Court Watch

Improper Registration Trips Up Franchisor in California

Franchisors that fail to properly register in California must concern themselves with more than just the risk of litigation with their franchisees. After a recent decision by the U.S. District Court for the Central District of California, they must also prepare for potential litigation with competitors alleging unfair competition. Edible Arrangements International, Inc. v. Notaris, (CCH) ' 13,487 (C.D. Cal. Oct. 19, 2006).

Edible Arrangements is a franchise business selling fresh, edible fruit arranged to resemble traditional floral bouquets. James and Amanda Notaris registered and began selling a similar franchise business in California called Fresh Fruit Bouquet Company. Edible Arrangements filed suit against the Notarises alleging unfair competition in offering an improperly registered franchise circular. Edible Arrangements claimed that the violation caused it irreparable harm by giving the defendants an unfair advantage in the franchise market and sought injunctive relief pursuant to the California Unfair Competition Law (the 'UCL'). The UCL's broad terms create a cause of action for unfair competition for 'any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or
misleading advertising.'

The court first found that '[v]irtually any law ' federal, state or local ' can serve as a predicate for a UCL action.' Edible Arrangements alleged that the Notarises had violated numerous laws in the process of selling franchises in California. First, it claimed that they had violated the UFOC Guidelines by failing to disclose any 'material civil action' concerning 'fraud, unfair or deceptive practices, or comparable allegations' filed against the franchisor or its directors within the 10 years immediately preceding the date of the offering circular. The Notarises failed to disclose their litigation with Edible Arrangements in Connecticut, in which Edible Arrangements sued the Notarises for misappropriation of trade secrets, conversion, cyberpiracy, and false designation of origin. The California court found that this litigation constituted deceptive practices since it was premised on Edible Arrangements' claims that the Notarises posed as prospective purchasers of an Edible Arrangements franchise in order to gain access to Edible Arrangements' proprietary information. The court deemed that the failure to disclose was material, because a prospective purchaser of a Fresh Fruit Bouquet Company franchise would consider information regarding the suit important in making a decision about the franchised business. Accordingly, the court found that by failing to disclose the litigation in their circular, the defendants violated the mandatory disclosure provisions of the California Code of Regulations, and thereby also violated the UCL.

Second, Edible Arrangements claimed that the Notarises violated the UFOC Guidelines by failing to include an independently audited financial statement in their circular. The Notarises submitted an audit conducted by James Notaris' father's accounting firm, for whom James Notaris had worked for 10 years prior to opening the Fresh Fruit Bouquet Company. The court found that the accounting firm was not independent, and that this misrepresentation was a violation of the UCL.

Finally, Edible Arrangements al-leged that the Notarises violated California Corporations Code '31110 by offering to sell franchises in the Fresh Fruit Bouquet Company prior to completing the registration process with the California Department of Corporations. The defendants failed to present evidence to the contrary, and the court concluded that unlawful offerings occurred and therefore defendants violated the UCL.

The court held that each of these violations of California law constituted an independent violation of the UCL, and therefore the plaintiff was likely to prevail on the merits of the action. The court further found that a preliminary injunction was necessary to prevent the plaintiff from suffering irreparable harm. Since the edible fruit bouquet franchising business was undergoing rapid expansion, it would be difficult to calculate the damage to Edible Arrangements' business that would result from the Notaris' further use of an incomplete and misleading franchise offering circular. The court concluded that if the Notarises were allowed to sell their franchises to the finite group of franchise purchasers, that would reduce Edible Arrange-ments' revenues, market share, and, upon opening of the competing franchises, sales. The court determined it would be difficult if not impossible for Edible Arrangements to win back purchasers of the Notarises' franchises, given its character as a long-term, capital-intensive investment.

In balancing the harm to the Notarises, the court found that because the UCL provides only for injunctive relief and not damages, the defendants would only be forced to postpone their entry into the market until they submitted a proper offering circular and made the statutorily mandated disclosures. The court did not require the Notarises to affirmatively notify every person in California to whom they already offered a franchise that they had been enjoined from making further offers to sell franchises until they registered a proper offering circular.

