December 2014 Archives

The National Labor Relations Board's General Counsel, Richard Griffin, recently spoke to a group of law students at West Virginia University's College of Law. During the discussion, which was recorded and is available here,

Mr. Griffin offered the students some insight into his decision determining that McDonald's USA, LLC is a "joint employer" of its franchisees' employees.

Mr. Griffin's view is that the standard that has long been applied by the NLRB to evaluate employment in the franchise relationship context is wrong because it does not focus heavily enough on the control that franchisors actually exert over franchisee employees in their day-to-day operations.

Mr. Griffin believes that the level of control exerted by McDonald's over the employees of its franchisees is significant enough to change the character of the relationship, making McDonald's not only a franchisor, but also a "joint employer" of its franchisees' employees.

In particular, during the talk Mr. Griffin focused on the computer and software systems that McDonald's requires each of its franchisees to use. In this computer system, he says, McDonald's is able to monitor all activities at each franchise location on a minute-by-minute basis and uses this data to direct its franchisees when to schedule their employees for work, and when to send their employees home.

This control, which Mr. Griffin says is direct control over employee hours, is enough to make McDonald's a "joint employer" of those employees.

Of course, the franchisor's view is that the direction given by McDonald's to its franchisees is only guidance, which is given to help the franchisee operate its business more efficiently.

The long term effect that General Counsel's decision, which sent shockwaves around the franchise industry, will have on franchising is still unknown, but his comments during the WVU talk do offer a glimmer of hope to franchisors that they can avoid "joint employer" liability by not having McDonald's level of involvement in day-to-day franchisee operations and employee scheduling.

As we move into 2015, most franchisors will be re-evaluating their franchise documents (including their Franchise Disclosure Documents and Franchise Agreements) as part of the annual update, registration, and renewal process.

This is a good time to talk with counsel about ways that those documents can be amended to offer additional elements of protection against being found to be a "joint employer" of franchisees' employees.

If you want to discuss how you may be able to improve your franchise documents to respond to these and other new threats heading into 2015, please feel free to contact me or connect with me on LinkedIn.

My education and experience in crisis avoidance and - if that fails - crisis management began rather early in my now more than 50 year professional practice.

The purpose of this article is to illustrate how the seeds of disaster are planted and grow, slowly at first in many instances and then explosively, and how best to avoid or manage those life threatening events.

The context is a story of three companies' experiences. One probably could not be avoided, as it was the product of the human tendencies that operate as it approaches critical mass and then explodes.

The other two were instances of avoidable mismanagement coupled with refusal to deal with anything that was not openly supportive of the agenda of a limited leader/owner - bullying as we conveniently call it today.

1. Let's deal with the giant company syndrome first.

It was the company's heyday. It led its field in almost everything it attempted. It had more money that just about any enterprise on earth. Its sales were more than the gross national product of several countries combined and its profits were mind boggling.

Department heads worried more that if they failed to go over their budgets the budgets would be reduced the following year. While enjoying an as yet unearned designation as an antitrust specialist, I was the lowest of the low in an enormous group of highly educated experienced people. What I really got to do was observe and learn.

No confidential information will be revealed in this article. Everything here is of public record and very old. Most of the people involved are long since gone to heaven.

In retrospect I think it is probably impossible for normal human beings to remain modest, humble and maintain their essential humanity in the face of so much wealth and power. I am not against wealth and power, but in this instance we are speaking of national level wealth and power - supernormal even for large companies.

Oddly enough, while antitrust enforcers sought and failed to bring it down, it ultimately brought itself down with inbred delusionality.

2. What I quickly learned was that most crises come from management blindness and resulting gross miscalculation.

The notion that one may be possessed of so much power, authority and wealth as to be immune from disastrous consequences is practically always the seed from which the tree of emergencies grows. This company was an extreme example of that, far more so than any other place I have ever been.

What I observed that opened my eyes to the notion that no one is sufficiently powerful to be immune to disaster was a trio of catastrophic instances of management arrogance and of management being oblivious to the opportunities for change in the marketplace.

• The management arrogance incident involved attempting to destroy a critic who had put his finger on a fundamental product weakness.

• No one was to be permitted publicly to suggest that this company was imperfect.

• The corporate braggadocios included such things as boasting that it was four deep in every position - the definition of wastefulness - and that its law department was The Praetorian Guard of the World's Largest Industrial Organization.

You just can't make this kind of stuff up.

The consequence of the incompetent attempt to destroy the critic was the establishment of organized insistence upon better automotive safety and the enactment of laws addressed to that and several other issues on which prior to that moment in history the company had had its own way. The genesis of the plot was laid to the law department.

Oddly enough, at the same time, its most effective potential competitor came out with a revolutionary design named The Ford Mustang that swept the market with excitement. Lee Iacocca really was the smartest man in the room.

Within a very short few years the Japanese, led by Honda, took up where Ford had begun and the era of the giant, powerful, fast, quick, gas guzzling behemoth of an automobile began to fade.

