News Briefs

Ford Settles Lawsuit Launched by Ottawa Dealerships

The Ontario Superior Court of Justice approved a settlement between Ford Motor Co. of Canada Ltd. and about 100 Ford dealers in Canada that will result in Ford creating a fund of up to $47 million (CAN) ($35 million (US)) to compensate dealers who claimed that the carmaker breached contract agreements when it decided to convert its Lincoln-Mercury outlets to the Ford banner. The decision by Judge Lynn Ratushny rejected an objection by two Ottawa dealerships that their share of the settlement would be insufficient.

Ford's dispute with its dealers began in the late 1990s, when the company converted about 125 Lincoln-Mercury dealerships to “Custom Franchises” that could sell Ford models. Previously, Lincoln dealers could sell only Lincoln- and Mercury-model cars, and Ford dealers could sell only Fords. After the change, some Ford dealers soon found that they had a direct competitor located close by, which they alleged was in direct violation of their franchise agreements, which prohibit Ford from setting up another dealership within a 15-kilometer radius. However, if Ford can prove that the market is sufficient to support two nearby dealerships, it can site them accordingly.

The plaintiffs argued that Ford did not follow its written procedures for the expansion of the Lincoln-Mercury dealerships, and the Ford dealers would be harmed. In settling the class action lawsuit, Ford created two funds: 1) “Goodwill Diminution Fund,” containing $18.8 million (CAN) to compensate about 70 dealers; and 2) “Proximity/Market Representation Fund,” containing $28.2 million (CAN) to compensate about 30 dealers.

A formula has been created to determine distribution of the funds, but two Ottawa dealers objected to the amount of the settlement and the formula for dividing the funds.

“In the end, Justice Ratushny decided that two of 100 dealers could not be permitted to derail what was otherwise a thoughtful, arms length – if slightly imperfect settlement arrived at between parties regarded as being of roughly equal bargaining power,” said Markus Cohen, a Toronto-based franchise attorney, who was not involved in the litigation or settlement. The judge also wrote that the two dealers could opt out of the settlement and pursue litigation against Ford, Cohen noted.

After Settling with Franchisee, Burger King Seeks $5 Million from Insurer

Burger King Corp. has sued one of its insurers, Lumbermens Mutual Casualty Co., for $5 million, seeking reimbursement for costs that the fast-food franchisor incurred in settling litigation with a Detroit-area franchisee. The lawsuit, Burger King Corp. v. Lumbermens Mutual Casualty Company, was filed in U.S. District Court for the Southern District of Florida.

The $5 million payment that Burger King is seeking is the maximum to which it is entitled under the insurance contract, said W. Barry Blum, senior general counsel for Burger King. Lumbermens is the only insurer with whom Burger King has a policy that covers this type of litigation expense.

Burger King's insurance dispute with Lumbermens arises from the franchisor's settlement of lawsuits and countersuits with former franchisee La-Van Hawkins in January 2001. The settlement ended several years of acrimony about an unrealized plan for Hawkins to open more than 200 Burger King franchises in urban areas. In 1999, Hawkins sued Burger King for backing out of the deal. In December 2000, U.S. District Court Judge Marianne Battani threw out his lawsuit, ruling that the franchise agreement signed by Hawkins was “clean and unambiguous” in stating that he could not sue the company.

Despite winning in court, Burger King faced negative publicity because Hawkins and several African-American activists charged that the company's decision was racist. The Rev. Al Sharpton called for a nationwide boycott of Burger King by African-Americans.

Burger King and Hawkins eventually negotiated a deal to end all litigation, resolve a multimillion-dollar loan that Hawkins received from the company, and to enable Burger King to repurchase the 22 franchises that Hawkins did own. Burger King says that it spent $30 million in litigation expenses, lost franchisee fees, and the costs to repurchase franchises. Given that $30-million expense, Burger King believes that it met the conditions of its insurance policy with Lumbermens.