Non-Signatory Must Abide By Franchise Covenants Signed By Business Partner

Do you have to sign the franchise agreement to become obligated under it? Not always. The court in Service-Master Residential/Commercial Ser-vices, L.P. v. Hooker, (CCH) ' 13,457 (W.D. Tenn. Sept. 29, 2006), held several non-signatories of a franchise agreement responsible for violating the agreement's covenants under a conspiracy theory.

ServiceMaster developed and franchises a business system for residential and commercial cleaning and related services. On Aug. 1, 1993, Tommy Tucker entered into a franchise agreement with ServiceMaster, giving him the right to operate a ServiceMaster franchise in Mississippi. In 1999, Tucker incorporated Blake Industries, Inc., of which he owned 49% and his wife Betty owned 51%. Tucker began operating his ServiceMaster franchise under the name of the corporation. Tucker renewed the franchise agreement on March 30, 2000 for another five years under his name. The 2000 agreement contained a list of the franchisee's obligations upon termination of the contract, including the obligation to cease using ServiceMaster's trademarks and to change its telephone number and listings, as well as a covenant not to compete. The covenant provided that during the term of the agreement and for a period of one year after the termination of the agreement or the date of the franchisee's last use of Service-Master's trademarks, the franchisee must not 'directly or indirectly, for itself or through, on behalf of, or in conjunction with any other person, persons, partnership or corporation' do the following within the franchisee's territory: 1) divert or attempt to divert any business or customer to any competitor; 2) employ or seek to employ any person who is employed by the franchisor; or 3) own, maintain, engage in, or have any interest in any other business which performs any of the same services as ServiceMaster.

In June 2004, Betty Tucker formed Clean Source, Inc., a commercial cleaning company, in which she had 100% ownership. She operated the company in an office adjacent to that of Blake Industries and employed her son Richard. After the formation of Clean Source, Betty Tucker and Richard Tucker continued to work for and draw an income from Blake Industries until March 2005, during which time they had access to Blake Industries' confidential and proprietary information. Tommy Tucker took no action to prevent his wife and son from operating a competing business or to restrict access to confidential information.

In June 2005, ServiceMaster terminated Tommy Tucker's franchise agreement for failure to pay monthly license fees. Tommy Tucker continued to use the phone number until November 2005, sent invoices to customers using ServiceMaster's trademarks until December 2005, and continued to do business with existing customers until the end of 2005. When Blake Industries vacated its office suite, Clean Source moved into the suite, hired the same employees, began using many of Blake Industries' business assets, and serviced some of Blake Industries' former customers.

ServiceMaster filed for a preliminary injunction against Tommy Tucker, Betty Tucker, Richard Tucker, Clean Source, and Blake Industries because Tommy Tucker had failed to abide by the post-termination obligations in his franchise agreement. ServiceMaster argued that even though Betty Tucker, Richard Tucker, and Clean Source did not sign the franchise agreement, they should also be enjoined because they helped Tommy Tucker unlawfully compete with ServiceMaster in violation of the franchise agreement.

The court held that the covenant against competition could be enforced against Betty Tucker as a franchisee because 'franchisee' was defined in the franchise agreement to include 'general partners and any limited partner (including any corporation and officers, directors and shareholders of a corporation which controls, directly or indirectly, any general or limited partner) if the Franchisee is a partnership.' Tommy Tucker had incorporated his ServiceMaster business under the operation of Blake Industries, of which Betty Tucker was a majority shareholder. Therefore, Blake Indus-tries and Betty Tucker were bound to the obligations of the franchise agreement as 'franchisees' under the definition of the term.

The court went on to say that even if Betty Tucker were not a 'franchisee,' she, Richard Tucker, and Clean Source could still be enjoined because they conspired with Tommy Tucker to violate the covenant. Betty Tucker established Clean Source, a competing cleaning business, next door to Blake Industries and operated it in competition with ServiceMaster for nine months while she was still employed by and receiving a salary from Blake Industries. Richard Tucker solicited business for Clean Source while he was still employed by and receiving a salary from Blake Industries. A 2004 client proposal stated that Blake Industries had changed its name to Clean Source and that Clean Source was responsible for servicing a client that was actually serviced by Blake Industries. Clean Source hired many of Blake Industries' em-ployees, moved into Blake Industries' office space, used Blake Industries' assets, and began servicing some of Blake Industries' customers.

