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From Antitrust Law Daily, March 4, 2019

District court erred in granting 7-Eleven judgment on franchisee labor law claims

By Peter Reap, J.D., LL.M.

It was error for the federal district court in Los Angeles to grant franchisor 7-Eleven judgment on the pleadings on the claims of plaintiff franchisees that the franchisor misclassified them as independent contractors rather than employees. The court also erred in denying the franchisee’s motion for injunctive relief.

The federal district court in Los Angeles erred in granting franchisor 7-Eleven judgment on the pleadings on claims brought by plaintiff franchisees that the franchisor violated the Fair Labor Standards Act and the California Labor Code by misclassifying them as independent contractors rather than employees, the U.S. Court of Appeals in San Francisco has ruled, vacating and remanding the case (No. 18-55462, Haitayan I). In addition, the lower court erred in denying the franchisees’ motion for a preliminary injunction and corrective notice in another case (Nos. 18-55910 and 18-56346, Haitayan II) regarding 7-Eleven’s distribution of a franchise renewal agreement requiring franchisees to release their wage-and-hour claims in Haitayan I (Haitayan v. 7-Eleven, Inc., February 27, 2019, per curiam).

Haitayan I. In this case, the district court erred by considering the persuasiveness of the plaintiffs’ factual allegations rather than the plausibility of the plaintiffs’ legal claims, according to the Ninth Circuit. The lower court also erred by focusing on the franchise agreement but failing to consider the plaintiffs’ allegations regarding 7-Eleven’s actual control. The district court’s judgment on the pleadings was vacated to the franchisor’s seeking judgment as a matter of law at a later time.

Furthermore, following the district court’s entry of judgment, the California Supreme Court decided Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), the appellate court noted. It advised the district court that it was currently considering the application of Dynamex to franchisees in Vazquez v. Jan-Pro Franchising Int’l Inc., No. 17-16096, argued December 18, 2018. To the extent appropriate, proceedings in the district court may be stayed pending the Ninth Circuit’s decision in Vazquez.

Haitayan II. The district court’s denial of injunctive relief and corrective notice in this case was also vacated. The lower court erred by failing to consider that under California law and employee may not waive a wage-and-hour claim by contract and it should consider this rule on remand. Because the franchisees are required to sign the challenged waivers in April 2019, the lower court was urged to address the franchisees’ requests on an expedited basis.

The appellate court also provided guidance to the district court on several other issues raised on appeal. First, the court’s reliance on Ahussain v. GNC Franchising, LLC, 2008 WL 11336812 (C.D. Cal. Mar. 19, 2008) in addressing the likelihood of success on the merits was unwarranted. Ahussain applies to general releases in franchise renewal agreements, but it does not address California’s prohibition on the contractual waiver of the plaintiffs’ claims, the Ninth Circuit noted. The franchisor’s contention that the waiver was a permissible settlement was rejected by the appellate court, as labor claims may only be settled by release and payment. The court also rejected the franchisor’s contention that the plaintiffs are contractually obligated to sign the general release because the franchise agreements they signed in 2004 said a general release would be required for renewal. 7-Eleven did not show that this provision negates California’s prohibition on contractual waiver of wage-and-hour claims.

As for irreparable harm, although putative class members must sign the waiver to protect their livelihoods, it was not clear how 7-Eleven will proceed once they sign. If the franchisees are found to be employees, the waiver will likely be found unconscionable and unenforceable, the court noted. If the franchisees are found to be independent contractors, the franchisor may attempt to hold them in breach of contract for participating in Haitayan I. This uncertainty imposed immediate and irreparable harm by deterring the franchisees from participating in the case and warranted consideration on remand, the appellate court advised.

The district court should consider California’s interest in allowing colorable wage-and-hour claims to proceed as it weighs the balance of the equities. The public interest here was substantial. The lower court should also take into consideration the parties’ relative size and strength.

Finally, the district court was encouraged to consolidate these two cases in the interest of judicial efficiency and for the convenience of the parties, the Ninth Circuit said.

This case is No. 18-55462.

Attorneys: Shannon Liss-Riordan (Lichten & Liss-Riordan, PC) for Serge Haitayan. James Speyer (Arnold & Porter Kaye Scholer LLP) and Ellen M. Bronchetti (DLA Piper LLP) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.

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