As of April 20, Lumbermens had not responded to the court filing. The company did not have a comment for FBLA.

New Federal Overtime Rules Bring Clarity

While applauding the modernization of U.S. overtime regulations, representatives of the International Franchise Association (IFA) said that they are still studying the new rules, as they seek to determine in which ways they will positively and negatively affect franchisors and franchisees. The new rules, announced by the U.S. Department of Labor in late April, will raise the salary floor below which workers are guaranteed overtime, and clarify the rules for determining which types of workers are eligible for overtime. The new rules were published in the Federal Register on April 26, and will go into effect in August 2004. (For a copy of the rules, go to www.access.gpo.gov/su_docs/fedreg/a040423c.html#Wage%20and%20Hour%20Division.)

“We've asked our members for feedback on the rules,” said Matt Lathrop, director of government relations for IFA. “Because we represent 75 industries, and they operate across the country, it's possible that different franchises are affected differently.”

Under the new rules, which the Labor Department has dubbed “FairPay,” all workers who earn less than $23,600 per year are automatically eligible for overtime. This threshold nearly triples the former income level, and it's the largest new protection that FairPay grants to workers. Many employees (and some managers) at quick-serve restaurants and hotels/motels will become newly eligible for overtime because of the higher wage threshold. On the other side of the coin, workers in certain job classifications will be specifically defined as exempt, and these include several that are common in franchised businesses: pharmacists; accountants; and chefs.

Franchisors will surely be relieved that the clarity in the new rules will reduce the likelihood that they will be the target of class action lawsuits related to overtime, said Lathrop. “It has been very difficult to understand how to classify an assistant manager as exempt or nonexempt, and [the uncertainty] has led to class actions,” he said. “We believe these new rules will help.”

Lathrop added that although the FairPay rule has been finalized, Sen. Tom Harkin (D-IA) is leading an effort in Congress to withhold funds for its implementation. “It's an election year, and if this is linked to a minimum wage debate, anything could happen,” said Lathrop.

Ford Settles Lawsuit Launched by Ottawa Dealerships

The Ontario Superior Court of Justice approved a settlement between Ford Motor Co. of Canada Ltd. and about 100 Ford dealers in Canada that will result in Ford creating a fund of up to $47 million (CAN) ($35 million (US)) to compensate dealers who claimed that the carmaker breached contract agreements when it decided to convert its Lincoln-Mercury outlets to the Ford banner. The decision by Judge Lynn Ratushny rejected an objection by two Ottawa dealerships that their share of the settlement would be insufficient.

Ford's dispute with its dealers began in the late 1990s, when the company converted about 125 Lincoln-Mercury dealerships to “Custom Franchises” that could sell Ford models. Previously, Lincoln dealers could sell only Lincoln- and Mercury-model cars, and Ford dealers could sell only Fords. After the change, some Ford dealers soon found that they had a direct competitor located close by, which they alleged was in direct violation of their franchise agreements, which prohibit Ford from setting up another dealership within a 15-kilometer radius. However, if Ford can prove that the market is sufficient to support two nearby dealerships, it can site them accordingly.

The plaintiffs argued that Ford did not follow its written procedures for the expansion of the Lincoln-Mercury dealerships, and the Ford dealers would be harmed. In settling the class action lawsuit, Ford created two funds: 1) “Goodwill Diminution Fund,” containing $18.8 million (CAN) to compensate about 70 dealers; and 2) “Proximity/Market Representation Fund,” containing $28.2 million (CAN) to compensate about 30 dealers.

A formula has been created to determine distribution of the funds, but two Ottawa dealers objected to the amount of the settlement and the formula for dividing the funds.

“In the end, Justice Ratushny decided that two of 100 dealers could not be permitted to derail what was otherwise a thoughtful, arms length – if slightly imperfect settlement arrived at between parties regarded as being of roughly equal bargaining power,” said Markus Cohen, a Toronto-based franchise attorney, who was not involved in the litigation or settlement. The judge also wrote that the two dealers could opt out of the settlement and pursue litigation against Ford, Cohen noted.

