January 2013 Archives

After half a season lost to a lockout, the National Hockey League (NHL) will resume play in the latter half of January. To say that this has hurt the league is an understatement. This comes after losing the entirety of the 2004-2005 season for the same reason: millionaires squabbling with billionaires.

What does this mean for the area's local team, the Detroit Red Wings, and the NHL as a whole?

Simply put, the NHL has an image problem. To call the league a niche sport at this point would be generous. The league likes to bill itself as one of the "Four Major Leagues" in the United States; however, the reality is quite different. In terms of popularity, the NHL comes in 7^th or 8^th place, behind the likes of the NFL, NBA, MLB, College Football and Basketball, NASCAR and even Major League Soccer.

After the 2004-2005 lockout, TV ratings and revenues struggled to come back. Teams were playing in half-empty arenas, and did so for years. Finally, in 2010, the NHL started to make significant progress expanding its fan base and popularity after an exciting tournament at the 2010 Winter Olympic Games in Vancouver.

The 2012 lockout was detrimental to this progress. The NHL has a small fan base as it is; however, the fans that do spend their hard-earned dollars to attend games and buy merchandise love the sport with a capital L. The second work stoppage in eight years has crushed the enthusiasm of even these die-hards. The NHL is going to have to work overtime, and pull out every marketing trick it can think of to lure not only new fans to games, but also ones that have followed the sport for decades; they've simply had enough.

On a local level, things are not quite so bleak as they are nationally; this is an area that bills itself as Hockeytown, after all. For the better part of a decade, the Red Wings had been the hottest ticket in town, and--no doubt--are still exceedingly popular; it's a team with a storied history that goes back nearly a century. There is also the added benefit of being in close vicinity to Canada, meaning playing hockey in the winter is a right of passage for many.

But this lockout has been a rude awakening: the downturn in the economy and the rise of the Detroit Lions had already begun to cut into ticket sales. Now, with even die-hard fans claiming to be fed up, the Red Wings' marketing department has some work to do. They not only need to get new fans, but old fans as well to come through the turnstiles.

This work stoppage has greatly damaged the reputation of a great sport for the second time in less than a decade. It is going to take a lot of time, and plenty of ad dollars to restore the National Hockey League to its old greatness.

In Awuah, et al. v. Coverall North America, Inc., No. 12-1301 (1st Cir. Dec. 27, 2012), the First Circuit reversed a district court's ruling and ordered arbitration of workplace disputes for certain franchisees even though they had not signed, received, or reviewed an arbitration agreement. The First Circuit found that the district court had erroneously adopted a special heightened notice requirement for arbitration clauses that does not exist and, even if Massachusetts law had imposed such a notice requirement, the FAA would preempt it. Id. at 4. The decision is important for employers in the context of workplace arbitration agreements.

The Facts Of The Case

Coverall North America, Inc. ("Coverall") contracts to provide commercial janitorial cleaning services to building owners or operators, and its "franchisees" do the cleaning. In their complaint, the franchisees asserted a variety of state law claims against Coverall including breach of contract, misrepresentation, deceptive and unfair business practices, misclassification as independent contractors, and failure to pay the wages due to them. Many (but not all) of the franchisees signed Franchise Agreements with Coverall providing that, with certain exceptions not implicated here, "all controversies, disputes or claims between Coverall . . . and Franchisee . . . shall be submitted promptly for arbitration." Id. The district court readily enforced the arbitration agreements in those instances where a franchisee signed a Franchise Agreement containing an arbitration clause. Id. at 7. 

However, the Franchise Agreements also permitted franchisees to assign the Agreement to a person ('the assignee') meeting the qualifications established by Coverall for granting new franchises. Thirty-one  of the franchisees, including the sixteen appellees, did not enter into the Franchise Agreement with Coverall but rather became Coverall franchisees either by signing Consent to Transfer Agreements ("Transfer Agreements") and Guaranties to Coverall Janitorial Franchise Agreements ("Guaranties"), or by signing only the latter Guaranties. Id. at 3-6. The sixteen appellees at issue in the appeal never even received a copy of the Franchise Agreement, but did execute the Transfer Agreements and/or the Guaranties, both of which incorporated the Franchise Agreement by reference.

The Underlying District Court Ruling

On September 22, 2011, the district court refused to enforce the arbitration agreement for certain of the franchisees and certified a class consisting of "all individuals who have owned a Coverall franchise and performed work for Coverall customers in Massachusetts at any time since February 15, 2004, who have not signed an arbitration agreement or had their claims previously adjudicated." Id. at *7 (emphasis added) (citing Awuah II, 843 F. Supp. 2d at 174). On November 29, 2011, plaintiffs filed a motion for a ruling on the scope of the class, arguing that "those who purchased their Coverall franchises through certain 'Consent to Transfer' agreements[ ] that do not contain arbitration clauses" should be added to the class. Id. The district court found that some of the transferee plaintiffs had received copies of the Franchise Agreement and therefore had notice of the arbitration clause. Id. at 8. Thus, the district court's resolution of whether or not to order franchisees to arbitrate was based on whether they had received copies of the Franchise Agreement containing the arbitration clause.