Though Tommy Tucker claimed that he had not helped Betty Tucker establish Clean Source, the court found that at the very least Tommy Tucker helped Betty Tucker establish Clean Source by allowing her and Richard Tucker access to all of Blake Industries' confidential and proprietary information during a time when he knew they were establishing a competing business. By failing to take any action to prevent the misappropriation of Blake Industries' confidential and proprietary information, Tommy Tucker acted in concert with Betty Tucker and Richard Tucker to violate his post-termination obligations under the franchise agreement.

The post-termination obligations of the franchise agreement were for a period of one year after the 'expiration or termination of the Agreement or from the date of the Franchisee's last use of the Franchisor's trademarks.' Since Tommy Tucker had used ServiceMaster's trademarks until December 2005, the preliminary injunction was to be issued for one year beginning Jan. 1, 2006.

Massachusetts Court Rules Franchisor Covered By Employment Law

Franchisors must be warned of the degree of control they exert over their franchisees' businesses, not just to protect themselves from vicarious liability claims, but also from claims under employment law. In Coverall North America, Inc. v. Commissioner of the Division of Unemployment Assistance, et al., www.findlaw.com/11stategov/ma/maca.html (Mass. Dec. 12, 2006), the court found that a franchisee was an 'employee' and was entitled to collect unemployment benefits when it was terminated by its closely supervising franchisor.

Coverall North America, Inc. ('Coverall') sells franchises specializing in janitorial cleaning businesses. Coverall provided franchisees with a complete training program covering the commercial cleaning business, Cover-all's cleaning techniques, and management techniques, as well as an initial customer base. Coverall also allowed franchisees to solicit prospective customers directly. New customers gained by franchisees through their own solicitation, however, were required to sign a contract with Coverall. Coverall directly billed all customers, and the franchisees received payments from Coverall for the services rendered to the customers, minus finance charges, royalties, and management fees.

The claimant had been working at Sunrise Nursing Home ('Sunrise') under the direction of a Coverall franchisee when the franchisee lost the Sunrise account. The claimant was still interested in maintaining her position at Sunrise, so she became a franchisee of Coverall, signed the franchise agreement, paid the initial franchise fee, and was promised and given the Sunrise account. Coverall negotiated the contract directly with Sunrise and billed it directly, without any involvement from the claimant. All complaints were channeled directly to Coverall and resolved by a Coverall field consultant. The claimant lacked her own business cards and clientele, apart from Coverall clients. Every morning, the claimant met with the Sunrise employee who directed her to complete a daily list of tasks and closely supervised her. In addition, she was supervised by a Coverall field consultant.

While working at Sunrise, the claimant complained to the Coverall field consultant that she could not complete the assigned tasks in the time allotted, but was directed to complete the tasks nonetheless. As a result, the claimant began working longer hours than contracted, including working on weekends to accommodate the workload. The claimant also completed 'special projects' for Sunrise at the direction of Coverall. The claimant testified that she was told she would be compensated for the additional hours, but was never paid additional money. In response, the claimant refused to continue the additional work. Subsequently, Coverall's regional director 'discharged' the claimant.

The claimant later filed a claim for unemployment benefits, but the Division of Unemployment Assistance (the 'Division') rejected her request based upon the determination that the services she performed did not constitute 'employment' and she was instead acting as an independent contractor. The claimant appealed to the Review Examiner for the Division, who examined whether she was an employee or independent contractor under the three-prong test of Massachusetts General Laws c. 151A, '2 (a)-(c) (the 'ABC Test'). Pursuant to the ABC Test, an employer bears the burden of proving that it is exempt from providing unemployment benefits by evidencing 'that the services at issue are performed (a) free from control or direction of the employing enterprise; (b) outside of the usual course of business, or outside of all the places of business, of the enterprise; and (c) as part of an independently established trade, occupation, profession, or business of the worker.' If an employer fails to establish any of the three prongs, the services in question constitute 'employment.' The review examiner reversed the initial determination, finding that Coverall failed to satisfy all three prongs required under the ABC Test to establish the claimant as an independent contractor.