Ultimately, the product of such ingrained arrogance was the failure of the entire company and a federal bailout to try to save the jobs it potentially represented. In such a rarified atmosphere it is probably unrealistic to expect what would seem rational to normal people.

The recent Supreme Court of Canada's discussion the value mediation and the protection of confidential information exchanged during mediation, reminded me of the excellent program several years ago at the ABA Forum.

Mediators Peter Klarfeld, Michael K. Lewis, and Peter Silverman, collectively "KLS", discussed the advantages, disadvantages and benefits of mediation over litigation, for franchise disputes.

By popular vote, their program was selected as one of the best programs at the 32nd Annual Forum on Franchising.

6 Advantages of Mediation over Litigation

KLS argued that there were at least six (6) benefits of mediation over litigation:

2. Informed risk management;

3. Creative solutions;

4. Preservation of relationship;

5. Mutually advantageous, and;

6. high success rate.

Finally, KLS believe that in a number of disputes, parties are more likely to live with their agreed upon settlements than find satisfaction with a Court judgment which may not speak to their business priorities.

4 Benefits Even When Mediation Doesn't Produce a Settlement

They also point to four (4) benefits of mediation even if there is not a settlement: reduced trial preparation, possible future settlement, more tempered appreciation of strength and weakness of case, and an overall reduction in misunderstandings and clarification of priorities.

3 Considerations of When Mediation is Superior

But mediation is not without its risks. Some parties use the mediation for pure delay, and there are times in which one party needs to make a statement through the trial process that certain behaviors will not be tolerated.

In sum, mediation is likely to be more effective than litigation if:

a) the parties wish to preserve their relationship, what KLS called "in-term disputes",

b) the dispute depends on business judgments rather than simple contractual analysis, and;

c) there is either a unilateral or mutual misunderstanding about positions which a mediator can reasonably dissolve.

Creating the Mediation Process in Advance

No mediation process is constructed from thin air. People don't simply show up at the mediator's location and sit around the table trading offers back and forth.

KLS presented a thoughtful list of 4 issues to consider when drafting a mediation agreement for the franchise system.

1. Should the mediation be mandatory or not?

The stratetic point I really liked was from Peter Silverman. He pointed out one big advantage for the franchisor to mandatory mediation:

Settlements reached through mediation need not be disclosed under the new Section 3 of the FDD. Even confidential settlements reached as the result of litigation or arbitration have to have material terms disclosed.

This disclosure is not required for mediated settlements. This is a benefit also for franchisees as they are not obliged, even in a mandatory mediation process, to agree to a settlement.

2. How wide should the mediation clause be?

Should a specific mediation service provider be selected before hand? One difficult question is whether the mediator should have any specific franchise or industry experience.

Extensive franchise experience can be seen as a bias by either party and may result in the mediator simply substituting his or her judgment for the group's collective judgment.

3. Time, limitation period tolling, and costs should be dealt with in the mediation provision.

Open Questions

KLS raised other issues to consider, but one that they don't talk about is the possible effect of the Fair Arbitration Act on the availability and use of mediation. Is franchising moving away from both litigation and arbitration? Will the passage of the Fair Arbitration Act make mediation a more attractive option for franchisors?

In order to offer or sell franchises in certain states with franchise disclosure laws, the franchisor must have effective registrations or notices in those states.

A state law may cover the offer or sale of a franchise if the prospect resides in the state, if the franchised business will be fully or partially operated in the state, or if any communications about the franchise offer or sale are made in, into or from the state.

State laws vary in terms of when they apply, so if any state with franchise disclosure laws is involved in any manner, you should check with the franchisor's lawyer or compliance manager about whether that state's law applies.

If the law applies and the franchisor does not have an effective registration or notice, you may be prohibited from offering or selling the franchise until after the franchisor obtains a registration or files a notice.

If the franchisor is registered with a state, the state and the effective date of the registration should be noted at the bottom of, or immediately after, the state cover page in the FDD. No effective date for a state with a state law likely means that the franchisor will need to obtain a registration from that state before you make an offer or sale covered by the law.

An old effective date likely means that the franchisor's FDD or registration will need to be updated before you make an offer or sale covered by the law.

If you have any question about a state, check with the franchisor's lawyer or compliance manager.

No effective date, or an effective date that is not within the previous 12-month period, for a notice state such as Florida, Indiana, Kentucky, Michigan, Nebraska, Texas or Utah, may not be a problem, since effective dates for those states are not required to be in the FDD, and since some of those states permit notices to remain effective indefinitely unless specific changes occur, such as address changes.

(This was the second post in a series of 11 posts on making compliant franchise sales. If you need to know more about these exact provisions, please ask for a copy of the Franchise Seller's Handbook. We will get one right out to you.)

I wrote this in 2013, and it seems appropriate to revisit the topic, today.

