Court Watch

More and more courts and franchise law administrators are taking a real-world view of business relationships, even in some cases where the definitional elements of a franchise can arguably be found. In a case such as this, the truckers were probably not in the type of relationship that franchise laws were designed to cover. The truckers were providing services for the entity paying them, even though they paid fees and other payments to the trucking company and its affiliate. Previous cases from other jurisdictions had found similar arrangements not to be franchises. Perhaps other jurisdictions would have found differently, particularly those with differing definitions of “franchise.” Some states may have even found an employment relationship or that the offering was a “Business Opportunity.” A slippery slope indeed.

Charles G. Miller is a shareholder and director, and Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. They can be reached at 415-956-1900 or at [email protected] and [email protected], respectively.

Creative Attempt to Skirt Ban on Class Actions Has Mixed Results

Now that class action waiver provisions in arbitration agreements have been upheld by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion , 131 S.Ct. 1740 (2011), the franchisee community is looking for creative ways to bring group claims that will not run afoul of such provisions. One such attempt was partially thwarted in Fantastic Sams Franchise Corp. v. FSRG Association, Ltd., 2011 WL 4899975 (U.S. Dist. Ct., D. Mass. Oct. 12, 2011), where a regional owners' association brought an “association” or “representative” claim in arbitration on behalf of its members for breach of the regional agreements and declaratory relief. In response, Fantastic Sams Hair Salons filed a federal court action and moved for a preliminary injunction to enjoin the representative action from proceeding, and after the American Arbitration Association denied its request to stay matters pending court resolution, sought a temporary restraining order. A majority of the franchise agreements at issue contained provisions that prohibited arbitration on a “class-wide basis” and required arbitration of the regional owners' “individual claims only.” The remainder simply included standard language that referred all claims or disputes to arbitration, without any reference to class arbitration, and gave the arbitrator broad powers to determine the validity of the arbitration agreement. With regard to the majority of the agreements, the court held that because it was clear and unambiguous that individual arbitrations were required, the court, and not the arbitrator, would determine if the group claims could be arbitrated. The court was clearly persuaded by the “individual claims only” language, since the prohibition against class actions did not mention representative actions, although the court did view the group arbitration as an “attempted end-run around” the class action prohibition. However, with respect to the remaining contracts, which were ambiguous or silent as to whether they precluded class actions, the court held that it was up to the arbitrator to decide if those contracts prohibited representative actions. The court referred to the Supreme Court's earlier ruling in Green Tree Financial Corp. v. Bazzle , 539 U.S. 444 (2003), that stressed that where the agreement was silent as to whether class arbitration would be permitted, it would be up to the arbitrator to decide that issue, since it was really a matter of contractual interpretation. Fantastic Sams argued, based on Stolt-Nielsen S.A. et al. v. Animal Feeds International Corp., 130 S.Ct. 1758 (2010), that it should not be compelled to arbitrate as a class action unless it expressly agreed to do so. The court noted that might be true, but it was for the arbitrator to decide whether or not Fantastic Sams had agreed or not, based on his or her construction of the agreements.

This case emphasizes the importance of language in an arbitration clause that specifically precludes class actions and requires only individual actions. The Fantastic Sams agreements provided: “It is the intent of the parties that any arbitration between [the parties] shall be of regional licensee's individual claim and that the claim subject to arbitration shall not be arbitrated on a class-wide basis.”

While it may often be difficult to predict every form of group recovery to preclude it, language that requires individual claims should withstand any ambiguity attacks. Some states, like California, have provisions that empower the courts to consolidate arbitrations involving common parties and issues (see, e.g., Cal. Code Civ. Proc. ' 1281.3). It has not yet been decided whether such statutes would be deemed pre-empted by the Federal Arbitration Act ' and that could be the next battleground. See, e.g., New England Energy Inc. v. Keystone Shipping Co. , 855 F.2d 1 (1st Cir. 1988) (court had power to consolidate where agreement was silent on the issue).

