Franchising continues to give rise to a multitude of types of lawsuits. The resulting decisions stem from various stages of lawsuits. Below we look at the rulings of the Massachusetts Supreme Court, the Delaware Chancery Court and a Federal District Court in Sacramento. The jurisdictions range from application of the independent contractor tests to location to breach of an asset purchase agreement.
Massachusetts Court Says ABC Test Applies to Franchise Relationships
In March, the Massachusetts Supreme Court ruled that the state’s independent contractor statute applied to the franchisor-franchisee relationship. The Court also ruled that the state independent contractor statute did not conflict with the franchisor’s disclosure obligations as set forth in the FTC Franchise Rule. The state Supreme Court ruled that a franchisor can comply with the FTC franchise rule to make the prescribed disclosures, and in situations where a franchisee is considered an employee under independent contractor statute, the franchisor can meet its obligations under of the payroll.
The case was brought by a group of 7-Eleven franchisees who alleged that the 7-Eleven would, among other things, classify its franchisees as independent contractors rather than employees in violation of the law. The Court found that the 7-Eleven agreements required franchisees to work around the clock, sell inventory by 7-Eleven’s salespeople, use the 7-Eleven payroll system to pay store employees, and follow other rules and requirements. follow. The 7-Eleven franchisees did not receive a “normal salary,” but the plaintiff operators were allowed to be paid out of the store’s gross profit after payment of various fees.
The Massachusetts Independent Contractor Statute requires an employee relationship to exist unless the alleged “employer” can demonstrate that: (1) the individual is free from control and direction in connection with the performance of the service, whether by virtue of his contract for the performance of service and in fact; and (2) the service is provided outside the normal course of the employer’s business; and (3) the individual is usually involved in an independently established trade, profession, profession or business of the same nature as that involved in the service rendered.
The Court stated that the Massachusetts Independent Contractor Statute does not expressly include nor expressly exclude franchisees from its scope. The court did not answer the Federal Circuit Court’s question to determine whether the Massachusetts ABC test applies to the relationship between a franchisor and its franchisee, which also requires the franchisor to abide by the FTC Franchise Rule. The Court concluded that the statute was intended to establish the franchise relationship and that the FTC Franchise Rule is a pre-sales disclosure rule that does not govern the substantive terms of the relationship.
The Court analyzed that the FTC franchise rule is “a pre-sale disclosure rule” that “does not regulate the material terms of the franchisor-franchisee relationship.” The court therefore ruled that it was not confronted with a conflict between, on the one hand, a construction of the self-employed person’s statute in such a way that it applies in the franchise context and, on the other, the required compliance by a franchisor with the FTC Franchise Rule.
The Massachusetts Court ruling leaves some room for franchisors. The Court recognized the protection of legitimate franchise relationships. More importantly, the Court states that there is a threshold question that must be answered. That is, the franchisee who claims to be misclassified must first establish that the franchisee is providing services for the franchisor. When viewed in a favorable light for franchisors, a franchisee does not provide services to the franchisor but operates an independent business associated with the franchisor’s brand and uses the franchisor’s system. This construction can call into question franchise systems where the money flows from the franchisor to the franchisee. The Court said that the franchisor cannot bear its burden by demonstrating that there is a mutual economic benefit between the franchisor and the franchisee and that the mere compliance of the franchisor with the relevant regulatory obligations also does not invalidate the question “does any off duty”.
The Massachusetts Court decision is not the end of the battle between franchise systems and employee relations. It was just another round of a multi-round fight.
Franchisor requires discontinuation no material adverse effect
In May 2019, CorePower Yoga exercised the right to contractually purchase one of its franchisees, Level 4 Yoga, LLC. The agreement between the parties was proven in a November 2019 Asset Purchase Agreement (APA). According to the APA, the acquisition of Level 4’s yoga studios would be in three tranches, with the first tranche to close on April 1, 2020. CorePower ordered all franchisees to close due to COVID-19 and Level 4 studios were temporarily closed. As companies across the country began to close to contain exposure to COVID-19, CorePower decided it wanted to delay or terminate the transaction. Level 4 refused deferment, insisting that it was ready and willing to meet its obligations under the APA.
CorePower then invoked the APA’s Material Adverse Effect (MAE) clause and the APA’s requirement that Level 4 continue to operate its yoga studios in the normal course of business. CorePower claimed that Level 4 rejected the contract and that CorePower was under no obligation to perform. The court rejected that argument because at the time CorePower claimed to be relying on MAE representation, there was absolutely no basis for CorePower to conclude that the business effects of COVID-19 were significant. The court also rejected the argument that the company was not being operated in the normal course of business, the steps Level 4 had taken in response to COVID-19 were to close the yoga studios at the direction of CorePower.
The court ruled that Level 4 was entitled to specific performance, damages and interest.
Texas Forum Selection Enforceable in California
A group of OsteoStrong franchisees, including a California franchise and several non-California franchisees, have filed a lawsuit in federal court in California. The franchisor moved to transfer the business to Texas based on a provision in the franchise agreements that required the action to be filed in the courts where the franchisor was located.
The court ruled that the choice of forum clause was valid for the non-California franchisees. However, the forum selection clause was void with respect to the California franchisee because of the relevant California statutes. The court ruled that transfer to the Southern District of Texas was appropriate for the franchisees who were not in California. The court ruled that this provision did not apply to the non-California franchisees because none of them operate a franchise in California.