March 2013 Archives

Last week, the International Franchise Association's Franchise Congress conducted a number of meetings with lawmakers in Massachusetts to discuss legislation that would clearly state that franchisees are independent contractors, and not employees.

If adopted, the law would address the problem that manifested itself in Massachusetts two years ago, when the United States District Court for Massachusetts caused shockwaves through the franchise world when he called franchising a "modified Ponzi scheme." 

In that case (Awuah v. Coverall North America), which I discussed in more detail in my blog posts here, here, and here, the Court found that the franchisees of Coverall (a janitorial service company) were employees, and not independent contractors.  

As the law currently exists under the Massachusetts Independent Contractor Act (the "Act"), an individual performing a service is considered an employee unless:

1. the individual is free from control and direction in connection with the performance of a service;
2. the individual performs a service that is outside the usual course of the employer's business; and
3. the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The court in Awuah found that the Coverall franchisees were not independent contractors under this test because the second prong of the test was not met, noting that "franchising is not in itself a business, rather a company is in the business of selling goods or services and uses the franchise model as a means of distributing the goods or services to the final end user without acquiring significant distribution costs."  

To address the problem, the IFA seeks legislation in Massachusetts that would clarify that franchisees are independent contractors, and not employees.  The IFA expects that the Massachusetts legislature will hold hearings on the proposed legislation within the next few months.

Last month, the State of California filed its first enforcement action under its privacy laws against Delta Air Lines, seeking potentially millions of dollars in fines. Under California's consumer privacy law, all parties that collect personal information from California residents are required to include a privacy notice on their websites and mobile applications.

This law applies to all companies - not just those based in California. Failure to comply with California's privacy notice requirement carries a fine of up to $2,500 per violation.  

Although Delta included a compliant privacy policy on its website, California alleges the airline did not state that the policy covered its "Fly Delta" mobile application nor did it include access to the policy on the app.

This case could signal increased scrutiny and regulatory enforcement by the State of California (and possibly other governmental authorities) against large and small companies that fail to comply with consumer privacy notice requirements.

It also serves as a good reminder for website and mobile app owners, who collect personal information, to:

• Ensure that they have a privacy policy that complies with both federal and state law.
• Verify that the manner in which the privacy policy is posted complies with federal and state law.
• Confirm that the privacy policy applies to its mobile applications and, if possible, that it is accessible from the mobile applications.
• Confirm that the privacy policy reflects the actual practices of the company.
• Respond promptly to any notice received from a governmental authority regarding potential violations.

This filing reminds franchise companies of the importance of ensuring that your website and mobile apps include access for consumers to your privacy policy. 

If you are a franchisor or other company and would like any assistance in reviewing your website, mobile applications and related privacy policy to determine whether they satisfy legislative requirements, please feel free to contact Armstrong Teasdale attorneys Joan Archer, Jennifer Byrne, or Tiffany Schwartz.

Nothing lasts forever. That includes the right to sue for franchise disclosure violations. If a franchisor does not comply with franchise disclosure laws, the franchisee has only a finite time to file a complaint.

This is referred to as the statute of limitation in the legal world. The statute of the limitations is the set period of time that claim must be filed. If the time period the complaining party has lapses, they cannot sue. There may be no remedy. No liability. No recovery - even for a great case.

So goes the case of Stocco v. Gemological Institute of America, Inc., Gemological Institute". Frederick Stocco and Kathleen Stocco, collectively "Stoccos" entered into a license agreement with the Gemological Institute in 2007. The license agreement was a franchise to be operated in California. In 2012, the Stoccos sued Gemological Institute. In one count, the Stoccos alleged Gemological Institute violated California franchise disclosure laws.

California's disclosure law states:

No action shall be maintained to enforce any liability created ..... unless brought before ..... [4] four years after .........the violation, [or] the expiration of [1] one year after the discovery........

That means the Stoccos could not claim a violation of the California franchise disclosure laws past 4 years. Do the math. The violation occurred in 2007 and the Stoccos did not bring their compliant until 2012. That is 5 years. The court disregarded the discovery issue. Four years was absolute. The Stoccos did not bring the claim within the 4 year window, the claim was dismissed!

Now, that is not the end of the story. The Stoccos had numerous other claims against Gemological Institute. So, don't assume a franchisor is off the hook after 4 years. In this case there were 5 other claims against the franchisor that will have to be defended.

Business Take Away: Disclosure violations have a finite life, but there are other counts to consider.

If you have an issue regarding a franchise disclosure violation, we want to hear about it. Contact us to discuss your specific case!