Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2011

And the saga continues . . .

In Roberts v. C.R. England, Inc., 827 F. Supp. 2d 1078 (N.D. Cal. 2011), independent contractors (“plaintiffs”) filed a putative class action against affiliated transportation industry companies (“defendants”) alleging, among other things, violation of the California Franchise Investment Law (“CFIL”).

 

There, defendants provided its customers with shipping services to transport goods. While some of defendants’ truck drivers were its employees, the majority of its drivers were those who purchased the “Driving Opportunity.” Plaintiffs, after seeing defendants’ Driving Opportunity advertised, contacted defendants, enrolled in its driving training school, and paid $3,000 each for training. Once plaintiffs finished the second phase of their training, they were formally offered a Driving Opportunity.

 

Although Plaintiffs wanted to be employees of the company, rather than independent contractors through the Driving Opportunity, they were informed that there were no positions currently available at the company and/or plaintiffs would need to purchase the Driving Opportunity for a minimum of six months to even be considered for a position at the company. Because of this, plaintiffs agreed to purchase the Driving Opportunity that was offered to them. A dispute later arose. Plaintiffs filed suit and defendants moved to dismiss the CFIL claim.

 

The court first looked at the definition of a “franchise” under the CFIL, which provides:

 

(a) “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(1) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and

(2) The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and

(3) The franchisee is required to pay, directly or indirectly, a franchise fee.

In support of plaintiffs’ argument that they paid a franchise fee, plaintiffs pointed to the following payments for: truck rental, computer rental, operational equipment, insurance, signs, maintenance, gas, promotional materials, and other items that were required “for the right to enter the Driving Opportunities.”

The court, however, found this argument unpersuasive. Explaining that these fees merely appeared to be ordinary business expenses, which could not be franchise fees, the court ultimately dismissed plaintiffs’ CFIL claim.

 

Takeaway: Although it is important to know which payments have been found to satisfy the franchise fee requirement, it is equally as important to know which payments have not been found to constitute the payment of a franchise fee. Here, the court notes that “ordinary business expenses” cannot be franchise fees, and provides practitioners with a laundry list of payments to turn to which have been characterized as such. When evaluating whether or not a certain franchisee’s payments are franchise fees under the CFIL, it can be helpful to look at this case to ensure that such payments have not been characterized as ordinary business expenses—and if they have, whether certain additional arguments can be tacked on to turn the purported ordinary business expense into a franchise fee.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.