Pennsylvania Record

Monday, September 16, 2019

Attorney: Third Circuit threatens business model of franchising

By Carrie Salls | Nov 1, 2016

PHILADELPHIA – A divided panel of the U.S. Court of Appeals for the Third Circuit recently granted class certification in a case against Jani-King of Philadelphia that alleges the company’s franchisees were improperly being classified as independent contractors.  

Two members of the three-judge panel ruled in favor of class certification, but Karen Marchiano, of counsel at DLA Piper LLP, said many franchising experts who were following the case may have preferred to see the court rule in accordance with the “well-reasoned” dissent.


“The majority’s opinion undermines the essence of franchising and threatens the economic viability of franchising as a business model,” Marchiano told the Pennsylvania Record.

“As those in the franchise industry understand, if franchising is to remain viable, the controls that are set forth in those documents that are essential to the protection of a franchisor’s brand and trademark cannot be considered indicia of an employment relationship.”


Marchiano said the majority’s decision turned on its answer to the question of whether the employment status question could be resolved through evidence common to the class, as the majority decision concluded that documentary evidence alone could be sufficient to resolve the multi-factor employment status test.


In addition, Marchiano said the court ruled that the franchisee classification issues were susceptible to class-wide determination through common evidence, including the franchise agreement, policies manual, training manual and testimony about those documents.


“The majority refused to reach the merits of whether the controls in the franchise agreement and manuals made Jani-King the employer of its franchisees under Pennsylvania’s multi-factor employment test,” Marchiano said.


Specifically, the majority decision said, “Jani-King may ultimately be correct that the franchise agreement and manual do not contain sufficient controls over the day-to-day work of its franchisees to make them employees under Pennsylvania law, and we express no opinion on that matter here. Either way, it is possible to make the determination on a class-wide basis.”


According to data provided by Marchiano, there were more than 750,000 franchised businesses in the United States as of 2013, and those establishments employed more than 8.3 million people and generated an economic output in excess of $800 billion. As of 2007, Pennsylvania alone had 29,514 franchise establishments, with a total payroll of $10.7 billion and more than $82.4 billion in output.


“Franchising is an important component of the U.S. and Pennsylvania economy,” Marchiano said.


The dissenting opinion, authored by Judge Robert E. Cowen, echoed that sentiment, citing a previous case filed against Domino’s Pizza, Inc. that established that franchising constitutes “a bedrock of the American economy.”


“Yet the majority’s opinion threatens the viability of this basic economic bedrock,” the dissenting opinion said. “I predict that the Pennsylvania Supreme Court would ultimately hold that controls necessary to protect a franchisor’s trademark, trade name, and goodwill - in short, franchise system controls’ - are insufficient by themselves to establish the existence of an employer-employee relationship between the franchisor and its franchisees.”


Marchiano said the dissent also worried that the majority’s opinion would lead to additional class action litigation against other franchisors and would be cited to support the proposition that franchise system controls may by themselves give rise to an employer-employee relationship


Jani-King has requested a rehearing or a hearing before the full roster of Third Circuit judges.


The International Franchise Association subsequently sought court approval to file an amicus brief in support of Jani-King’s rehearing petition. The association said the majority opinion “threatened the viability of and foundation of franchising.”


The case was appealed following a ruling by the U.S. District Court for the Eastern District of Pennsylvania.

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Organizations in this Story

DLA Piper International Franchise Association Pennsylvania Supreme Court U.S. Court of Appeals for the Third Circuit