After unsuccessfully appealing to the Division's Board of Review, Coverall filed a request for judicial review. The District Court judge affirmed the Division's final decision. After Coverall's final appeal, the Massachusetts Supreme Judicial Court transferred the case from the appeals court. The court considered only the third prong of the ABC Test in its review. Under this prong, the court was to consider 'whether the service in question could be viewed as an independent trade or business because the worker is capable of performing the service to anyone wishing to avail themselves of the services or, conversely, whether the nature of the business compels the worker to depend on a single employer for the continuation of the services.'

The court found that the claimant did not operate an independent business apart from Coverall, only cleaned at the locations that Coverall provided, and was provided with a plan of action and directed to follow it by Coverall supervisors. Coverall argued that the division incorrectly focused on what the claimant actually did with her franchise rather than what she was capable of doing. Coverall claimed that the franchise agreement allowed her to be an entrepreneur and expand her business by hiring employees and directly soliciting new customers, and that although the claimant did not take advantage of these opportunities, she was still an independent contractor because she was capable of expanding her business.

The court, however, regarded the question as whether 'the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.' It determined the claimant was compelled to rely heavily on Coverall, who negotiated contracts and pricing directly with clients, billed clients, and provided a daily cleaning plan to which the claimant was required to adhere. The court concluded that even if the claimant was capable of being an 'entrepreneur' and expanding her own business, the growth of her business inevitably expanded Coverall's clientele base, since each new customer was required to sign a contract with Coverall. Moreover, the claimant's reliance on Coverall's employment was evidenced by the fact that her business ended once Coverall 'discharged' her.

Cynthia Klaus, Jon S. Swierzewski, and Sejal Desai Winkelman are attorneys with Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis. They
can be reached by phone at 952-835-3800 or by e-mail at [email protected], [email protected], or [email protected], respectively.

Improper Registration Trips Up Franchisor in California

Franchisors that fail to properly register in California must concern themselves with more than just the risk of litigation with their franchisees. After a recent decision by the U.S. District Court for the Central District of California, they must also prepare for potential litigation with competitors alleging unfair competition. Edible Arrangements International, Inc. v. Notaris, (CCH) ' 13,487 (C.D. Cal. Oct. 19, 2006).

Edible Arrangements is a franchise business selling fresh, edible fruit arranged to resemble traditional floral bouquets. James and Amanda Notaris registered and began selling a similar franchise business in California called Fresh Fruit Bouquet Company. Edible Arrangements filed suit against the Notarises alleging unfair competition in offering an improperly registered franchise circular. Edible Arrangements claimed that the violation caused it irreparable harm by giving the defendants an unfair advantage in the franchise market and sought injunctive relief pursuant to the California Unfair Competition Law (the 'UCL'). The UCL's broad terms create a cause of action for unfair competition for 'any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or
misleading advertising.'

The court first found that '[v]irtually any law ' federal, state or local ' can serve as a predicate for a UCL action.' Edible Arrangements alleged that the Notarises had violated numerous laws in the process of selling franchises in California. First, it claimed that they had violated the UFOC Guidelines by failing to disclose any 'material civil action' concerning 'fraud, unfair or deceptive practices, or comparable allegations' filed against the franchisor or its directors within the 10 years immediately preceding the date of the offering circular. The Notarises failed to disclose their litigation with Edible Arrangements in Connecticut, in which Edible Arrangements sued the Notarises for misappropriation of trade secrets, conversion, cyberpiracy, and false designation of origin. The California court found that this litigation constituted deceptive practices since it was premised on Edible Arrangements' claims that the Notarises posed as prospective purchasers of an Edible Arrangements franchise in order to gain access to Edible Arrangements' proprietary information. The court deemed that the failure to disclose was material, because a prospective purchaser of a Fresh Fruit Bouquet Company franchise would consider information regarding the suit important in making a decision about the franchised business. Accordingly, the court found that by failing to disclose the litigation in their circular, the defendants violated the mandatory disclosure provisions of the California Code of Regulations, and thereby also violated the UCL.

