Mandatory Loss Leaders Travel North Of The Border

By William F. Jones

Recent litigation in the United States has examined issues relating to franchise systems imposing price ceilings on items sold by franchisees, even when those ceilings mandate that items are sold at a loss.  In a notable case, National Franchisee Association v. Burger King Corp., the United States District Court for the Southern District of Florida in 2010 affirmed the right of Burger King to impose a $1 price ceiling on its “Buck Double”  cheeseburger, even though the cost to franchisees producing that cheeseburger were higher than $1.  Essentially, the court agreed with Burger King’s argument that enforcing such price ceilings is a reasonable strategy to draw in other customers in to purchase higher price items, essentially acting as a “loss leader” to benefit overall store sales.

This legal precedent for allowing franchisors to enforce maximum, below-cost price ceilings appears to have migrated north of the border.  Recently, an association of Tim Horton’s franchisees filed a class action against the franchisor requirement that franchisees sell lunch item menus for less than cost.  Echoing the holding in the Burger King case, the Canadian court embraced Tim Horton’s arguments that the applicable analysis involves the overall profitability of the franchise store, rather than the individual profitability of a single item.  The court found that it was commercially reasonable for Tim Horton’s to adopt and enforce a strategy on its franchisees to use below cost lunch menu item as a loss leader to bring in customers and create additional profit on other items.

The adoption of the “loss leader” concept in the context of maximum price ceilings in the Canadian courts may demonstrate a trend towards greater franchisor control and discretion and the pricing of specified menu items system-wide.

Update On The Coverall Employee-Independent Contractor Litigation

By William F. Jones

 A major case of interest in the franchise industry continues to wind its way through the federal district court and state courts in Massachusetts.  In Awuah v. Coverall (the “Coverall case”,  the core dispute involves whether Coverall franchisees are actually classified as employees, rather than independent contractors.  More explanation of the core dispute is covered in a prior blog entry, “Franchisees: Independent Contractors or Employees?” by Bud Culp, posted below.

In the Coverall case, presiding federal district court has now entered an order defining the damages that the Coverall franchisees who were misclassified as independent contractors rather than employees will ultimately receive.  The successful plaintiff franchisees are allowed to recover damages against Coverall which include refunds of their initial franchise fees, additional business fees and insurance deductions.  Also, the plaintiff franchisees can recover any unreimbursed chargebacks and interest on late payment of reimbursed chargebacks. 

Most importantly, however, the judge issued an order which trebled the damages assessed against Coverall.  The court took this action under the prior 2007 version of the applicable Massachusetts statute which makes treble damages discretionary.  The judge’s order trebles damages against Coverall for successful plaintiff-franchisees dating back to 2006.

It is important to note that revisions to the Massachusetts statute in 2008 now make the trebling of damages for misclassification mandatory, rather than discretionary.  This change in the law, along with Coverall case precedent, should impress upon franchise systems the importance of properly evaluating any potential exposure they may face on the issue of whether their franchisees can be classified as employees, rather than independent contractors.