With respect to the sixteen franchisees who had not received copies of the Franchise Agreement, the district court concluded that "Coverall did not give the Transferees information sufficient to put a reasonably prudent employee on adequate notice of the agreement to arbitrate." Id. at 9. Thus, the district court "expanded the class to include these new plaintiffs who had not been given copies of the Franchise Agreement, [although it was] referred to in the documents they did receive." Id. The district court also held that a franchisee could not be bound to an arbitration clause if he does not have notice of it," and that "Coverall . . . has not produced any evidence that the transferees were ever themselves shown the transferors' franchise agreements or that they were in any other way informed about the existence of an arbitration clause." Id. at 8. Coverall argued that "[p]laintiffs' assertion that some specific level of notice is required before the Transferee-Owners may be bound by their agreements to arbitrate is contrary to settled law." Id.

The First Circuit's Decision

On appeal, the First Circuit agreed with Coverall, holding that while the Transfer Agreements did not all use the traditional language of "incorporating by reference" the arbitration clause of the Franchise Agreement, no such magic terms are required and other language in the agreements clearly communicated the purpose of incorporating the arbitration clause. Id. at 13. These agreements provided that the transferees "succeed to all of Franchisee's rights and obligations under Franchisee's Janitorial Franchise Agreement," or "become liable with the Franchisee for all of the obligations imposed by the Janitorial Franchise Agreement." Id. (internal quotation marks omitted). Moreover, the First Circuit held that the Transfer Agreements were not the only pertinent documents executed by the parties and other Transfer Agreements incorporated the responsibilities, duties, and obligations with respect to arbitration.

Implications For Employers

This case is an interesting one for employers because while it is always preferable to have an employee execute the arbitration agreement itself, this ruling implies that an employer may enforce an arbitration agreement where the employer has incorporated it by reference into another document it has provided to the employee.

If you have ever eaten in a restaurant, you are likely to have seen an entire menu or specific menu items that do not list prices. And if you have ever been surprised by the prices you were charged for the unpriced items, you are not alone. That practice might come to an end if a vexed and crusading Houlihan's customer gets his way.

How Things Went Down

In a lawsuit currently pending in the New Jersey Federal District Court, the customer claimed he visited a Houlihan's restaurant in Brick, New Jersey and ordered several beers and mixed drinks from the menu. No prices were listed for the drinks or beers. On receiving the tab and after consuming the beverages, the customer learned that the prices far exceeded his expectations. Without objecting, the customer paid the tab and left.

Soon after that happening, the customer and his attorney filed a class action lawsuit against Houlihan's Restaurant, or the franchisor company ("Houlihan's"). The complaint stated that Houlihan's breached its contract with the customer and was unjustly enriched by the excessive charges for the drinks. See Pauly v. Houlihan's Restaurants, Inc., 2012 WL 6652754 (Dec. 20, 2012).

Houlihan's: the Franchisee Did It and Why We are Not at Fault!

The Houlihan's franchisor objected to the lawsuit and advanced several reasons for it being tossed. It claimed that as the franchisor, it had no dealings with the customer; that the franchisee, not it, overcharged the customer and thus it was not a party to the alleged contract between the customer and the franchisee; that it had no control over the franchisee's menu pricings; that the customer did not say what contract term it breached; and that the customer waived his right to sue because he accepted the prices when he paid the beverage tab without objection.

Customer's Complaint Lives to See Another Day

Over Houlihan's objections, the court refused to toss the lawsuit and allowed it to proceed. The court said the customer's complaint had alleged sufficient facts that, if true, entitled him to recover against Houlihan's.

The customer alleged that Houlihan's and the franchisee had a franchise relationship through which Houlihan's exerted control over the franchisee's menu items and shared in the franchisee's profits.

The customer also alleged that Houlihan's, through its franchisee, should have charged him a reasonable--as opposed to the excessive--price for the beverages since Houlihan's, the franchisee, and the menu remained silent about the price of the beverages.

The court also agreed that the customer had not waived his right to sue Houlihan's by paying the tab. The customer would have faced criminal charges if he had not paid since New Jersey imposes criminal penalties against diners who eat and dash without paying their tabs. Finally, the court agreed that--if the customer assertions are true--unjust enrichment would result if Houlihan's and its franchisee were allowed to keep the excessive charges from the beverage sale.

The Federal District Court's ruling in this case means the customer's complaint was not deficient in making its case for relief against Houlihan's. It does not mean the customer will win the case. Indeed, the customer will still need to prove that the facts in the complaint are true and has merit.

A Few Take-Aways

It is too early to glean a reckoning from this episode, but its very existence raises issues for businesses of all types. Do no-price menus make sense? And, although franchisors rightly shy from recommending prices for fear of anti-trust offenses and other legal entanglements, should they impose a "reasonable price" requirement across the franchise system?

No matter the ultimate outcome, this case is a reminder that each time a consumer enters a restaurant and consumes a meal or a drink, a contract is formed, and that a reasonable price is assumed if prices are absent from the menu or not discussed.

Let the attorneys of Johns Marino LLP help with your franchise and business needs.