Second, Edible Arrangements claimed that the Notarises violated the UFOC Guidelines by failing to include an independently audited financial statement in their circular. The Notarises submitted an audit conducted by James Notaris' father's accounting firm, for whom James Notaris had worked for 10 years prior to opening the Fresh Fruit Bouquet Company. The court found that the accounting firm was not independent, and that this misrepresentation was a violation of the UCL.

Finally, Edible Arrangements al-leged that the Notarises violated California Corporations Code '31110 by offering to sell franchises in the Fresh Fruit Bouquet Company prior to completing the registration process with the California Department of Corporations. The defendants failed to present evidence to the contrary, and the court concluded that unlawful offerings occurred and therefore defendants violated the UCL.

The court held that each of these violations of California law constituted an independent violation of the UCL, and therefore the plaintiff was likely to prevail on the merits of the action. The court further found that a preliminary injunction was necessary to prevent the plaintiff from suffering irreparable harm. Since the edible fruit bouquet franchising business was undergoing rapid expansion, it would be difficult to calculate the damage to Edible Arrangements' business that would result from the Notaris' further use of an incomplete and misleading franchise offering circular. The court concluded that if the Notarises were allowed to sell their franchises to the finite group of franchise purchasers, that would reduce Edible Arrange-ments' revenues, market share, and, upon opening of the competing franchises, sales. The court determined it would be difficult if not impossible for Edible Arrangements to win back purchasers of the Notarises' franchises, given its character as a long-term, capital-intensive investment.

In balancing the harm to the Notarises, the court found that because the UCL provides only for injunctive relief and not damages, the defendants would only be forced to postpone their entry into the market until they submitted a proper offering circular and made the statutorily mandated disclosures. The court did not require the Notarises to affirmatively notify every person in California to whom they already offered a franchise that they had been enjoined from making further offers to sell franchises until they registered a proper offering circular.

Non-Signatory Must Abide By Franchise Covenants Signed By Business Partner

Do you have to sign the franchise agreement to become obligated under it? Not always. The court in Service-Master Residential/Commercial Ser-vices, L.P. v. Hooker, (CCH) ' 13,457 (W.D. Tenn. Sept. 29, 2006), held several non-signatories of a franchise agreement responsible for violating the agreement's covenants under a conspiracy theory.

ServiceMaster developed and franchises a business system for residential and commercial cleaning and related services. On Aug. 1, 1993, Tommy Tucker entered into a franchise agreement with ServiceMaster, giving him the right to operate a ServiceMaster franchise in Mississippi. In 1999, Tucker incorporated Blake Industries, Inc., of which he owned 49% and his wife Betty owned 51%. Tucker began operating his ServiceMaster franchise under the name of the corporation. Tucker renewed the franchise agreement on March 30, 2000 for another five years under his name. The 2000 agreement contained a list of the franchisee's obligations upon termination of the contract, including the obligation to cease using ServiceMaster's trademarks and to change its telephone number and listings, as well as a covenant not to compete. The covenant provided that during the term of the agreement and for a period of one year after the termination of the agreement or the date of the franchisee's last use of Service-Master's trademarks, the franchisee must not 'directly or indirectly, for itself or through, on behalf of, or in conjunction with any other person, persons, partnership or corporation' do the following within the franchisee's territory: 1) divert or attempt to divert any business or customer to any competitor; 2) employ or seek to employ any person who is employed by the franchisor; or 3) own, maintain, engage in, or have any interest in any other business which performs any of the same services as ServiceMaster.

In June 2004, Betty Tucker formed Clean Source, Inc., a commercial cleaning company, in which she had 100% ownership. She operated the company in an office adjacent to that of Blake Industries and employed her son Richard. After the formation of Clean Source, Betty Tucker and Richard Tucker continued to work for and draw an income from Blake Industries until March 2005, during which time they had access to Blake Industries' confidential and proprietary information. Tommy Tucker took no action to prevent his wife and son from operating a competing business or to restrict access to confidential information.

