The Massachusetts Supreme Judicial Court (“MASJC”) heard oral argument on December 8, 2021 in a case of substantial importance to franchise owners, and Jeffrey Rosin, Managing Partner of the Firm’s Boston office and co-founder of the Firm’s Franchise Industry Practice group, offers a perspective on these developments.
On August 9, 2021, the federal First Circuit Court of Appeals certified a question to the MASJC in the case of Patel v. 7-Eleven, Inc. (Docket No. 20-1999): specifically, whether the “control of a franchisee” required of a franchisor by the Federal Trade Commission (“FTC”) conflicts with and is irreconcilably inconsistent with the “control” that can make an independent contractor an employee under the Massachusetts Independent Contractor law (“MICL”). In other words, when evaluating a franchisee’s assertion in litigation that it is a misclassified employee of the franchisor, can a court hold the franchisor’s controls of the franchisee against it despite the fact that a franchisor is required to have those controls in order to be a franchisor?
In Patel, the federal District Court (Gorton, J.) held that it was impossible for a franchisor to satisfy both laws, and it granted summary judgment to 7-Eleven that it had not misclassified franchisees under Massachusetts law. See Patel v. 7-Eleven, Inc. 485 F. Supp. 3d 299, 307 (D. Mass. 2020). Upon appeal to the First Circuit, recognizing that the MASJC has not “analyzed the interactions between the ICL and the FTC Franchise Rule,” the First Circuit certified this important question of law.
The MICL requires that a putative employer prove, among other things, that the individual asserting the employment relationship “is free from control and direction with the performance of the service, both under his contract for the performance of service and in fact.” See M.G.L. c. 149, Section 148B(a)(1). A putative employer’s inability to prove that alone will render the contractor an employee. Yet, the FTC requires that, to be a franchisor, “[t]he franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation[.]” See 16 C.F.R. § 436.1(h)(2).
As the First Circuit noted when certifying this question, “considering the text” of these sections of law, there “appears to be a conflict” and “it appears difficult, if not impossible, for a franchisor to satisfy [both laws.]” Thus, the First Circuit asked the MASJC to weigh in on the following question:
Whether the three-prong test for independent contractor status set forth in the Mass. Gen. Laws ch. 149 § 148B applies to the relationship between a franchisor and its franchisee, where the franchisor must also comply with the FTC Franchise Rule.
Of note, this question was part of what was presented (but not decided) almost a decade ago in Depianti et. al v. Jan-Pro Franchising International, Inc. (“JPI”), 465 Mass. 607 (2013) when Jeffrey Rosin argued that case before the MASJC. There, the federal District Court (Wolf, J.) certified the question as to whether the MICL could be applied to JPI at all. JPI was a national franchisor with a three-tier franchise system, whereby it had no contract with the plaintiff-franchisee at issue. JPI’s regional franchise owner, BradleyMktg Enterprises, was the Massachusetts regional franchisor who sold the plaintiff a franchise. Thus, when the plaintiff-franchisee sued JPI for misclassification, JPI argued the MICL could not be applied to it, because textually, the MICL requires there be a contract between the parties to give rise to a claim. In Depianti, the District Court certified the question of whether a contract was required between the parties in order to prove a claim under the MICL. In briefing, the parties also made arguments about whether the MICL could be squared with the FTC franchise rule, but the MASJC did not reach that issue in Depianti. The MASJC held simply that the MICL could be applied to JPI, despite the lack of a contract between them, but the MASJC specifically chose not to weigh in on whether or how to apply the MICL factors to JPI. That said, when the District Court did that, it granted summary judgment to JPI, following the reasoning of, and finding res judicata, a final judgment in Georgia on the matter between the same parties. See Depianti v. Jan-Pro Franchising International, Inc. 39 F. Supp. 2d 112 (D. Mass. 2014) (citing Jan-Pro Franchising International, Inc. v. Depianti, 310 Ga. App. 265 (2011), review denied). The Depianti ruling was affirmed on appeal to the First Circuit September 29, 2017. Jeffrey Rosin was counsel to JPI in Georgia on JPI’s appeal, and throughout the Massachusetts litigation, obtaining final judgment for JPI in both jurisdictions.
Thus, there has already remained an open question that Depianti did not decide: can the MICL factors be applied to a franchisor in a direct relationship with a franchisee or are they inconsistent? The Depianti ruling and other precedent may superficially suggest that the MICL factors can be applied to a third party franchisor, but none of this precedent truly reaches this exact and critical issue. For example, in Awuah v. Coverall North America, Inc. (2011) 460 Mass. 484 (2011), the MASJC received certified questions in a franchise case where the District Court (Young, J.) had already ruled that the franchisees were misclassified, and the MASJC was simply asked certified questions on permissible damages under the MICL. In Coverall N.A., Inc. v. Com’r of Div. of Unempl. Assis, 857 N.E.2d 1083 (Mass. 2006), the MASCJ looked at the claims that a franchisee was misclassified under certain subparts of the MICL and found that the evidence at a Department of Unemployment proceeding sufficiently supported a finding of misclassification under those subparts. Additionally, in a more recent case, decided December 13, 2021, Jinks et al. v. Credico (USA) LLC, the MASJC clarified the narrow circumstances in which the MICL could be applied to a third party: (1) where there is “corporate disregard” of the intermediate entity, or (2) where the third party really set up the intermediate entity for the purpose of evading the wage laws. Neither are (or should be present in franchising). In Jinks, the MASJC clarified that this was, in effect, its ruling on the certified question in Depianti that Jeffrey Rosin argued.
Now, for the first time, the MASJC is being asked to expressly decide whether the “control” subpart of the MICL can be squared with the FTC franchise rule. At the oral argument December 8, the Justices of the MASJC seemed hostile to the notion of “absolutes” on either side of the equation. That is, the MASJC seemed uninterested in Patel’s argument that all employers would “turn themselves into franchisors” if there was any FTC escape route from misclassification. Similarly, the MASJC did not seem to agree with 7-Eleven that if the MICL was strictly applied to franchisors, no franchisor could ever satisfy the MICL.
But the latter question raised by 7-Eleven’s counsel is the heart of the matter. And, the MASJC has never specifically addressed the “control” subpart of the MICL against the FTC rule. For its part, the FTC submitted an amicus brief, arguing that its rules were just “disclosure rules” and they were not designed to impair employment laws. The FTC’s brief seems to skirt the point. If, to be a franchisor, a franchisor must control its franchisees and that control must be significant under the FTC’s own rules, this is not just a “disclosure” rule. It is an operational rule that will play out in practice. That is, if to qualify as a franchisor, a franchisor needs to disclose the controls it will have in the course of the franchise relationship, then it will in fact have those controls in the course of the franchise relationship. In this regard, the FTC’s position is not persuasive.
To be sure, the MASJC has a significant legal issue on its hands and it will be a landmark ruling either way. Jeffrey Rosin and the O’Hagan Meyer Franchise Industry Practice will continue to share new developments.
Jeffrey M. Rosin is the Managing Partner of the firm’s Boston Office and has represented franchisors facing misclassification litigation for 15 years.
Authored By: Jeffrey M. Rosin