NLRB’s General Counsel Responds To Congressional Inquiries

NLRB’s General Counsel Responds To Congressional Inquiries

On November 4 and 10, 2014, the NLRB’s General Counsel, Richard Griffen, responded to two different letters from members of Congress.  These letters requested Griffen’s explanation for why he believes that the NLRB should depart from its current joint employer standard and hold a franchisor liable as a joint employer of its franchisee’s employees.

In Griffen’s response, he referred members to his office’s amicus brief in the pending Browning Ferris case in California.  He also stated that McDonald’s, the first franchisor targeted under his leadership, would be afforded due process protections and a fair trial.  Finally, he stated that the McDonald’s case was evaluated under the current joint employer test, not the one that his office proposed in its Browning Ferris amicus brief.  This statement seems to back peddle from his previous announcement.

The NLRB’s decision in the Browning Ferris case is expected before December 16, 2014, when one of the members term expires.

Does a franchisor have a duty to disclose what is not statutorily required (or statutorily permitted) to be disclosed?

A 2010 case muddied the waters on whether a franchisor has a duty to disclose information that is not required (or even permitted) to be in its franchise disclosure document. In the case of Colorado Coffee Bean, LLC, et al. v. Peaberry Coffee Inc., et al., the Court analyzed:

• Whether a franchisor had a duty to disclose non-required material information.
• Whether the prospective franchisees could reasonably rely on the absence of any disclosure to assume that no bad information existed.
• Whether exculpatory clauses in the disclosure document (disclaimer clauses in Item 19), the integration clause in the franchise agreement and the acknowledgements in the franchise agreement precluded the prospective franchisees from relying on the nondisclosure.

The franchisees brought claims of fraudulent nondisclosure, negligent misrepresentation, alter ego and violation of the Colorado Consumer Protection Act. The franchisees also brought the additional claim of aiding and abetting fraudulent nondisclosure against the law firm that prepared the franchisor’s disclosure document (then a UFOC).

The franchisees alleged that the franchisor failed to disclose:

• that most of its company owned and operated stores were operating at a loss; and
• that its parent company had been operating at a loss for several years.

The franchisees did not allege that they had been provided with false information. They alleged that there was material information, other than what they were told, and other than what was required to be disclosed in the UFOC, that the franchisor should have disclosed to them. The franchisor did disclose the gross sales of all if its company owned stores in Item 19, but not any additional information on cost of goods sold or operating expenses of its stores.

The franchisor claimed it did not have a duty to disclose either the profitability of the company owned stores or the profitability of its parent company, either under the FTC Franchise Rule or otherwise. The franchisor also felt that is was not liable under the franchisees’ claims because its parent company’s operating losses were the result of its rapid growth, some of its company owned stores were profitable, and its retail sales had increased in the years immediately before it implemented its franchising program, all of which rendered the nondisclosure immaterial.

Company Owned Stores

With regard to the failure to disclose the profitability of the company owned stores, the Court found that even though the franchisor actively concealed material financial facts, the franchisees could not rely on the lack of disclosure to bring a claim against the franchisor. The Court based its logic on two reasons. First, the Court found that the exculpatory clauses (disclaimers) in Item 19 and the integration clauses, acknowledgements and disclaimers in the franchise agreement and related documents that the franchisees signed were adequate to preclude the franchisees from inferring that the company owned stores were profitable. Second, the Court found that there was adequate publicly available information from which the franchisees could determine the profitability of a store.

Item 19 of the UFOC contained disclosures that are commonly found when a franchisor includes an earnings claim (now called a financial performance representation). The Court found that these disclaimers were adequate to preclude a claim of reliance and that the franchisees could therefore not rely on the absence of additional information to infer that any additional information would not be material. Also, in signing the franchise agreement, the franchisees agreed to several acknowledgements, disclaimers, statements of non-reliance and integration provisions. Simultaneously with the signing of the franchise agreement, the franchisees also signed a Closing Acknowledgement that contained acknowledgements and disclaimers similar to those in the franchise agreement.

In addition to the Item 19 disclaimers, several of the franchisees testified that they had used the Item 19 gross sales and “publicly available store expense information” to prepare a “break even revenue point” of the company owned stores. The franchisees then used this information to prepare pro forma analyses to determine profitability at different levels of revenue to determine the revenues that they needed to achieve in order to obtain certain returns on their investments. The Court then found that because there was adequate publicly available information from which a determination of the profitability of the company owned stores could be made, the franchisees could not have relied justifiability on the franchisor’s failure to provide this information.

The franchisor therefore won this round.

Parent Company Profitability

On the claims for failure to disclose the profitability of the parent company, the Court reached a different conclusion. The Court found that the exculpatory clauses were not adequate to preclude a franchisee’s reasonable reliance on the nondisclosure of information on the parent company’s operating history. The exculpatory clauses addressed a franchisee’s non-reliance on any affirmative representations that might be made outside of the UFOC and franchise agreement, but did not address a failure to disclose material information. The Court pointed out that none of the exculpatory clauses addressed non-reliance on undisclosed but material information. Since the exculpatory clauses were not specific enough to cover the failure to disclose material information about the parent company’s profitability, the Court found that the franchisees’ reasonable reliance claim on the nondisclosure was sufficient to move forward.

The franchisees won this round. At least temporarily.

