GRAY PLANT MOOTY The GPMemorandum TO:

OUR FRANCHISE AND DISTRIBUTION CLIENTS AND FRIENDS

FROM: GRAY PLANT MOOTY'S FRANCHISE AND DISTRIBUTION PRACTICE GROUP Quentin R. Wittrock, Editor of The GPMemorandum Maisa Jean Frank, Assistant Editor DATE:

March 11, 2015—No. 191

Below are summaries of recent legal developments of interest to franchisors. FRAUD GEORGIA FEDERAL COURT REJECTS FRANCHISEES' SUPPLY CHAIN KICKBACK CLAIMS A federal court in the Northern District of Georgia recently ruled in favor of the franchisor of the Moe's Southwest Grill, and related parties, in a case brought by several Moe's franchisees, alleging that Moe's made written and oral misrepresentations related to the profits that Moe's derived from franchisees' purchase of food supplies. Massey, Inc. v. Moe's Southwest Grill, LLC, 2015 U.S. Dist. LEXIS 12281 (N.D. Ga. Feb. 3, 2015). The franchisees alleged that Moe's offering circular falsely represented that neither Moe's nor its affiliates would derive income from franchisees' purchases of required supplies, and that representatives of Moe's made similar precontractual representations. The franchisees alleged that these representations were false because the CEO of Moe's had an interest in an approved food supplier, and other approved food suppliers were, allegedly, Moe's affiliates. Based on these allegations, the franchisees asserted fraud and negligent misrepresentation claims, a RICO claim under Georgia law, and a claim under the Tennessee Consumer Protection Act. After a bench trial, the court ruled for Moe's on all claims. First, the court held that the common law misrepresentation claims arising from the offering circular failed because the representations did not concern food suppliers. Second, the court held that even if the representations concerned food suppliers, they related to future performance rather than a present fact and,

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therefore, were not actionable representations. Third, the court found that merger clauses in parties' agreements barred common-law misrepresentation claims premised on precontractual oral representations. The court held that the RICO claims failed for the same reasons as the common-law misrepresentation claims. Finally, the court held that Moe's did engage in an unfair or deceptive trade practice under the Consumer Protection Act. The FTC regulations required Moe's to disclose "[w]hether the franchisor or its affiliates will or may derive revenue or other material consideration from required purchases or leases by franchisees," and, at the time the offering circular was provided, it had been contemplated that Moe's CEO would have an interest in a supplier. But the court concluded that the franchisees had not proved damages, in part because evidence introduced at trial demonstrated that Moe's food supply chain structure actually benefited the franchisees. CHOICE OF FORUM COURT HOLDS NONEXCLUSIVE FORUM SELECTION PROVISION IS NOT BARRED BY THE MINNESOTA FRANCHISE ACT In Ramada Worldwide, Inc. v. SB Hotel Management Inc., 2015 U.S. Dist. LEXIS 20955 (D.N.J. Feb. 23, 2015), a federal court in New Jersey denied a franchisee's attempt to dismiss the complaint for improper venue or, alternatively, transfer the case to Minnesota. Ramada brought an action against the franchisee, SB, in New Jersey federal court for breach of a license agreement for the operation of a Ramada Inn located in Wisconsin. In the license agreement, SB consented to the nonexclusive jurisdiction of the New Jersey courts for any dispute between the parties. In response to the lawsuit, SB argued that the addendum to the license agreement, which referenced the Minnesota Franchise Act, created a valid forum selection clause that required the litigation to take place in Minnesota. The court rejected this interpretation of the agreement, noting that SB's consent to nonexclusive jurisdiction in New Jersey did not require litigation to occur there, but merely allowed it. The court further noted that the Minnesota Franchise Act ensures only that Minnesota franchisees have the right to bring their own lawsuits in that state, regardless of any attempt in a licensing agreement to waive that right. After reviewing the Minnesota Franchise Act in combination with the nonexclusive jurisdiction provided in the license agreement, the court concluded that both New Jersey and Minnesota were proper forums, and for that reason denied SB's motion to dismiss. In response to SB's alternative request for a transfer of venue to Minnesota, the court noted that both states' interests in the action were equal, and because SB did not present evidence that a change in venue from New Jersey to Minnesota would do anything other than shift the inconvenience of litigating in a different state from it to Ramada, the court concluded that no transfer was warranted. 2

