the awuah case: bellwether or outlier?

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The Awuah Case: Bellwether orOutlier?

Implications of new case may pose potential risks tofranchisors across the board

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Your Hosts

Gregg A. RubensteinPartner

Franchise & DistributionLabor & EmploymentLitigation & Dispute

Resolution

Diana VilmenayAssociate

FranchisingLitigation & Dispute

Resolution

Arthur L. PressmanPartner

Franchising & DistributionIntellectual PropertyLitigation & Dispute

Resolution

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CLE Information

• An attendance CLE verification code will be announced at the end ofthe presentation. Please make a note of it.

• CLE documents are downloadable from the Adobe Connect documentpod on your screen.

• Complete and return your CLE certificate of attendance and evaluationform to Nixon Peabody’s Accreditation/Marketing Manager (VanessaYork – [email protected]).

• When we receive your attendance verification form we will issue you acertificate of completion.

• You will also receive a link to the presentation slides after the program.

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Arthur L. Pressman | Partner | Boston, MA

Background of Coverall Litigation in Massachusetts

• Litigation against Coverall, a global commercial cleaningfranchise, has been ongoing in Massachusetts since 2004.

• In lawsuits and other proceedings various Coverallfranchisees allege that it misclassified them asindependent contractors instead of employees (and that ithad also engaged in unfair or deceptive trade practices).

• The suits stem from changes to Massachusetts’independent contractor law in 2004.The changes tightenedthe standards of Massachusetts’ three part test fordetermining employment status. Mass. Gen. Laws Ch.149, § 148B.

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Awuah, et al. v. Coverall North America, Inc.2010 U.S. Dist. LEXIS 29088 (D. Mass. Mar. 23, 2010)

• The Coverall System

› Franchisees receive FTC-compliant franchise disclosuredocuments and sign franchise agreement specifyingtheir status as independent contractors.

› Franchise owners complete mandatory trainingprograms and wear approved uniforms and ID badgeswhile on customer site

› Franchisor has customer contracts andperforms all billing and collection, remittingbalance of revenues to franchisees afterdeducting royalty and other fees.

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Overview of Awuah Litigation

• Plaintiff, Pius Awuah, a self-described Coverall “worker,”filed a class action lawsuit on behalf of himself andothers similarly situated in 2007 alleging breach ofcontract, misrepresentation, and employmentmisclassification.

• Coverall’s Massachusetts franchisees move on theirmisclassification claim.

• Federal court grants partial summary judgment tofranchisees.

• Franchise community is split as to whetherthe court’s decision will have a significanteffect on franchising.

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Gregg A. Rubenstein| Partner | Boston, MA


MASSACHUSETTS INDEPENDENT CONTRACTOR LAW

• Massachusetts, like 25 other states, has adopted a three-part testknown as the “ABC test” to determine individuals’ employmentclassification.

› A – the worker/franchisee is sufficiently free from the franchisor’scontrol and direction in connection with the performance of services,both contractually and in fact;

› B - the worker’s services are performed outside the putativeemployer’s/franchisor’s usual course of business; and

› C - the worker is customarily engaged in an independentlyestablished trade, occupation, profession, or business that it couldperform for other customers outside of the franchise.

The burden of proof is on the putative employer and its failure tomeet that burden as to any one prong will result in an

employer-employee relationship.

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• In its summary judgment opinion, the Awuah Courtfocused on only one prong – prong B

• Court rejected concept that franchisor was engaged in adifferent type of business than franchisee’s. Both,according to the court, are in the cleaning servicebusiness.

• Judge refers to the concept of a franchisor being in abusiness distinct from that of its franchisees as a modifiedPonzi scheme.

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How the Court Got it Wrong

• Rejects decades of case law recognizinglegitimacy of business format franchising andindependent status of franchisees.

• Fails to recognize that Coverall performs nocleaning services.

• Analysis is based on gross simplification ofbusiness model. Implicates all supply chainbusiness models involving more than oneentity.

• Fails to acknowledge FTC Rule and States’recognition that business format franchising isviable business model with appropriatesafeguards already in place.

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Diana Vilmenay | Associate | Washington, DC

Broader Implications

• Status of independent contractors

• Potential for increased wage act claims

• Health insurance and unemployment insurance concerns

• Workers’ compensation

• Social Security

• Attorneys’ fees

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Suggestions

• Review franchise agreement and disclosure documents toensure they properly describe the franchisor’s business.