On November 9, 2012, a federal district court in the State of Washington certified a class action against Papa John's pizza and some of its franchisees, with the potential for enormous damages, for sending unsolicited text advertising messages.

The case involves alleged violations of the federal Telephone Consumer Protection Act ("TCPA") based on texts sent to customers by Papa John's franchisees. It is significant because, among other things, it threatens Papa John's, a franchisor, with very significant potential damages -- direct or vicarious -- for the acts of franchisees.

The decision also vividly reminds all businesses that the TCPA applies to unsolicited text messages just as it does to unwelcome faxes.

Papa John's International, Inc. and Papa John's USA (collectively, "Papa John's"), enter into agreements with independent franchisees, who then own and operate Papa John's restaurants.

As franchisor, Papa John's imposes certain requirements; however, the franchisees generally control the operations of their own restaurants, including advertising.

But Papa John's employs Franchise Business Directors ("FBDs") to work with and assist the franchisees. Papa John's asserted that neither it nor the FBDs controlled the franchised businesses and, specifically, they had no control over advertising. Rather, the franchisees make all marketing decisions on their own.

The text message advertising program was offered and run by a third-party marketer, OnTime4U ("OnTime"), also a defendant. OnTime told the Papa John's franchisees that it was legal for them to send text message advertisements to their customers, without the customers' express consent, because of an existing business relationship.

Franchisees who signed up for the program provided OnTime with customer telephone numbers, derived from their point-of-sale system database of those who had bought pizza from them.

The POS System is a proprietary data system mandated for use by Papa John's. OnTime scrubbed the land lines and sent text advertisements to the remaining cell phone numbers, offering discount codes and soliciting the purchase of Papa John's products. 

The plaintiff sued Papa John's, the franchisor, asserting that certain of its franchisees and OnTime violated the TCPA by causing text messages advertising pizza to be sent to her cell phone without obtaining her prior consent. The plaintiff claimed Papa John's was also liable for any TCPA violations because of its alleged involvement in the marketing campaign.

Papa John's denied it had any involvement with OnTime or the text message advertising campaign. It denied having any contract with OnTime, and thus asserted that the plaintiff's injury could not be fairly traced to it. Plaintiff alleged, however, that Papa John's had directed, encouraged and/or authorized its franchisees to use OnTime.

In granting certification of a class action, and refusing to dismiss Papa John's from the case, the court found sufficient evidence to support the plaintiff's allegations, including testimony and emails suggesting that Papa John's, through its FBDs, had encouraged franchisees to try OnTime's text marketing service.

The court also found evidence that Papa John's had allowed OnTime to promote its services to its franchisees at a Papa John's "Operators Summit." Based on that information, the court refused to dismiss Papa John's at this preliminary stage.

Importantly, we note that the court did not decide the case on the merits, but simply allowed it to proceed as a class action on the claim of TCPA violations.

However, while Papa John's may appeal, the decision presents significant risks to Papa John's.

The TCPA enables a private litigant to recover actual damages or statutory damages of up to $500 per violation. 47 U.S.C. § 227(b)(3). The plaintiff alleges that franchisees provided OnTime with more than 68,000 phone numbers, and the case potentially involves thousands of calls; accordingly, potential damages total well into the millions.

There are multiple lessons to be drawn from the case:

1. Know the rules about text messaging and any form of unsolicited telephone contact. The TCPA prohibits making calls to any cellular telephone number using an automatic telephone dialing system, with only minor exceptions (emergencies and calls made with the customer's express prior consent). 47 U.S.C. § 227(b)(1)(A). Multiple courts have ruled that text messages are covered, and the penalties, as noted, are significant: as much as $500 for each call.
   
   
2. Use caution to avoid taking on liability for the acts of your franchisees. It is too early to know whether Papa John's limited involvement will be sufficient to hold it liable, but even limited involvement in franchisee advertising, or other activities, may be sufficient for a court to find liability. It is alarming that OnTime's presence at Papa John's franchise convention promoting its advertising services was considered evidence that Papa John's controlled the text advertising and could be liable for OnTime's apparent advertising mistake. Also alarming is that the court cited local business development managers encouraging email to franchisees to try OnTime's services as support for Papa John's alleged control over the actual advertising.
   
   
3. Be wary of legal advice from third-party vendors, particularly those who stand to profit from your business. Here, according to the court's decision, OnTime reportedly told Papa John's franchisees that it was legal to send texts without express customer consent in light of the pre-existing restaurant/customer relationship. This issue is in dispute, and the risk of a contrary finding is significant.
   
   
4. If you are sued for an advertising violation, check your insurance policies for potential coverage. Legal fees can be enormous in such cases, but Commercial General Liability policies typically provide coverage for certain "personal and advertising injury" offenses, including the cost of defense. As always, coverage will depend on the specific policy language.

When in doubt, call us with your questions regarding advertising programs and best practices. The case is Maria Agne et al. v. Papa John's International et al, 

Case No. C10-1139-JCC (U.S. District Court for the Western District of Washington).

For more details on this case, please contact Greg Everts at (608) 283-2460 / [email protected], David Beyer at (813) 387-0264 / [email protected] or your Quarles & Brady attorney.