In June 2005, ServiceMaster terminated Tommy Tucker's franchise agreement for failure to pay monthly license fees. Tommy Tucker continued to use the phone number until November 2005, sent invoices to customers using ServiceMaster's trademarks until December 2005, and continued to do business with existing customers until the end of 2005. When Blake Industries vacated its office suite, Clean Source moved into the suite, hired the same employees, began using many of Blake Industries' business assets, and serviced some of Blake Industries' former customers.

ServiceMaster filed for a preliminary injunction against Tommy Tucker, Betty Tucker, Richard Tucker, Clean Source, and Blake Industries because Tommy Tucker had failed to abide by the post-termination obligations in his franchise agreement. ServiceMaster argued that even though Betty Tucker, Richard Tucker, and Clean Source did not sign the franchise agreement, they should also be enjoined because they helped Tommy Tucker unlawfully compete with ServiceMaster in violation of the franchise agreement.

The court held that the covenant against competition could be enforced against Betty Tucker as a franchisee because 'franchisee' was defined in the franchise agreement to include 'general partners and any limited partner (including any corporation and officers, directors and shareholders of a corporation which controls, directly or indirectly, any general or limited partner) if the Franchisee is a partnership.' Tommy Tucker had incorporated his ServiceMaster business under the operation of Blake Industries, of which Betty Tucker was a majority shareholder. Therefore, Blake Indus-tries and Betty Tucker were bound to the obligations of the franchise agreement as 'franchisees' under the definition of the term.

The court went on to say that even if Betty Tucker were not a 'franchisee,' she, Richard Tucker, and Clean Source could still be enjoined because they conspired with Tommy Tucker to violate the covenant. Betty Tucker established Clean Source, a competing cleaning business, next door to Blake Industries and operated it in competition with ServiceMaster for nine months while she was still employed by and receiving a salary from Blake Industries. Richard Tucker solicited business for Clean Source while he was still employed by and receiving a salary from Blake Industries. A 2004 client proposal stated that Blake Industries had changed its name to Clean Source and that Clean Source was responsible for servicing a client that was actually serviced by Blake Industries. Clean Source hired many of Blake Industries' em-ployees, moved into Blake Industries' office space, used Blake Industries' assets, and began servicing some of Blake Industries' customers.

Though Tommy Tucker claimed that he had not helped Betty Tucker establish Clean Source, the court found that at the very least Tommy Tucker helped Betty Tucker establish Clean Source by allowing her and Richard Tucker access to all of Blake Industries' confidential and proprietary information during a time when he knew they were establishing a competing business. By failing to take any action to prevent the misappropriation of Blake Industries' confidential and proprietary information, Tommy Tucker acted in concert with Betty Tucker and Richard Tucker to violate his post-termination obligations under the franchise agreement.

The post-termination obligations of the franchise agreement were for a period of one year after the 'expiration or termination of the Agreement or from the date of the Franchisee's last use of the Franchisor's trademarks.' Since Tommy Tucker had used ServiceMaster's trademarks until December 2005, the preliminary injunction was to be issued for one year beginning Jan. 1, 2006.

Massachusetts Court Rules Franchisor Covered By Employment Law

Franchisors must be warned of the degree of control they exert over their franchisees' businesses, not just to protect themselves from vicarious liability claims, but also from claims under employment law. In Coverall North America, Inc. v. Commissioner of the Division of Unemployment Assistance, et al., www.findlaw.com/11stategov/ma/maca.html (Mass. Dec. 12, 2006), the court found that a franchisee was an 'employee' and was entitled to collect unemployment benefits when it was terminated by its closely supervising franchisor.

Coverall North America, Inc. ('Coverall') sells franchises specializing in janitorial cleaning businesses. Coverall provided franchisees with a complete training program covering the commercial cleaning business, Cover-all's cleaning techniques, and management techniques, as well as an initial customer base. Coverall also allowed franchisees to solicit prospective customers directly. New customers gained by franchisees through their own solicitation, however, were required to sign a contract with Coverall. Coverall directly billed all customers, and the franchisees received payments from Coverall for the services rendered to the customers, minus finance charges, royalties, and management fees.