• Think about particular business arrangements

• Review state laws, particularly where there is alarge/significant presence

• Focus on ongoing legislative efforts

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Related Articles

• “Franchisees: We’re Employees, Not Contractors” The Wall StreetJournal, May 10, 2010, click here to read: http://bit.ly/aI9p3h

• “Laws Put Squeeze on Franchisors, Independent Contractors SayTightening of U.S., Mass. Measures Hurt Livelihoods,” Boston Globe,April 7, 2010

• “Pandora’s Law, When Franchisees Are Ruled Employees, All BetsAre Off,” Franchise Times, May 2010

• “Franchisees Miscast as Independent Contractors,” MassachusettsLawyers Weekly, April 5, 2010

• “Are Franchisees Independent Contractors? Not Everyone Agrees,”Franchising World, (Arthur Pressman, Gregg Rubenstein), July 2008

• “Ruling Threatens Viability of Franchise Businesses inMassachusetts,” IFA press release, March 2010

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Related Presentations

• “Have Your Franchisees and Their Employees BecomeYour Employees Without Your Knowledge?” (GreggRubenstein, Donald Burleson and Kris Carey), will bepresented at IFA Legal Symposium May 17-18, 2010

• “Franchisee or Employee? The Risk of Misclassification onFranchise Relationships,” (Arthur Pressman and CarlaWong McMillian), ABA Forum on Franchising, Oct. 2009

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Questions?

Gregg A. [email protected]

Diana [email protected]

Arthur L. [email protected]

Twitter: @nixonpeabodyllp

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CLE Information

Attendance CLE Verification CODE:

NPCLE NPCLE 05/11/10

Send forms to:

Vanessa York

[email protected]

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Next in Our Monthly Webinar Series:International Franchising Issues

In this interactive web seminar, you will learn:

- the latest developments in franchise and related lawsacross the globe

- practical tips on structuring, documenting andnegotiating cross-border deals; and

- how to avoid the most common mistakes whenexpanding internationally.

Date:June 8, 2010

Time:12:30 EDT to 1:30 EDT

Location:Online webinar

Speakers:Andrew P. Loewinger, Partner,Washington, DCKendal H. Tyre, Partner,Washington, DCSteven B. Feirman, Partner,Washington, DC

To register:You will receive an evite, or goto: nixonpeabody.com/events

Since the 1960s, international franchising has grownsignificantly due to a number of push and pull factors.Domestic saturation, increased competition anddiminishing profits in the United States have pushedfranchisors to examine their opportunities abroad. Atthe same time, favorable macroeconomic, demographicand political conditions abroad have pulled U.S.franchisors into markets overseas.

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On the Nixon Peabody Website

• Recorded webinars

› Are Franchisors Liable for Employment Discriminationby Their Franchisees?

› Is Social Networking a Tool for Developing YourFranchise Business or a Dangerous Game?

› Vicarious Liability of Franchisors: A trend towards amore unified approach and what it means for yoursystem

• Alerts

› Federal Judge Likens Franchising as Business to“Modified Ponzi Scheme” and Holds that Franchisor isEmployer of Massachusetts Franchisees

› U.S. Supreme Court raises threshold for constructivetermination and constructive nonrenewal

› Vietnam’s franchise laws laid groundwork for increasedfranchising activity

• Upcoming events

› IFA Legal Symposium, May 16-18

› International Franchising Update (webinar) June 8

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Thank You!

Gregg A. [email protected]

Diana [email protected]

Arthur L. [email protected]

Twitter: @nixonpeabodyllp

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Arthur L. Pressman

100 Summer StreetBoston, MA 02110Phone: 617-345-1158E-mail: [email protected]

PracticeFranchise & Distribution Team Co-ChairLitigation & Dispute Resolution

EducationTemple University, J.D.University of Pennsylvania B.A.

AdmissionsAdmitted to practice in Massachusetts, New York andPennsylvania.

Experience

For more than 25 years, Arthur has been recognized as a leading franchise lawyer with anationwide practice, specializing in the representation of franchisors. Before joining thefirm’s Boston office in 2003, Arthur practiced in Philadelphia, first with the boutiquefranchise law firm that he co-founded in 1973, and then as co-chair of the Franchise andDistribution Section of an AmLaw 100 firm.

Arthur represents world leaders in franchising and retail distribution, and numeroushotel, restaurant, real estate, and consumer services systems. Under his leadership, thegroup has handled litigation and transactions for clients in more than seventy countries.