Complying With the FTC Franchise Rule Was Not Dispositive

The Court did not spend a lot of time in reaching the conclusion that fully complying with the FTC Franchise Rule requirements would not insulate the franchisor from liability for claims of nondisclosure of material information. In reaching this conclusion, the Court cited the FTC Franchise Rule statement that the requirements did not “preclude franchisors . . . from giving other nondeceptive information orally, visually, or in separate literature so long as such information is not contradictory to the information in the disclosure document.” The Court further cited the Federal Regulations which provide that the disclosures do not “create a safe harbor for franchisors engaging in otherwise unlawful conduct.”

Conclusion

The old saying “If you can’t say something nice, don’t saying nothing at all,” may satisfy the golden rule, but may not be the best policy to avoid legal liability. . . or does the double negative save you?

Federal Restaurant Labeling Requirements

The Patient Protection and Affordable Care Act is a federal statute that was signed into law on March 23, 2010. Along with the Health Care and Education Reconciliation Act of 2010 (signed into law on March 30, 2010), the Act is the product of the health care reform agenda.

One provision of this Act requires restaurants or similar food establishments that are part of a chain with 20 or more locations (regardless of the ownership of the 20 locations) to disclose, with certain exceptions, nutritional information. The new law requires covered restaurants to display the number of calories contained in standard menu items on the menu listing the item for sale and on menu boards (including drive-thru). This information also must be available in a written form on the premises and the menu listings must indicate that this information is available on premise. Restaurants also must display a succinct statement concerning suggested daily caloric intake, as specified by the Secretary of Health and Human Services by regulation, to enable the public to understand the significance of the provided nutrition information.

Covered restaurants will have to comply with the Act’s labeling provisions when the Food and Drug Administration completes its implementing regulations. The FDA’s proposed regulations must be published by March 20, 2011. The Act required these provisions to be fully implemented by January 1, 2014.

North Carolina Bill Would Amend Business Opportunity Act to Include Franchises

North Carolina has a pending bill, called the North Carolina Franchisee and Business Opportunity Purchasers Protection Act, that would require franchisors to comply with the FTC Franchise Rule.

If passed, franchisors will have to file 2 copies of the required disclosure document with the North Carolina Secretary of State. One of the remedies afforded to franchisees under the bill is the right to void the agreement (in addition to seeking damages) in cases involving untrue or misleading statements, disclosure violations, or other noncompliance. The bill provides for certain exemptions that mirror those in the FTC Franchise Rule and for large franchisors.

A franchisor will have to establish either a surety bond or trust account if the franchisor makes any of the following representations in the pre-sale process: (1) that the prospective franchisee will derive income from the franchise that exceeds the price paid for the franchise; or (2) that the franchisor will refund all or part of the price paid for the franchise, or repurchase any of the products, equipment, supplies or chattels supplied by the franchisor if the franchisee is unsatisfied and pays to the seller an initial, required consideration that exceeds $200. This last provision is troublesome for franchisors that offer to refund some or all of the initial franchise fee if the franchisee fails the initial training program or is unable to locate a suitable site in a timely manner.

House Bill 2036 passed its first reading and was referred to the Committee on Commerce, Small Business, and Entrepreneurship on May 26, 2010.

North Carolina Bill Pending Would Add Reporting Requirement For Franchisors

North Carolina has a bill pending that would require franchisors to report certain information about their North Carolina franchisees, similar to the law that was enacted in New York last year. Under the bill, a covered taxpayer would have to file an annual report by May 1 of each year. The annual report would have to include: the gross sale of each franchise located in North Carolina (as each franchisee reported to the franchisor), the total amount of sale by the franchisor to the franchisee itemized by franchisee, and the income of each franchise located in North Carolina (as each franchisee reported to the franchisor).

As written, the bill is vague on the covered franchisors, referring to them only as “taxpayers,” without any further clarification. Therefore it is unclear on whether a franchisor that does not have to file tax returns in North Carolina would be considered a “taxpayer,” although the drafters of the bill probably intended to include all franchisors that have franchises in North Carolina.

House Bill 2001 passed its first reading and was referred to the Committee on Commerce, Small Business, and Entrepreneurship on May 26, 2010.

New Jersey Expands Franchise Practices Act

New Jersey amended its Franchise Practices Act by expanding the definition of "place of business." This change was effective immediately on signing on January 16, 2010.

The new definition of “place of business” is: a fixed geographical location at which the franchisee displays for sale and sells the franchisor's goods or offers for sale and sells the franchisor's services. Place of business shall not mean an office, a warehouse, a place of storage, a residence or a vehicle, except that with respect to persons who do not make a majority of their sales directly to consumers, "place of business" means a fixed geographical location at which the franchisee displays for sale and sells the franchisor's goods or offers for sale and sells the franchisor's services, or an office or a warehouse from which franchisee personnel visit or call upon customers or from which the franchisor's goods are delivered to customers.

This expanded definition now includes wholesale distribution businesses that deliver their products to their customers, rather than having the customers come to the distributor’s place of business.

Virginia Clarifies Requirement for Current Financial Statements In FDD

Virginia made a change to the Regulations under its Retail Franchising Act, effective July 1, 2010. The new requirement is that the audited financial statements must be current within 120 days of the date of filing for initial or renewal franchise registrations. If the audited financial statements are not current within this time period, the franchisor must include in its FDD the franchisor’s unaudited financial statements that are current within 120 days. The unaudited financial statements must be prepared in accordance with generally accepted accounting practices.

Since many states already have this requirement, the Virginia change should not present any new problems for franchisors desiring to register or renew a registration in Virginia. You simply must remember to include the unaudited statements in your FDD if your audited financial statements are dated more than 120 days before the date you file your initial or renewal registration.