has lapsed and there is no correction. All this is laid out in the franchise agreement.

 Is there ever a case where, a franchise agreement may be terminated contrary to wording of the franchise agreement? Yes. That is the case of 7-Eleven, Inc., v. Upadhyaya et. al. The franchise agreement between 7-Eleven and Upadhyaya said, for the first event, the franchise agreement shall not be terminated without notice and opportunity to cure. 7-Eleven terminated its franchisee Upadhyaya. 7-Eleven did not follow the words of the franchise agreement. It did not allow Upadhyaya notice or time to cure. The termination notice said ‘your franchise agreement is terminated immediately.’

How can that be? The franchise agreement between 7-Eleven and Upadhyaya said that the franchisee would be entitled to a period of notice and opportunity to cure prior to the termination of the franchise agreement. Is that permissible? The court said: 7-Eleven had the right to terminate the franchise agreement per New Jersey law without following the prescribed notice and time to cure period because:

A contract may be terminated without notice and opportunity to cure in specific circumstances, even where contractual provisions require such notice. LJL Transp., Inc. v. Pilot Air Freight Corp., 599 Pa. 546 [2009]. Notice and opportunity to cure provisions are not enforceable where a breach goes “directly to the essence of the contract, which is so exceedingly grave as to irreparably damage the trust between the contracting parties.” Id. at 567.

In essence the conduct of Upadhyaya was so heinous and grave that it damaged the trust of 7-Eleven and caused 7-Eleven irreparable harm. Upadhyaya was not ringing sales through the franchise POS system thereby reducing monies owed to 7-Eleven. This was not a minor issue. And, 7-Eleven had plenty of the evidence. 7-Eleven sent secret shoppers into the store. Of the 18 secret shops sent, it found 13 where the product purchased was not recorded properly by the store. Inventory reports showed that “reported purchases of cigarettes in the store exceeded reported sales of cigarettes by over 112,000.

The act of terminating a franchise agreement is lenient with legal consequences. Termination of a franchise agreement should be done only after a careful review of the agreement, the law, and facts.  If done improperly, without cause and contrary to the franchise agreement or state laws, the legal ramifications can be huge. The franchisor could be forced to pay large sums for damages and lost profits to the franchisee.   In this case, 7-Eleven had a copious amount of evidence, reports, videos, and compute readouts.

In a previous blog we posted a business tool to help assess the risk and resolve conflicts. Get the 7 step infographic to resolving conflicts and assessing your legal risks. Make your request below to receive the infographic.

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There has been an on-going and escalating debate:  Independent contractor or employee?   When is a worker an independent contractor and when is the worker an employee?  The answer to that question can make a sizable monetary difference in the taxes that a business pays.   This debate is getting a lot of   state and federal government attention.  Here is the time line:

More than 30 states have passed or introduced legislation targeted at independent contractor misclassification.  The United States Government Accountability Office [GAO] Report to Congressional Registers dated August 2009 reported that an estimated 10.3 million or 7.3% of the US workers are classified as independent contracts.  In the same report, the GAO found that the number of   independent contractors is growing.  And, the number of workers wrongly classified as independent contractors is also growing.

  A U.S. Department of Labor study conducted 9 years before in 2000 found that 30% of businesses misclassified employees as independent contractors.  Per the study, 1% of the misclassified workers nationally amount to losses in unemployment taxes across all states at the amount of $200 million annually.

The GAO in its 2009 Report to Congressional Registers professes that the number of misclassified workers has expanded by more than 50% between 2000 and 2007.  In an attempt  to squelch this growing trend and stop gap the economic losses, the IRS announced the worker reclassification amnesty. 

In order to curb, what the government sees as an ever growing and pervasive issue, the IRS announced a ‘worker reclassification amnesty.’ Under the amnesty program, businesses can raise their hand and say: ‘I misclassified my workers as independent contractors; I agree   now to treat them as employees.’ The benefit to businesses is a generous reduction in the federal taxes that should have been paid if the workers were treated as employees, and forgiveness of interest and penalties.

 Does your business have independent contractor arrangements?  Contact us about doing an employee/independent contractor review.  The window for declaring amnesty is closing soon.

Below is infographic of the slides.