Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—9th Cir.: Franchise trade group fails in second bid to enjoin Seattle minimum wage hike, (Sep 25, 2015)

By Lisa Milam-Perez, J.D.

The International Franchise Association (IFA) was unable to convince the U.S. Court of Appeals in San Francisco that it was likely to succeed on the merits of its challenge to Seattle’s $15 an hour minimum wage ordinance—or more specifically, to the municipality’s decision to group franchisees in with the category of “large employers” that will be subjected to the steeper schedule of incremental wage hikes over the next five years. Nor was the franchise trade group able to demonstrate that it would serve the public interest to enjoin enforcement of the minimum wage ordinance, the appeals court said, affirming a district court’s decision denying preliminary injunctive relief (International Franchise Association, Inc. v. City of Seattle, September 25, 2015, Hawkins, M.).

Minimum wage ordinance. A mayor-appointed Income Inequality Advisory Committee (IIAC) recommended enacting staged minimum wage increases in Seattle. The committee advised that smaller businesses should be subject to a more gradual schedule because it would be harder for these employers to withstand the effects of paying a sharply higher minimum wage. The IIAC debated whether to classify franchisees as large employers in this rubric; in the end, it did not recommend doing so. Nonetheless, the city passed an ordinance that classified those franchisees that were associated with a franchisor, and/or a network of franchisees employing more than 500 employees nationwide, as large employers—regardless of the number of persons employed by the particular franchisee or the number of persons employed in Seattle.

IFA alleged that this franchisee classification violated the federal Commerce Clause, Equal Protection Clause, First Amendment, and the Washington State Constitution, and was preempted by the Lanham Act. The district court held the IFA did not show a likelihood of succeeding on the merits of its claims, and that the remaining preliminary injunction factors weighed against a preliminary injunction.

Dormant Commerce Clause. The appeals court noted that the case before it “does not resemble an established type of dormant Commerce Clause case,” in that the challenged ordinance “arguably imposes costs on a class of businesses said to be highly correlated with out-of-state firms or interstate commerce.” Ultimately, the IFA could not establish that Seattle franchisees are “out-of-state entities,” or that the corresponding franchises “are so interstate in character relative to non-franchises that a distinction drawn on this basis interferes with interstate commerce.”

Not facially discriminatory. The district court did not apply an improper legal standard or clearly err in finding that the ordinance does not facially discriminate against out-of-state entities or interstate commerce, according to the court. The ordinance does not classify employers based on the location of their headquarters, the location of their workers, or the extent to which they participate in interstate commerce. Rather, the classification is based on the number of employees and the business model, both of which are facially neutral classifications. Nor does the ordinance classify based on an employer’s links to interstate commerce or out-of-state firms, but on neutral characteristics, such as having a marketing plan, operating a business associated with a trademark, and paying a franchisee fee.

Arguing that the ordinance does expressly discriminate against franchises, the IFA insisted that the ordinance’s requirements were not facially neutral. However, “[a] distinction drawn based on a firm’s business model—a characteristic IFA contends is highly correlated with interstate commerce—does not constitute facial discrimination against out-of-state entities or interstate commerce,” the appeals court wrote. At a minimum, it said, the district court did not clearly err in rejecting IFA’s proposed correlation.

No discriminatory purpose. The IFA further argued that the lower court erred in evaluating the evidence of discriminatory motive. But while there was some evidence that city officials and advocates questioned the merits of the franchise business model, there was no clear error in the court’s finding that the city council, in passing the ordinance, had no intent to discriminate against out-of-state firms or interstate commerce. The text of the ordinance, and its preamble, show a legitimate, nondiscriminatory purpose: to improve public health and welfare and reduce economic inequality. Also, as for the distinction made between large and small businesses, the ordinance explains in a finding that “small businesses and not-for-profit organizations may have difficulty in accommodating the increased costs.” While the preamble does not provide a rationale for the franchisee classification, the definition of franchisees as large employers, read in concert with the “small business” finding, supports an inference that the city council viewed franchisees as more akin to large employers than small businesses and nonprofits in their ability to accommodate higher wage costs, the Ninth Circuit held.

As evidence of improper motive, the IFA cited tweets, emails, and formal statements by city council members, IIAC members, the mayor, and his staff. Emails from one IIAC member in particular persuasively evinced anti-franchise sentiment, but they did not show that he was looking to impose greater burdens on out-of-state employers—or that city officials did, either. The emails were not entitled to substantial weight anyhow, as the sender was merely one of 24 IIAC members and was not on the city council. While the committee had quasi-official status, it did not draft any proposed legislation and, even if it did, the committee’s proposal recommended against the challenged classification. In addition, although the IFA presented some evidence that city officials also criticized the franchise model, the statements that it cited were “too indirect and limited to overcome the evidence of the provision’s permissible purpose.”

No discriminatory effects. IFA also argued to no avail that the district court wrongly applied a heightened evidentiary burden and an incorrect standard in analyzing whether the statute would cause discriminatory effects. To make this showing, the lower court correctly required the IFA to provide evidence that the statute “causes local goods to constitute a larger share and goods with an out-of-state source to constitute a smaller share of the market.” Yet the court did not rely solely on this “mix of goods” test; it also considered whether the ordinance would cause franchisees to suffer a “competitive disadvantage as compared to other similarly situated small businesses,” “increas[e] costs for a particular type of business model,” create barriers to entry, raise labor costs “in a way that will impact the flow of interstate commerce,” cause franchisees to close or reduce operations, or generally affect interstate commerce. Thus, while the “mix of goods” test was on its own insufficient, the lower court did not err because it had evaluated a whole range of possible effects.