Truckers Not Franchisees Under CA Law

Often the line between a contractual relationship of one type and a franchise can be thin. In the early days of franchise regulation, courts and franchise law administrators were quick to find the existence of a franchise. More recently, as sophistication about franchise laws has grown, fewer relationships that once may have been considered to be franchises are found to be so. However, it is still a slippery slope for a firm operating in the gray area of trying to slice the definition of a franchise thin enough to avoid one or more of the required definitional elements. A recent California federal district court decision illustrates.

In Roberts et al. v. C.R. England, et al., Bus. Fran. Guide (CCH) ' 14,768 (USDC ND Cal., Jan. 25, 2012), the plaintiff truck drivers alleged that their Independent Contractor Operating Agreement (“ICOA”) with the C.R. England trucking company amounted to an unregistered franchise under the California Franchise Investment Law (“CFIL”). Under the CFIL a franchise is required to have all of the following elements: 1) the franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor; 2) the operation of that business by the franchisee is substantially associated with the franchisor's name, mark, advertising, symbol, etc.; and 3) the franchisee is required to pay a “franchise fee.”

C.R. England contracted with third parties, including Wal-Mart, to deliver goods. The deliveries were carried out by the drivers operating under the ICOA. The trucks were marked with C.R. England's name and symbols. C.R. England paid the drivers based, it is assumed, on the number of packages they delivered each day, and the drivers paid various fees to C.R. England, including a truck rental fee, payable to an affiliate of C.R. England, and a “Variable Mileage Fee.”

After having failed to state facts sufficient to satisfy the court that their relationship satisfied the franchise requirements, the plaintiffs tried again in a second amended complaint. They alleged that under the rule of Gentis v. Safeguard Business Systems , 60 Cal.App.4th 1294 (1998), which found that the distributors of record-keeping systems were operating a franchise by offering their principal's products even though the distributors could not contract for the sale of the items, the services provided by C.R. England's truckers for the third-party customers satisfied the first element of the CFIL's franchise definition. The court, however, decided that the truckers' services were provided for C.R. England and not for the customers, and the minor additional services voluntarily provided by the truckers for the third parties did not rise to the level required by the CFIL.

In an effort to satisfy the “substantially associated” element of the CFIL's franchise definition, the truckers pointed to the trucks that were decorated (“emblazoned” according to the court) with the name and logo of C.R. England. In an attempt to satisfy the court that driving trucks with the England name and marks and identifying themselves as being from C.R. England when dealing with third parties covered the required identification element, the plaintiffs cited Kim v. Servosnax, Inc. , 10 Cal.App.4th 1346 (1992). In that case, Servosnax entered into an arrangement with the owner of a building to provide a cafeteria for the building. It then sold the contract to Kim, who was prohibited from using the Servosnax name on the facility. The court held that there were two levels of customers to whom the name could be important, the building owner and the cafeteria patrons. Since to the owner the cafeteria was substantially associated with the Servosnax name, the second element of the CFIL's franchise law definition was satisfied.

In Roberts, the court held that even though the trucks and the truckers used the C.R. England name, the two levels of customers serviced by the truckers ' England and the third parties directly receiving the services of the truckers ' did not suffice to establish a franchise. Presumably, the third parties were considered customers of England, not the truckers.

The court then dealt with the sums that were paid by the truckers to England and its truck-leasing affiliate. It stated that even if these payments constituted “franchise fees,” the absence of the other definitional elements defeated the franchise claim.

More and more courts and franchise law administrators are taking a real-world view of business relationships, even in some cases where the definitional elements of a franchise can arguably be found. In a case such as this, the truckers were probably not in the type of relationship that franchise laws were designed to cover. The truckers were providing services for the entity paying them, even though they paid fees and other payments to the trucking company and its affiliate. Previous cases from other jurisdictions had found similar arrangements not to be franchises. Perhaps other jurisdictions would have found differently, particularly those with differing definitions of “franchise.” Some states may have even found an employment relationship or that the offering was a “Business Opportunity.” A slippery slope indeed.

Charles G. Miller is a shareholder and director, and Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. They can be reached at 415-956-1900 or at [email protected] and [email protected], respectively.