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ARBITRATIONS/CLASS ACTIONS COURTS IN PENNSYLVANIA AND CALIFORNIA UPHOLD ARBITRATION CLAUSES AND CLASS ACTION WAIVERS A federal court in Pennsylvania recently ruled that a cleaning service franchisee must arbitrate his claims against a franchisor on an individual basis, upholding the franchise agreement's arbitration clause and class action waiver. Torres v. CleanNet USA, Inc., 2015 WL 500163 (E.D. Pa. Feb. 5, 2015). Torres claimed CleanNet and its two subfranchisors engaged in a scheme to misclassify franchisees as independent contractors to avoid their obligations under state labor laws. Citing the United States Supreme Court's decision in AT&T Mobility LLC v. Concepcion, the court rejected the argument that arbitration would prevent Torres from vindicating his rights by limiting discovery, requiring a filing fee, and precluding him from collecting certain statutory damages or attorneys' fees. Concepcion held that vindication of state statutory rights is not a legitimate basis to invalidate an arbitration agreement. The court also found all of the defendants could enforce arbitration on the basis of equitable estoppel, even though only one of the three defendants was a signatory to the franchise agreement. Similarly, in Estrada v. CleanNet USA, Inc., 2015 U.S. Dist. Lexis 22403 (N.D. Cal. Feb. 24, 2015), a California court compelled arbitration in an action filed by former CleanNet franchisees under similar franchise agreements. The court rejected Estrada's argument that the alternative dispute resolution provisions were unconscionable, finding that the agreements were not substantively unconscionable and any procedural unconscionability was very minor. The court also held that Estrada must arbitrate his state labor law claims on an individual basis because the Federal Arbitration Act preempts the California statute preventing an employee from waiving his right to bring an action under the applicable state labor law. FEDERAL COURT FINDS ARBITRATION CLAUSE APPLIES IN SUIT AGAINST FORMER FRANCHISEE'S CONTINUED USE OF TRADEMARKS AND RELATED CLAIMS In an unusual twist, an Idaho federal court granted a former franchisee's motion to dismiss, or alternatively, a motion to stay the action pending arbitration, because the franchisor's claims were subject to the franchise agreement's arbitration clause. Arctic Circle Rests. v. Bell, 2015 U.S. Dist. LEXIS 24342 (D. Idaho Feb. 26, 2015). Arctic Circle, a franchisor, filed an action to enforce certain provisions of the franchise agreement, as well as claims under trademark and unfair competition law, after Bell continued to use trademarks owned by Arctic Circle and refused to deidentify his business activities or to return Arctic Circle's property while operating a similar business five miles away.

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The franchise agreement required resolution through arbitration of any dispute or breach. Another provision allowed either party to seek preliminary or equitable relief from a court. Although Arctic Circle originally sought a preliminary injunction and/or a temporary restraining order against Bell, the motion had been mooted by Bell's remedial actions. In granting Bell's motion, the court held that all of Arctic Circle's remaining causes of action arose in some way out of the franchise agreement, and that none of the claims could be pursued separately, outside of the valid arbitration clause. OST-TERMINATION INJUNCTIONS: TRADEMARK VIOLATIONS COURT ENJOINS FORMER FRANCHISEE FROM USING TRADEMARKS A federal court in California granted a franchisor's motion to preliminarily enjoin a former franchisee from continuing to use its trademarks following the franchisee's termination for failure to pay royalties and advertising fees. IHOP Franchising, LLC v. Hameed, 2015 U.S. Dist. LEXIS 12021 (E.D. Cal. Feb. 2, 2015). After IHOP and its affiliates terminated the franchise agreement, Hameed continued to operate his restaurant using IHOP's trademarks. IHOP then filed suit for breach of contract, trademark infringement, and unfair competition, and moved to enforce Hameed's posttermination obligations under the franchise agreement. The court began by holding that IHOP was likely to succeed on the merits of its trademark infringement claim because it was undisputed IHOP owned the marks in question and that Hameed had lost his right to use those marks by virtue of the termination. The court next found IHOP would likely suffer irreparable harm because Hameed's business had received very poor ratings in IHOP's internal evaluation system, and continued operation of the deficient business would damage IHOP's reputation. The balance of equities also favored an injunction because the harm that Hameed alleged he would experience—his inability to make a living when his business closed— was self-imposed. Finally, the court concluded that an injunction would serve the public interest by preventing Hameed from further misleading customers. EMPLOYMENT FRANCHISORS CONTINUE TO STRUGGLE WITH JOINT EMPLOYER CLAIMS The trend of troublesome "joint employer" lawsuits against franchisors continues. In Benitez v. Demco, 2015 US Dist. Lexis 20325 (S.D.N.Y. Feb. 19, 2015), for example, a federal court in New York declined to consider a franchisor's motion to dismiss federal and New York state-law claims asserted by franchisees' employees, on the grounds that imposing joint-employer liability is a fact specific question that cannot be resolved on a motion to dismiss. Two managers of Planet Wings franchises claimed the franchisor was 4

