Antitrust Law Daily Wrap Up, FRANCHISING AND DISTRIBUTION—N.D. Ill.: Challenge to non-compete agreements signed by employees of Jimmy John’s franchises fail, (Apr 9, 2015)

By Edward L. Puzzo, J.D.

Employees of Jimmy John’s franchises did not have standing to challenge the confidentiality and non-compete agreements that they signed because no steps had been taken to enforce those agreements against them and affidavits were presented attesting that no enforcement action would be taken in the future, the federal district court in Chicago has ruled (Brunner v. Liautaud, April 8, 2015, Kocoras, C.).

Defendant James John Liautaud is the founder and Chief Executive Officer of Jimmy John’s, LLC and its subsidiaries, the franchisor of over 2,000 Jimmy John’s Sandwich Shops throughout the United States. Plaintiff Emily Brunner is a current employee at one of 28 Jimmy John’s shops owned by franchisee JS Fort Group; plaintiff Caitlin Turowski is a former employee at one of 12 Jimmy John’s shops owned by franchisee JJ Severson Affiliates.

Under the Jimmy John’s franchise agreements, employees of franchises are required to sign a Confidentiality and Non-Competition Agreement which sets forth restrictions during and after their employment. The Agreement prohibits former employees from working at food service venues—within a prescribed radius of the Jimmy John’s shop where they worked—that derive 10 percent or more of their revenue from the sale of sandwiches, submarines, or wraps.

On January 9, 2015, plaintiffs, as individuals and on behalf of a putative class, brought a number of actions, including a count seeking a declaratory judgment and injunctive relief regarding the Confidentiality and Non-Competition Agreements, and a count alleging violations of the Fair Labor Standards Act (FLSA).

Declaratory judgment. The Plaintiffs sought declaratory and injunctive relief prohibiting the enforcement of the Confidentiality and Non-Competition Agreements, based on the alleged invalidity of those agreements.

The Seventh Circuit has not addressed whether a claim for declaratory relief is judiciable in the context of non-compete provisions, the court stated. However, based on principals set forth in the patent infringement case of International Harvester Company v. Deere & Company, 623 F.2d 1207 (7th Cir.1980), plaintiffs must have a “reasonable apprehension” that the defendants are going to file a lawsuit against them for violating the Non-Competition Agreement, and plaintiffs must allege that they were preparing to engage or had engaged in conduct that would compete with the defendants.

Brunner. Here, plaintiff Brunner, a current employee of a Jimmy John’s franchise, alleged apprehension that her prior and ongoing disclosures of “certain information” could constitute breach of the Non-Competition Agreement. But she did not explain what the “certain information” was, nor did she disclose whether a clarification of the Agreement would continue to subject her to a fear of litigation. The court found that Brunner’s allegations concerning the information she discloses, which has the possibility to infringe on the Confidentiality Agreement, was far too tenuous and broad to constitute a reasonable apprehension of litigation stemming from her alleged violation.

Brunner also alleged that her apprehension concerning the Non-Competition provisions of the Agreement kept her from applying to other food service positions, but she failed to specify if she applied, was interviewed, or was offered a position elsewhere. She was also unsure if any of the sought-after food service establishments were covered under the terms of the Non-Competition Agreement. Brunner’s litany of possibilities did not amount to a violation of the terms of the Confidentiality or Non-Competition Agreement, the court found. As a result, the court ruled, she did not allege a sufficient injury to provide her with standing to bring the declaratory judgment claim.

Turowski. Plaintiff Turowski formerly worked at a Jimmy John’s shop and later worked for BBQ’d Productions, a restaurant located within the prohibited three-mile radius of the Jimmy John’s shop where she was formerly employed. She alleged uncertainty as to whether her subsequent place of employment was a “competitor” under the terms of the Non-Competition Agreement, which would possibly subject her to suit for her violation of the contractual agreement.

Turowski worked at BBQ’d Productions for an undefined time period without any indication that the defendants opposed her new position, the court noted. Now that Turowski has left her employment at BBQ’d Productions, her assertion that she feared an impending lawsuit from Jimmy John’s was not reasonable, the court found. Therefore, Turowski did not allege a sufficient injury and also did not have standing to pursue the declaratory judgment claim, the court ruled.

