During the past several years, joint employer liability has been a hot-topic affecting franchisors and franchisees alike, due to the lack of clarity surrounding when two or more businesses may be deemed joint employers. On the one hand, there are laws that require brands to protect their federally registered trademarks by exercising certain brand controls. However, there are also competing laws that can create joint-employer liability when a company exercises such controls. In franchising, the argument has been that by placing controls to promote uniformity on franchisees contained in franchise agreements, franchisors are also controlling working conditions at the franchised location. As a result, franchise businesses often find themselves in a catch-22.
The joint-employer dilemma faced by franchise businesses largely is a result of the controversial 2015 National Relations Board’s (NLRB) decision in Browning-Ferris Industries of California, which expanded the definition of “joint employer” under the National Labor Relations Act (NLRA). Browning-Ferris abandoned the previous test applied by the NLRB, which measured joint-employer liability on whether there was “direct and immediate” control over the employees’ “essential terms and conditions of employment.” As a result of Browning-Ferris, “indirect” or “potential” control over employees’ working conditions was now sufficient for finding a joint-employment relationship.
The Browning-Ferris decision inevitably had an immediate impact on a wide array of businesses, including franchises. Indeed, franchisors and other businesses that license their trademarks are required to police the use of their intellectual property licensed to third parties pursuant to the Lanham Act. Uniforms worn by employees, the logos used and the shape and weight of a hamburger patty are all ingredients of consumer experience. Without imposing a certain level of controls on franchisees, franchisors not only risk losing the hallmark of uniformity in the franchise system, but they also risk losing protection of their trademarks.
In response to the legal minefield surrounding joint employment, the NLRB recently issued a notice of proposed rulemaking, which is intended to restore the pre-Browning-Ferris joint-employer framework. However, the proposed-rule must go through the comment period and still faces uncertainty. The Browning-Ferris decision is also not over, as it is still proceeding though the appeals process. Notably, some critics have also pointed out that the NLRB’s notice fails to address the unique concerns of licensors and licensees of intellectual property. In relationships such as franchising, distributorships and dealerships, the trademark owner will often dictate significant quality control standards. This begs the question whether such efforts to police the licensed rights will be considered “direct and immediate,” thus triggering joint employment liability—even under a new proposed rule.
Legislative efforts are now underway to address the legal predicament faced by intellectual property owners. At the state level, there are several states that have enacted legislation to exempt franchise relationships from joint employment liability, but their scopes are not uniform, and they do not apply to federal claims. Fortunately, U.S. House Small Business committee Chairman Steve Chabot (R-Ohio) and Rep. Henry Cuellar (D-Texas) introduced a bipartisan bill, the Trademark Licensing Protection Act of 2018. The bill, which has been praised by the International Franchise Association (IFA), is intended to provide clarity that the licensing of a mark, and any control or exercise of control for purposes under the Lanham Act does not create an employment relationship. Specifically, the bill would provide a more stable solution by amending the Lanham Act and adding the following language to Section 5, if enacted: “The licensing of a mark for use by a related company, and any control or exercise of control over thereof for the purpose of preserving the goodwill, reputation, uniformity, or expectation of the public of the nature and quality of goods or services associated with the mark, may not be construed as establishing an employment or principal-agent relationship between the owner of the mark and the related company.”
n the meantime, despite recent efforts to tackle the uncertainty surrounding joint employment liability, the legal landscape is far from being resolute. Franchisors and other owners of intellectual property who license their trademarks should still remain cognizant of the level and types of controls placed on licensees and franchisees that extend beyond the necessary standards put in place to protect their trademarks and the integrity of their brands. The good news is that recent legislative and rule-making efforts demonstrate that the tide is shifting in the joint employment framework, and that franchise and similar businesses may eventually have the legal clarity and comfort knowing that they will not be penalized for requiring the proper use of their trademarks.
Morgan Ben-David is a partner with AXS Law Group in Wynwood. She focuses her practice on franchise and distribution law, licensing, hospitality and emerging businesses. She may be reached at email@example.com