The claimant had been working at Sunrise Nursing Home ('Sunrise') under the direction of a Coverall franchisee when the franchisee lost the Sunrise account. The claimant was still interested in maintaining her position at Sunrise, so she became a franchisee of Coverall, signed the franchise agreement, paid the initial franchise fee, and was promised and given the Sunrise account. Coverall negotiated the contract directly with Sunrise and billed it directly, without any involvement from the claimant. All complaints were channeled directly to Coverall and resolved by a Coverall field consultant. The claimant lacked her own business cards and clientele, apart from Coverall clients. Every morning, the claimant met with the Sunrise employee who directed her to complete a daily list of tasks and closely supervised her. In addition, she was supervised by a Coverall field consultant.

While working at Sunrise, the claimant complained to the Coverall field consultant that she could not complete the assigned tasks in the time allotted, but was directed to complete the tasks nonetheless. As a result, the claimant began working longer hours than contracted, including working on weekends to accommodate the workload. The claimant also completed 'special projects' for Sunrise at the direction of Coverall. The claimant testified that she was told she would be compensated for the additional hours, but was never paid additional money. In response, the claimant refused to continue the additional work. Subsequently, Coverall's regional director 'discharged' the claimant.

The claimant later filed a claim for unemployment benefits, but the Division of Unemployment Assistance (the 'Division') rejected her request based upon the determination that the services she performed did not constitute 'employment' and she was instead acting as an independent contractor. The claimant appealed to the Review Examiner for the Division, who examined whether she was an employee or independent contractor under the three-prong test of Massachusetts General Laws c. 151A, '2 (a)-(c) (the 'ABC Test'). Pursuant to the ABC Test, an employer bears the burden of proving that it is exempt from providing unemployment benefits by evidencing 'that the services at issue are performed (a) free from control or direction of the employing enterprise; (b) outside of the usual course of business, or outside of all the places of business, of the enterprise; and (c) as part of an independently established trade, occupation, profession, or business of the worker.' If an employer fails to establish any of the three prongs, the services in question constitute 'employment.' The review examiner reversed the initial determination, finding that Coverall failed to satisfy all three prongs required under the ABC Test to establish the claimant as an independent contractor.

After unsuccessfully appealing to the Division's Board of Review, Coverall filed a request for judicial review. The District Court judge affirmed the Division's final decision. After Coverall's final appeal, the Massachusetts Supreme Judicial Court transferred the case from the appeals court. The court considered only the third prong of the ABC Test in its review. Under this prong, the court was to consider 'whether the service in question could be viewed as an independent trade or business because the worker is capable of performing the service to anyone wishing to avail themselves of the services or, conversely, whether the nature of the business compels the worker to depend on a single employer for the continuation of the services.'

The court found that the claimant did not operate an independent business apart from Coverall, only cleaned at the locations that Coverall provided, and was provided with a plan of action and directed to follow it by Coverall supervisors. Coverall argued that the division incorrectly focused on what the claimant actually did with her franchise rather than what she was capable of doing. Coverall claimed that the franchise agreement allowed her to be an entrepreneur and expand her business by hiring employees and directly soliciting new customers, and that although the claimant did not take advantage of these opportunities, she was still an independent contractor because she was capable of expanding her business.

The court, however, regarded the question as whether 'the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.' It determined the claimant was compelled to rely heavily on Coverall, who negotiated contracts and pricing directly with clients, billed clients, and provided a daily cleaning plan to which the claimant was required to adhere. The court concluded that even if the claimant was capable of being an 'entrepreneur' and expanding her own business, the growth of her business inevitably expanded Coverall's clientele base, since each new customer was required to sign a contract with Coverall. Moreover, the claimant's reliance on Coverall's employment was evidenced by the fact that her business ended once Coverall 'discharged' her.

Cynthia Klaus, Jon S. Swierzewski, and Sejal Desai Winkelman are attorneys with Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis. They
can be reached by phone at 952-835-3800 or by e-mail at [email protected], [email protected], or [email protected], respectively.