The recent case of Echo, Inc. v. Timberland Machines & Irrigation, Inc. (7th Cir. October 25, 2011, CCH Business Franchise Guide ¶14,714) evolved from the termination of a dealer by a supplier and the subsequent appointment of another. But the case is almost a compendium of franchise litigation issues.
Both federal district court and the Seventh Circuit Court of Appeals:
(1) Barred the apparently quite mundane testimony by the business owner about adjustments to financial statements as constituting “expert testimony,” even though the man was testifying about his own financial statements;
(2) Upheld prior decisions regarding the definition of “substantial association” under the Connecticut Franchise Act (i.e., that the franchisee must receive more than 50% of its revenues from the franchised product to be eligible for the CFA’s protection);
(3) Ruled that a subsequent distributor cannot tortiously interfere with a contract that has already been terminated; and
(4) Required that testimony concerning certain accounting adjustments be provided by an expert rather than the company’s president (a lay witness).
Ultimately, the decision was that without providing “admissible evidence” to meet the 50% of revenues threshold, all the alleged franchisee’s claims under the CFA and other claims that depended on it were dismissed.
Is a Franchisee an Employee or an Independent Contractor?
The Ninth Circuit Court of Appeals recently reversed a federal district court decision holding it lacked jurisdiction to decide whether drivers for a franchisor of airport passenger shuttle businesses were employees or independent contractors under California law. (Kairy v. SuperShuttle Int’l, 9th Cir., November 3, 2011, CCH Business Franchise Guide ¶14,707)
The appellate court rejected the district court’s ruling ( CCH Business Franchise Guide ¶14,288) that exercising such jurisdiction would hinder or interfere with the California Public Utilities Commission’s exercise of regulatory authority over the relationship between the drivers and the franchisor. The case was remanded.
The issue also resonates with disputes over vicarious liability. (See, e.g., Barak v. Chen, Appellate Division, Second Department, September 13, 2011, 2011 NY Slip Op 06466)
Also, in Jason Robert’s, Inc. v. Administrator Unemployment Compensation, (Conn. App. Ct. April 12, 2011, CCH Business Franchise Guide ¶14,577) after losing throughout the unemployment compensation administrative process on the issue of whether a concrete artisan who had been an employee and then became a licensed dealer was still an employee for purposes of unemployment insurance, the dealer filed a court proceeding. It lost again and then brought an appeal arguing that, in fact, the relationship was a “franchise” under the Connecticut Franchise Act and that, therefore, the relationship was exempt from the “ABC test” to determine whether or not the worker was an “employee.”
The ABC test “is conjunctive; failure to satisfy any one of the prongs will render the enterprise subject to the act …. Under the ABC test, an individual will not be considered an employee if: [A] such individual has been and will continue to be free from control and direction in connection with the performance of such service, both under his contract for the performance of service and in fact; and [B] such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and [C] such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed…” (Citation omitted; emphasis in original).
The court did not agree, saying:
“Specifically, the plaintiff argues that a finding that a franchise agreement exists between the parties exempts the relationship from the purview of the act. The plaintiff neither cites, nor does our research reveal, any legal support for this argument. On the basis of our review of the act, we find nothing that elucidates the question of whether the existence of a franchise agreement precludes application of the ABC test.”
Attorneys’ Fees: Who Is the Prevailing Party?
Frequently, the fee-shifting language used in franchise agreements and statutes says that the loser shall pay the “prevailing party’s” attorneys' fees and costs. However, often there is an issue as to who is the “prevailing party.” A party that only succeeds on an interim basis may not be considered to have prevailed. A recent example of this can be found in Kaeser Compressors, Inc. v. Compressor & Pump Repair Services, Inc. (E.D. Wis. September 2, 2011, CCH Business Franchise Guide ¶14,674), where a distributor of industrial compressors—which had prevailed on a manufacturer’s motion for a declaratory judgment brought to ensure that it would not violate the Wisconsin Fair Dealership Law (WFDL) by terminating the distributor without “good cause”—was not entitled to an award of attorneys’ fees.
The WFDL provided such payments to a dealer who sued a grantor successfully but by its plain terms, only if the grantor violated the WFDL. Since the manufacturer did not violate the WFDL, the attorneys’ fee provision did not apply.
Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.