Franchise 101: Joint Employer? Check √; and Braking the Competing Business

Franchisor 101: Joint Employer? Check √

A Maryland federal district court denied a restaurant franchisor’s motion to dismiss, concluding that a restaurant manager at a franchised location alleged sufficient facts to support a finding that the franchisor is a joint employer with its franchisee.

Plaintiff, a former district manager of a Checkers Drive-in Restaurant franchise, sued the franchisee for employment discrimination, hostile work environment and wrongful termination, among other claims, after the franchisee terminated plaintiff’s employment while on medical leave. Plaintiff also named franchisor, Checkers Drive-In Restaurants, Inc. as a defendant, alleging joint employment. Checkers filed a motion to dismiss on grounds that plaintiff failed to state sufficient facts to establish Checkers as a joint employer.

The court applied a multi-factor test to determine whether plaintiff sufficiently alleged Checkers was a joint employer, noting that no one factor is determinative. The three most important factors are the authority to hire and fire; day-to-day supervision, including employee discipline; and whether the putative employer provides the equipment used.

The court determined the fact allegations, if taken as true, were sufficient to support the three factors identified. Plaintiff plausibly alleged facts supporting an inference that Checkers had the authority to hire and fire him since Checkers allegedly had the authority to approve and disapprove the hiring of manager-level employees. Plaintiff asserted sufficient facts that Checkers exercised control over his day-to-day responsibilities by pointing to Checkers’ training of manager-level employees and Checkers’ oversight of franchisee’s customer and employee complaints’ hotline. Checkers also allegedly had the authority to set guidelines and working conditions for franchisee’s employees.

Finally, the court held plaintiff sufficiently alleged Checkers furnished equipment used by franchisee employees pursuant to the franchise agreement and “Team Member Handbook,” and that Checkers allegedly controlled plaintiff’s expected compliance with Checkers’ mandatory standards, including standards related to equipment at the franchised location.

In denying Checkers’ motion to dismiss, the court noted that cases evaluating franchise relationships for joint employment routinely concluded that a franchisor’s expansive control over a franchisee does not create a joint employment relationship on its own, but the plaintiff in this case alleged sufficient facts that if proven, establish essential control factors that would justify joint employer.

Franchisors should evaluate franchise agreement terms, operational standards, and their actual oversight of franchisees that could be viewed as exceeding a franchisor’s “expected” control. While the law surrounding joint employer in the franchise relationship remains in flux, if the franchisor’s exertion of control over the franchisee appears more than necessary to protect trademarks and trade secrets, an employee will likely be able to plead joint employer, precluding dismissal at the pleadings stage.

Whitfield v. R&R Enter., LLC, No. GLS-22-2957, 2024 U.S. Dist. LEXIS 54574 (D. Md. Mar. 27, 2024)

Franchisee 101: Braking The Competing Business

A Massachusetts federal district court enforced a non-compete provision in a franchise agreement to enjoin former franchisees from operating a different branded automotive business at the same location as the former franchise.

Former franchisees of SpeeDee Oil Change & Auto Service executed a franchise agreement that contained a non-compete provision. They were restricted from operating a competing automotive service business for a period of two years after termination within 50 miles of the franchise location.

Defendants informed SpeeDee they intended to terminate the franchise agreement, effective January 1, 2024. Before giving notice, however, the franchisees began operating under a different brand. After termination, defendants posted on social media: “We have left the franchise world…. We need help if you are a current customer please leave us a review to help us get this page up….” SpeeDee made a demand that the franchisees cease and desist. The demand went unanswered.

On February 1, 2024, SpeeDee filed a lawsuit asserting claims for breach of contract, injunctive relief and misappropriation of trade secrets. SpeeDee moved for, and the court granted, a preliminary injunction against defendants, enforcing the franchise agreement’s non-compete provision and enjoining them from operations until December 21, 2025.

The court held that SpeeDee was likely to succeed on the merits, because in Massachusetts, a covenant not to compete is enforceable if necessary to protect a legitimate business interest, is reasonably limited in time and space, and in accordance with the public interest. SpeeDee identified the existence of trade secrets and goodwill of its customer base as legitimate business interests needing protection. The former franchisees’ continued operations under a different brand did not negate their use of SpeeDee’s confidential operating manuals, business and mechanic training materials and customer lists, because it was apparent they continued to derive a benefit from those materials. The court also found the geographic and temporal scope of the non-compete restriction was reasonable.

The court found SpeeDee would suffer irreparable harm absent a preliminary injunction, because SpeedDee demonstrated likelihood of success on a claim for misappropriation of trade secrets, where irreparable injury is presumed. Additionally, the former franchisees’ continued operations in the exact location of the prior franchised location would cause SpeeDee irreparable harm because customers are likely to confuse defendants’ operations for a SpeeDee franchise.

The balance of hardships weighed in SpeeDee’s favor, though the court acknowledged hardship to the former franchisees as well. But the hardship of being unable earn a living outside the automotive industry, was found to be a “predictable consequence of their breach and misconduct.” SpeeDee, on the other hand, would suffer hardship, including losing customers and other franchisees assuming they can breach their franchise agreements without consequence.

Franchisees intent on competing with their franchisor during or after the franchise term should consult franchise counsel to understand and evaluate the circumstances surrounding establishment of the business, any restrictive covenants in the franchise agreement, and applicable law to assess risks and likelihood of enforcement if the franchisee does not comply.

SpeeDee Worldwide, LLC v. Toppa, No. 24-CV-10274, 2024 U.S. Dist. LEXIS 65392 (D. Mass. Apr. 10, 2024)