After Settling with Franchisee, Burger King Seeks $5 Million from Insurer

Burger King Corp. has sued one of its insurers, Lumbermens Mutual Casualty Co., for $5 million, seeking reimbursement for costs that the fast-food franchisor incurred in settling litigation with a Detroit-area franchisee. The lawsuit, Burger King Corp. v. Lumbermens Mutual Casualty Company, was filed in U.S. District Court for the Southern District of Florida.

The $5 million payment that Burger King is seeking is the maximum to which it is entitled under the insurance contract, said W. Barry Blum, senior general counsel for Burger King. Lumbermens is the only insurer with whom Burger King has a policy that covers this type of litigation expense.

Burger King's insurance dispute with Lumbermens arises from the franchisor's settlement of lawsuits and countersuits with former franchisee La-Van Hawkins in January 2001. The settlement ended several years of acrimony about an unrealized plan for Hawkins to open more than 200 Burger King franchises in urban areas. In 1999, Hawkins sued Burger King for backing out of the deal. In December 2000, U.S. District Court Judge Marianne Battani threw out his lawsuit, ruling that the franchise agreement signed by Hawkins was “clean and unambiguous” in stating that he could not sue the company.

Despite winning in court, Burger King faced negative publicity because Hawkins and several African-American activists charged that the company's decision was racist. The Rev. Al Sharpton called for a nationwide boycott of Burger King by African-Americans.

Burger King and Hawkins eventually negotiated a deal to end all litigation, resolve a multimillion-dollar loan that Hawkins received from the company, and to enable Burger King to repurchase the 22 franchises that Hawkins did own. Burger King says that it spent $30 million in litigation expenses, lost franchisee fees, and the costs to repurchase franchises. Given that $30-million expense, Burger King believes that it met the conditions of its insurance policy with Lumbermens.

As of April 20, Lumbermens had not responded to the court filing. The company did not have a comment for FBLA.

New Federal Overtime Rules Bring Clarity

While applauding the modernization of U.S. overtime regulations, representatives of the International Franchise Association (IFA) said that they are still studying the new rules, as they seek to determine in which ways they will positively and negatively affect franchisors and franchisees. The new rules, announced by the U.S. Department of Labor in late April, will raise the salary floor below which workers are guaranteed overtime, and clarify the rules for determining which types of workers are eligible for overtime. The new rules were published in the Federal Register on April 26, and will go into effect in August 2004. (For a copy of the rules, go to www.access.gpo.gov/su_docs/fedreg/a040423c.html#Wage%20and%20Hour%20Division.)

“We've asked our members for feedback on the rules,” said Matt Lathrop, director of government relations for IFA. “Because we represent 75 industries, and they operate across the country, it's possible that different franchises are affected differently.”

Under the new rules, which the Labor Department has dubbed “FairPay,” all workers who earn less than $23,600 per year are automatically eligible for overtime. This threshold nearly triples the former income level, and it's the largest new protection that FairPay grants to workers. Many employees (and some managers) at quick-serve restaurants and hotels/motels will become newly eligible for overtime because of the higher wage threshold. On the other side of the coin, workers in certain job classifications will be specifically defined as exempt, and these include several that are common in franchised businesses: pharmacists; accountants; and chefs.

Franchisors will surely be relieved that the clarity in the new rules will reduce the likelihood that they will be the target of class action lawsuits related to overtime, said Lathrop. “It has been very difficult to understand how to classify an assistant manager as exempt or nonexempt, and [the uncertainty] has led to class actions,” he said. “We believe these new rules will help.”

Lathrop added that although the FairPay rule has been finalized, Sen. Tom Harkin (D-IA) is leading an effort in Congress to withhold funds for its implementation. “It's an election year, and if this is linked to a minimum wage debate, anything could happen,” said Lathrop.