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liable as their employer for various wage and hour violations. To be liable, the alleged employer must possess the power to control the workers in question. This determination is made in New York using the four part "economic realities" test, which considers whether the alleged employer (1) possessed the power to hire or fire the plaintiffs, (2) supervised their work schedules or conditions of employment, (3) determined pay, and (4) established employment records. The court "could not imagine" a more fact intensive analysis, and accordingly denied Planet Wing's motion to dismiss without prejudice, suggesting that the issue may be raised anew on a properly supported motion for summary judgment after discovery. Similarly, in Owens-Presley v. MCD Pizza, Inc., 2015 U.S. Dist. Lexis 16430 (E.D. Pa. Feb. 10, 2015), a Pennsylvania federal court denied franchisor Domino's Pizza, Inc.'s motion to dismiss a wrongful failure to hire claim. Owens-Presley alleged that she was wrongfully denied employment at a franchised Domino Pizza restaurant on the basis of her gender. The court noted the test for determining whether Domino's was the employer for Title VII purposes is a factual inquiry. The court found sufficient the allegations that Domino's owned the business, owned the premises of the business, and exercised control over the management, operations, and policies of the Domino's location through its agent the franchisee. MASTER FRANCHISEE RESPONSIBLE FOR WORKERS COMPENSATION PREMIUMS A state appellate court has reinstated a decision of the Board of Industrial Insurance Appeals that Jan-Pro cleaning franchisees without employees or subordinates were considered covered workers under the Washington Industrial Insurance Act. Dept. of Labor and Indus. v. Lyons Enters., Inc., 2015 WL 459409 (Wash. Ct. App. Feb. 3, 2015). The Act requires employers to report and pay workers compensation premiums for covered workers. Lyons Enterprises, the master franchisee of Jan-Pro cleaning franchises, argued that franchisees should not be considered workers under the Act, noting that franchisees are organized as independent businesses that can and do hire their own employees. In other words, the franchise agreements between Lyons and the franchisees should not be considered contracts for personal labor. The court determined, however, the franchisor retained responsibility under the franchise agreements to deal with clients on behalf of its franchisees. As a result, the court found that any franchisee working alone is "necessarily exerting personal labor" to provide the cleaning services, but franchisees with subordinates are "necessarily contributing more to the contract than his or her own personal labor." In addition, the franchisees could not be considered independently established businesses, as, pursuant to the franchise agreements, they would be required to terminate the operation of their cleaning businesses at the end of the franchise relationship.

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Minneapolis, MN Office John W. Fitzgerald, co-chair (612.632.3064) * Megan L. Anderson (612.632.3004) * Sandy Y. Bodeau (612.632.3211) Phillip W. Bohl (612.632.3019) Jennifer C. Debrow (612.632.3357) Danell Olson Caron (612.632.3383) Elizabeth S. Dillon (612.632.3284) Ashley Bennett Ewald (612.632.3449) * Michael R. Gray (612.632.3078) Kelly W. Hoversten (612.632.3203) Franklin C. Jesse, Jr. (612.632.3205) * Richard C. Landon (612.632.3429) Gaylen L. Knack (612.632.3217)

Kirk W. Reilly, co-chair (612.632.3305) * Craig P. Miller (612.632.3258) * Holly Miller (612.632.3479) Bruce W. Mooty (612.632.3333) John W. Mooty (612.632.3200) Kevin J. Moran (612.632.3269) Kate G. Nilan (612.632.3419) * Karli B. Peterson (612.632.3278) Daniel J. Ringquist (612.632.3299) Max J. Schott II (612.632.3327) Michael P. Sullivan, Jr. (612.632.3350) Lori L. Wiese-Parks (612.632.3375) * Quentin R. Wittrock (612.632.3382)

Washington, DC Office Robert L. Zisk, co-chair (202.295.2202) * Janaki J. Parmar (202.295.2235) Iris F. Rosario (202.295.2204) * Julia C. Colarusso (202.295.2217) * Maisa Jean Frank (202.295.2209) * Justin L. Sallis (202.295.2223) * Erica L. Tokar (202.295.2239) Jan S. Gilbert (202.295.2230) * Virginia D. Horton (202.295.2237) * Stephen J. Vaughan (202.295.2208) Mark A. Kirsch (202.295.2229) David E. Worthen (202.295.2203) Peter J. Klarfeld (202.295.2226) Eric L. Yaffe (202.295.2222) Sheldon H. Klein (202.295.2215) * Carl E. Zwisler (202.295.2225)

* Wrote or edited articles for this issue. For more information on our Franchise and Distribution practice and for recent back issues of this publication, visit the Franchise and Distribution Practice Group at http://www.g pm law.com/Practices/Franchise-Distribution. GRAY PLANT MOOTY 500 IDS Center Suite 700, The Watergate 600 New Hampshire Avenue, N.W. 80 South Eighth Street Minneapolis, MN 55402-3796 Washington, DC 20037-1905 Phone: 612.632.3000 Phone: 202.295.2200 [email protected]

The GPMemorandum is a periodic publication of Gray, Plant, Mooty, Mooty & Bennett, P.A., and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own franchise lawyer concerning your own situation and any specific legal questions you may have.

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