The Franchise Memorandum

A franchisor's adoption of an arbitration policy a month after lawsuits were commenced against it could not force franchisees to arbitrate prior to pursuing litigation, the United States Court of Appeals for the Seventh Circuit ruled last week. Druco Rests., Inc. v. Steak n Shake Enters., Inc., 2014 U.S. App. Lexis 16869 (7th Cir. Aug. 29, 2014). This case arose in the context of franchisee challenges to Steak n Shake's new pricing and promotion policy, which required adherence to company pricing on menu items as well as participation in promotions. After the franchisees filed suit in ...

Last month, a federal court in New Jersey held that a group of 7-Eleven franchisees alleged sufficient facts in their amended complaint to withstand a motion to dismiss their claim that they were employees of 7-Eleven under the Fair Labor Standards Act (FLSA). NAIK v. 7-Eleven, Inc., 2014 U.S. Dist. LEXIS 107139 (D.N.J. Aug. 5, 2014). In denying 7-Eleven's motion, the court held that the facts, as alleged by the franchisees, weighed in favor of finding an employment relationship when considering the six-factor test articulated by the Third Circuit and the economic reality of the ...

A federal court in Maryland has held that an arbitration clause in a franchise agreement is ambiguous and has set a jury trial to determine whether the parties intended to arbitrate the franchisee's claims or litigate them in court. Trouard v. Dickey's Barbeque Restaurants, Inc., 2014 U.S. Dist. LEXIS 106218 (D. Md. Aug. 1, 2014). The franchisee plaintiffs in this case claimed Dickey's understated the start-up costs involved and overstated the expected profits with respect to their franchises. The franchise agreement at issue contained an arbitration clause that required the ...

In Legacy Academy v. Mamilove, LLC, 2014 Ga. App. LEXIS 556 (Ga. Ct. App. July 16, 2014), the Georgia Court of Appeals affirmed a judgment in favor of franchisees who alleged that their franchisor, Legacy Academy, Inc., fraudulently induced them to enter into a franchise relationship by making a false earnings claim during the parties' precontract negotiations. When the franchisees first entered into discussions to open a Legacy daycare franchise, Legacy's representatives gave them a pro forma financial statement showing the net income a new franchisee could expect to earn after ...

In an opinion generally favorable to the franchisor in a unit franchisee's attempt to impose vicarious liability on the franchisor for the actions of its master franchisee, the United States District Court for the District of Massachusetts recently granted in part and denied in part a franchisor's motion for summary judgment. Depianti v. Jan-Pro Franchising International, Inc., 2014 U.S. Dist. LEXIS 116943 (D. Mass. Aug. 22, 2014). At issue was the unit franchisee's claims of misrepresentation and unfair and deceptive business practices based on the conduct of Jan-Pro's master ...

The trend of troublesome wage and hour lawsuits against franchisors continues. In recent months, several new cases have commenced that should serve as an ongoing reminder that when it comes to employment, franchisors should take care not to control or become entangled in their franchisees' day-to-day activities. In the recent cases, various franchisors were sued by their franchisees' employees for alleged violations of the Fair Labor Standards Act (FLSA), on the theory that the franchisor was a "single enterprise" or "joint employer" with the franchisee. Orozco v. Plackis, 2014 ...

The United States Court of Appeals for the Ninth Circuit has affirmed a California district court's dismissal of a vicarious liability claim against a franchisor based on an advertising text message sent by its franchisee. Thomas v. Taco Bell Corp., 2014 U.S. App. LEXIS 12547 (9th Cir. July 2, 2014). The plaintiff, who received the text message advertising a Taco Bell product, alleged violation of the Telephone Consumer Protection Act (TCPA), which makes it unlawful to make automated mass-marketing communications to a cell phone. The text message was a promotion by an association of ...

A federal district court recently granted in part and denied in part a franchisor's motion to dismiss counterclaims filed by a former franchisee. Yumilicious Franchise LLC v. Barrie, 2014 U.S. Dist. LEXIS 113049 (N.D. Tex. Aug. 14, 2014). Yumilicious brought suit against its franchisee, Why Not, LLC, based on alleged breaches of two franchise agreements. It claimed that Why Not breached the franchise agreements when it closed one of the franchised stores without authorization and when it and its guarantors failed to pay monies owed for royalties and products. Why Not filed ...

The Third Circuit has announced a decision regarding the availability of classwide arbitration in an employment agreement that could have significant impact on arbitration agreements in franchising. Opalinski v. Robert Half Int'l, Inc., 2014 U.S. App. LEXIS 14538 (3rd Cir. July 30, 2014). The underlying dispute arose when two former employees of Robert Half International filed a class action complaint against it for alleged violations of the Fair Labor Standards Act. Robert Half moved to compel arbitration of the claims, which the district court granted while also holding that ...