Enforcement. Even if the plaintiffs had standing, the court continued, the defendants submitted affidavits stating that they did not intend to enforce the Confidentiality and Non-Competition Agreements against the plaintiffs, now or in the future. Under United States v. Concentrated Phosphate Export Assn., 393 U.S. 199 (1968), an issue is rendered moot by the defendant's voluntary conduct if subsequent events make it absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur.

The plaintiffs did not allege that the Confidentiality and Non-Competition Agreement was ever enforced against them in the past, the court noted. The lack of any prior enforcement diminished the plaintiffs’ argument that the wrongful conduct will occur again, because no injury occurred to begin with. Defendants’ affidavits attesting to their intention not to enforce any breach of the Confidentiality and Non-Competition Agreements satisfied their burden of establishing that the challenged conduct will not reappear in the future. The court therefore granted defendants’ motion to dismiss the claim for declaratory and injunctive relief.

FLSA. Plaintiffs, individually, and on behalf a putative nationwide class, also brought a claim alleging that Jimmy John’s and Liautaud violated the Fair Labor Standards Act (FLSA) by misclassifying them as exempt employees, resulting in them not being compensated for overtime. Liautaud moved to dismiss, stating that the FLSA claim only applied to employers and he was not plaintiffs’ employer.

Courts assess the “economic reality” of the working relationship to determine whether an individual is an employer under the FLSA, the court explained. For a joint-employer relationship to exist, each alleged employer must exercise control over the working conditions of the employee. To analyze the amount of control an alleged joint employer has over employees, relevant factors include: (1) the power to hire and fire employees; (2) supervision and control of employee work schedules or conditions of payment; (3) determination of rate and method of payment; and (4) maintenance of employment records.

Plaintiffs contended that Liautaud exerted the functional control of an employer, as shown by his involvement in the selection of employees via highly detailed and strictly enforced operational policies established for each franchise store. But the court stated that Liautaud’s involvement was in the form of providing guidance as to the type of employees the franchised shops should seek to employ. They did not show he was involved in the hiring decisions of individual employees.

Plaintiffs contended that Liautaud’s status as an employer was also shown by the fact that under the franchise agreements, he had an absolute right to terminate a franchisee relationship, therefore allowing him to terminate an employee that works for the franchisee. But the court stated that Liautaud’s ability to exercise a contractual right in terminating a franchise did not amount to him having the power to terminate a franchisee’s employees.

Plaintiffs also contended that Liautaud exerted control over all aspects of the franchisee business operation and therefore supervised and controlled the Plaintiffs’ conditions of employment. The court, however, found that the plaintiffs had not specifically pleaded distinct facts that firmly established Liautaud’s control over employees’ work schedules and therefore they did not demonstrate that Liautaud was involved in the supervision and control of employees’ work schedules.

Plaintiffs further contended that Liautaud determined the rate and method of payment by mandating the implementation of payroll policies that amounted to “systematic wage theft” of Jimmy John’s Sandwich Shop employees. But the court found that plaintiffs failed to identify any specific actions attributed solely to Liautaud that suggest he determined the rate and method of payment.

Thus, the court ruled, plaintiffs failed to establish that the joint-employer factors favored Liautaud being considered an employer under the FLSA. Liautaud’s actions done in the context of quality control and brand uniformity did not manifest an employer-employee relationship, the court explained. The court therefore granted Liautaud’s motion to dismiss.

The case is Civil Action No. 14-C-5509.

Attorneys: Jacie C. Zolna (Myron M. Cherry & Associates) for Emily Brunner. Gerald L. Maatman, Jr. (Seyfarth Shaw LLP) for Jimmy John's Enterprises, Inc., Jimmy Johns LLC, Jimmy Johns Franchisor, LLC, and Jimmy Johns Franchise, LLC. Gregory Harvey Andrews (Jackson Lewis PC) for JS Fort Group, Inc.

Companies: Jimmy John's Enterprises, Inc.; Jimmy Johns LLC; Jimmy Johns Franchisor, LLC; Jimmy Johns Franchise, LLC; JS Fort Group, Inc.

Cases: FranchisingDistribution IllinoisNews