“Direct conflict” between the FTC Franchise Rule and the Massachusetts Independent Contractor Law
By Sandra Gibbs on November 18, 2020
In Patel v. 7-Eleven, Inc., 2020 WL 5440623 (D. Mass. Sept. 10, 2020), the court granted summary judgment in favor of the defendant franchisor after finding a “direct conflict” between the FTC Franchise Rule and the Massachusetts Independent Contractor Law (“ICL”). Plaintiffs, a proposed class of 7-Eleven franchisees, had asserted that they were employees under the ICL, and had been misclassified as franchisees.
Under the ICL, “an individual performing any service” for another person is presumed to be an employee unless the purported employer can prove all three prongs of the ABC test:
A. The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
B. The service is performed outside the usual course of the business of the employer; and
C. 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.
In Awuah v. Coverall North America, Inc., 707 F. Supp. 2d 80 (D. Mass. 2010) the district court had ruled in favor of the plaintiff in a similar case, on the ground that the purported employer was in the “same business” as the franchisee, thereby precluding a showing under prong B of this test.
The divergent outcomes between Awuah and Patel can be traced to a 2015 case from the Massachusetts Supreme Judicial Court, Monell v. Boston Pads, LLC, 31 N.E.3d 60 (Mass. 2015). Before the court in Monell was a claim that real estate sales agents were employees of real estate brokers, and had been misclassified as independent contractors. However, because the state law regulating real estate brokers effectively required that they exercise control over sales agents, the court found that the brokers were unable to prove Prong A—a lack of control and direction—while simultaneously complying with their obligations under the real estate statute. Although the ICL contained no express exception for real estate brokers, the Monell court held that one was implied because the ABC test was incompatible with this group’s other statutory obligations.
The Patel court extended this reasoning to the franchise context. The FTC Franchise Rule, the court held, required franchisors to exercise “substantial control” over franchisees. Thus, because franchisors could not simultaneously satisfy both the FTC Franchise Rule and the ABC test, the court found another implied exception: “It cannot be the case … that, in qualifying as a franchisee pursuant to the FTC’s definition, an individual necessarily becomes an employee. In effect, such a ruling by this Court would eviscerate the franchise business model, rendering those who are regulated by the FTC Franchise Rule criminally liable for failing to classify their franchisees as employees.”
The Massachusetts ABC test is virtually identical to the ABC test adopted by Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), and later codified by AB-5. To date, court decisions applying California’s ABC test have not embraced the Patel reasoning that “franchising is different.” Indeed, in Vazquez v. Jan-Pro Franchising Int’l, 923 F.3d 575 (9th Cir.), opinion withdrawn, 940 F.3d 1107 (9th Cir.), on rehearing, 939 F.3d 1045 (9th Cir.), and opinion reinstated in part, 939 F.3d 1050 (9th Cir. 2019), the Ninth Circuit instructed the district court, on remand, to disregard the holding of a previous California Supreme Court case to the effect that franchising should be regarded differently due to franchisors’ need to exert quality control over licensees’ use of the trademarks. Cf. Patterson v. Domino’s Pizza, LLC, 60 Cal.4th 474 (2014). As Vazquez explained, because Patterson had been decided in the context of a tort claim, rather than a wage-hour claim, it had no utility in applying the ABC test. If the reasoning of Patel is applied to the California ABC test, the so-called “Patterson gloss” should apply equally to the wage-hour context.
One court that will need some convincing is Fleming v. Matco Tools Corp., 2020 WL 6461327 (N.D. Cal. Nov. 3, 2020). There, in a proposed class action of distributors asserting that they have been misclassified as independent contractors, the court declined to apply Ohio law—finding California’s interest in enforcing its wage-hour laws to be materially greater—and declined the manufacturer’s motion to stay the proceedings pending a California Supreme Court decision in Vazquez. Arguing that the parties’ choice of Ohio law should prevail, the manufacturer asserted that, in the context of franchising, uniformity was paramount, and urged reliance on Patel’s reasoning. The court rejected this argument, dropping a footnote characterizing Patel as “involv[ing] different circumstances” and “not controlling.”
This case report was prepared by Sandra Gibbs (email@example.com) of the law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation and regulatory firm that provides legal services to franchisors, manufacturers, and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.