Following on the heels of similar strikes in recent weeks in New York and Chicago, hundreds of St. Louis area fast food restaurant employees walked off the job May 9, which affected more than 30 area businesses including a number of fast food franchise businesses. The strikes spread to Detroit on May 10.

These employees joined a growing wave of protests over wages and other terms and conditions of employment in what is one of the fastest-growing segments in the U.S. labor market.

You may even remember similar actions by Wal-Mart employees on Black Friday in 2012.

Although strikes are often associated with labor unions, the workers involved in these impromptu strikes are not unionized.

Instead, the efforts are being supported by a coalition of organizations, including labor groups, nominally coined "alt-labor," that are not legally unions.

But this does not mean that their activities are not protected by U.S. labor laws, specifically the National Labor Relations Act ("NLRA"). Enacted in 1935, the NLRA protects the right of workers to join together to bargain collectively with their employer and engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.

The NLRA also protects the right of workers to refrain from any and all such activities.

Among other things, employees covered by the NLRA (which includes most, but not all, private sector employees) have the right to walk out or strike, even if they are not in a union. Many employers who are unfamiliar with unions or do not regularly deal with unionized workforces, can sometimes fall into a trap for the unwary by disciplining or discharging employees who are engaged in protected, concerted activities such as a strike.

Even though failing to report for work or even walking out during the middle of a shift impacts an employer's operations and may, in fact, violate an attendance policy, depending on the circumstances, an employer may actually be prohibited from disciplining them or questioning them about such protected activities.

In some cases, however, striking and picketing may not be protected. One such circumstance involves what is known as "recognitional picketing." This occurs when employees, and perhaps non-employees, picket an employer with the goal of obtaining recognition. When employees (and non-employees) picketed Wal-Mart on Black Friday, Wal-Mart filed a charge with the National Labor Relations Board. This charge was ultimately resolved when the union involved agreed to cease organizing the employees.

For franchisors and franchisees, an ounce of prevention is truly worth a pound of cure. To lawfully confront the potential for such activities, wise and savvy employers need to train their supervisors and managers now, before any such activity begins. Trained managers and supervisors not only have the tools to respond effectively and lawfully should such an incident occur, but are vital to warding off such activities in the first place.

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There is a general feeling of dissatisfaction with both litigation and arbitration in the franchise community.

Rupert Barkoff, a "Dean" of Franchising, puts it this way:

Litigation is a lousy way to resolve disputes, and arbitration is, in my opinion, not much better.

We can try to give meaning to phrases like "good faith" and "unconscionability," but in the end all we accomplish is to create more legal battle fields on which the parties can feud.

Michael K. Lewis is an Adjunct Faculty member for the Harvard Program of Instruction for Lawyers Mediation Workshop and his colleague, Robert H. Mnookin, in his book "Beyond Winning" has an explanation for why litigation is lousy, costly and unsatisfactory:

In litigation it can sometimes seem as if each side is frantically preparing for a trial that will never take place.

One side drafts a complaint, files motions, takes depositions, goes through document production, prepares for trial --all with the knowledge that it will probably settle the case.

And each side knows this.

It is like an arms race: each side builds up an arsenal, hoping never to use it.

Each needs the arsenal to signal a readiness for battle. But each would also benefit if both sides could agree to reduce the weapons stockpile. The problem is that neither side wants to disarm first.

How can we move beyond the limitations of litigation or arbitration as the sole method of solving franchise disputes?

On November 25, 2014, the City of San Francisco unanimously passed a new law called the "Retail Workers Bill of Rights." If it is signed by Mayor Edwin Lee, it would go into effect next summer.

Among other things, the law would require retailers to give schedules to workers at least two weeks in advance, and penalize companies for noncompliance. Further, if a company is sold, workers with at least six months of tenure would be guaranteed work with the new owner for at least 90 days.

The problem with the law is, like the minimum wage laws in Seattle and Chicago, it disproportionately targets franchise companies. The law would apply to any retailer with at least 20 locations worldwide that also have at least 20 workers. This would put independent franchise owners at a disadvantage vis-a-vis other small businesses, because even a franchisee with a single location could be considered to fall under the law's criteria if the franchisee's entire franchise system counts more than 20 locations, worldwide. This is fundamentally unfair to franchises.

To illustrate the point: consider mom-and-pop business owners, the Smiths, who own a single Quizno's sub shop in San Francisco. The Smiths compete with the Joneses, who own an independent (non-franchise) sub shop one block away from the Smiths. The Smiths, whose annual sales are about the same as the Joneses (but also have to pay royalty, marketing, and other fees to their franchisor), would be required to comply with the new law because they are part of a large franchise system, while the Joneses are free to continue operating their business as usual. This inequity makes it difficult for franchise operators to compete.

The International Franchise Association has responded to this inherent inequity by writing a letter (available here) to Mayor Lee urging him to veto the new law. We will follow this story as it develops.