Arthur began representing franchise and distribution clients in 1975, and he has focusedexclusively in this area for 25 years. He is recognized as one of the leading franchise triallawyers in the nation and has litigated cases on a national basis. In its 2008 editionChambers USA wrote that Mr. Pressman is “a great litigator with an enviable marketreputation,” and “widely acknowledged for his expertise as a trial lawyer, he has acquiredrenown for his high level of client care and has acted for clients across the globe.” Mr.Pressman was identified in 2008 Chambers USA as one of the top six individual franchiselawyers in the United States.

Arthur served as the first chair of the American Bar Association Forum on Franchising,Litigation and Dispute Resolution division. He has also served on the American BarAssociation Governing Committee of the Forum on Franchising.

Arthur is a member of the CPR Institute for Dispute Resolution’s Franchise Panel ofDistinguished Neutrals and a certified JAMS-trained mediator, concentrating in theresolution of franchise and commercial disputes. Mr. Pressman who has been namedone of the top 100 franchise lawyers in the country by Franchise Times every year since itsinception, was selected by his peers as a Massachusetts “Super Lawyer” in 2005 through2008, and recognized as a “New England Super Lawyer” by Boston Magazine. He has alsobeen listed in The Best Lawyers in America.

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Gregg A. Rubenstein

100 Summer StreetBoston, MA 02110Phone: 617-345-6184E-mail: [email protected]

PracticeFranchise & DistributionLitigation & Dispute ResolutionLabor & Employment

EducationBoston University, J.D., magna cum laudeCornell University, School of Industrial and LaborRelations, B.S.

AdmissionsAdmitted to practice in Massachusetts and New York.

Experience

Gregg is a member of the firm’s Business Litigation Group. He focuses his practice inthe areas of franchise and distribution litigation, complex commercial litigation, andtrade secret matters. Gregg represents franchise clients on a nationwide basis in a varietyof forums. Past representations include enforcement of post-termination covenants notto compete, enforcement of arbitration agreements and franchise terminations.

Gregg also has experience with and represents clients in a variety of labor andemployment matters, including arbitration proceedings and defense of wrongfultermination and employment discrimination claims before federal and state courts.

Gregg has co-authored multiple papers on franchise matters. These papers include:Current Ethical Issues in Arbitration and Mediation which was presented at the 2006International Franchise Association Legal Symposium and the 2007 Franchise LawUpdate which was presented at the 2007 Ontario Bar Association Annual Franchise LawConference. Gregg is a scheduled speaker at the 2008 International FranchiseAssociation Legal Symposium and was featured in the October 22, 2007 edition ofMassachusetts Lawyers Weekly.

Gregg was selected as a “Rising Star” in the Massachusetts legal community by BostonMagazine in 2005, 2006, and 2007.

Affiliations

Gregg is a member of the American Bar Association, Massachusetts Bar Association,Boston Bar Association, and New York State Bar Association.

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Diana Vilmenay

401 Ninth Street, NW, Suite 900Washington, DC 20004Phone: 202-585-8298E-mail: [email protected]

PracticeFranchise & DistributionLitigation & Dispute Resolution

EducationHoward University, J.D.Georgetown University, B.A.

AdmissionsAdmitted to practice in Virginia and the District ofColumbia.

Experience

As an associate in the Litigation & Dispute Resolution Group, Diana Vilmenayrepresents clients in a broad range of commercial civil litigation and general corporatedefense matters. She has litigated and argued motions on contract, commercial landlordand tenant, and employment disputes.

Diana works with clients on a number of issues including franchising and federal andstate income tax matters. As a member of the Franchise & Distribution Team, sheassists clients on various aspects of franchising and licensing domestically and abroad.

Diana was a summer associate at Nixon Peabody. Prior to joining the firm, Dianaworked as a law clerk for Marriott International, Inc.’s Legal Department, where shesupported the corporate transactions, asset management, and lodging operations groupsand performed extensive legal research. While in law school she also served as co-captain of the moot court team and won brief writing awards in two competitions. Shewas the first District Four recipient of the Equal Access to Justice Scholarship awardedby the National Association of Women Judges.

Affiliations

Diana is a member of the American Bar Association (Forum on Franchising) and theInternational Franchise Association. She is also a member of the ABA’s Young LawyersDivision, Women in the Profession Committee.

Languages

Fluent in French and conversational in Spanish.

the awuah case: bellwether or outlier?

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