Nor was there clear error in the lower court’s finding that that IFA did not offer substantial evidence of discriminatory effects on out-of-state firms or interstate commerce. IFA’s showing that 96.3 percent of Seattle franchisees are affiliated with out-of-state franchisors, and that in-state franchisees will be placed at a competitive disadvantage, did not prove that the ordinance would have a discriminatory effect on out-of-state firms. “Rather, to the extent the ordinance has an effect, its primary or perhaps exclusive effect is to harm in-state firms—franchisees located in Seattle,” the appeals court reasoned. “These in-state firms will face a higher wage requirement relative to franchisees outside of Seattle and non-franchisees.” Alternatively, the appeals court suggested, “the ordinance can be viewed as harming one type of in-state entity (franchisees) while benefitting another type of in-state entity (non-franchisees). Neither comparison shows that in-state economic interests are benefitted by burdening out-of-state competitors.”

Finally, even crediting IFA’s contention that a disparate impact on national chains discriminates against interstate commerce, the district court did not clearly err in finding that this affiliation rate, along with franchisee declarations to this effect, were insufficient. The record did not show that interstate franchise networks will face higher costs or reduce their investment and operations in Seattle, or that the ordinance will discourage the flow of goods in interstate commerce. Nor did it show that interstate firms will be excluded from the market, earn less revenue or profit, lose customers, close or reduce stores, or that new franchisees will not enter the market or that franchisors will suffer adverse effects.

No equal protection violation. Rejecting the IFA’s equal protection claim, the appeals court found no clear error in the holding below that the franchisee classification had a legitimate purpose and that there was a rational relationship between franchisees and their classification as large employers. The district court found that a “reasonably conceivable state of facts” could support the classification based on “the economic benefits flowing to franchisees” and franchisees’ ability to “handle the faster phase-in schedule.” Underlying this determination were declarations from experts on franchises as well as individual franchisees. At any rate, the city did not have to base its determination on empirical data; its classification was entitled to a strong presumption of validity, the appeals court pointed out. “It is legitimate and rational for the City to set a minimum wage based on economic factors, such as the ability of employers to pay those wages.”

No First Amendment breach. The Ninth Circuit also found no merit in the IFA’s First Amendment challenge. IFA argued that the ordinance discriminates on the basis of protected speech because two of three definitional criteria for franchises—(1) operating under a marketing plan prescribed by a franchisor, and (2) associating with a trademark or other commercial symbol—are based on speech and association. The appeals court was not persuaded. “Seattle’s minimum wage ordinance is plainly an economic regulation that does not target speech or expressive conduct,” it wrote. “The conduct at issue—the decision of a franchisor and a franchisee to form a business relationship and their resulting business activities—exhibits nothing that even the most vivid imagination might deem uniquely expressive.” Moreover, the ordinance clearly was not motivated by a desire to suppress speech.

No Lanham Act preemption. The district court correctly held the IFA did not show a likelihood of success on this claim, as the ordinance does not conflict with the purposes of the Act, the court held. According to the IFA, because the Seattle ordinance defines franchisees in part based on their shared use of a trademark, it frustrates the purposes and objectives of the Lanham Act. The ordinance does not interfere with a franchise’s ability to maintain quality, compromise the public’s confidence in trademarks, allow misappropriation, or directly interfere with or regulate marks. Further, there was no evidence that Congress, in enacting the Lanham Act, clearly intended to preempt an ordinance of this nature. Thus, the ordinance was not preempted.

No state constitutional violation. The IFA’s claim that the ordinance violates the privileges and immunities clause of the state constitution failed as well. This provision is not violated “anytime the legislature treats similarly situated businesses differently.” Rather, to state a viable claim, IFA had to show that the classification derogated “a fundamental right which belongs to the citizens of the state by reason of such citizenship.” It failed to do so. The city permissibly determined that franchisees have material advantages over non-franchisees that affect their ability to absorb increases in the minimum wage. That distinction related to the ordinance’s subject matter; this differential treatment did not run afoul of the state constitution.

Harm was speculative. Although the evidence was mixed, the district court erred in rejecting IFA’s evidence of competitive injury, according to the court. The IFA contended that as a result of the ordinance, franchisees will suffer competitive injury, lose customers and goodwill, and go out of business. The declarations of franchise owners and the ordinance’s text indicate that franchisees will face a higher minimum wage obligation compared to non-franchisees. Franchisees will experience higher labor costs or lose the flexibility to pay workers the wage rate required of non-franchisees. The allegations are neither conclusory nor without support in the record. And this competitive disadvantage constitutes irreparable harm.

IFA did not show, however, that franchisees face irreparable harm as a result of losing customers or goodwill. The only evidence supporting these allegations is the speculation of franchise owners that higher wages will result in higher prices and reduce demand. It was impossible to evaluate on the record evidence whether franchisees will need to raise prices or whether price changes will result in decreased demand. Consequently, the chain of events suggested by IFA is speculative, and it does not rise beyond the mere “possibility” of harm.

Other injunctive factors. The district court also erred in finding that the IFA did not demonstrate that the balance of hardships tips in its favor. The inquiry is not between franchisees and workers, the appeals court explained, but between the franchisees and the municipality—the parties to this suit. If the ordinance goes into effect, franchisees will face a higher wage requirement than their competitors; on the other hand, the city did not show it would face a corresponding hardship from the issuance of a preliminary injunction.

In contrast, the district court properly concluded that the public interest disfavored IFA’s requested relief. Granting a preliminary injunction would likely result in many workers earning lower wages. Moreover, the IFA did not raise serious questions going to the merits on any of its claims. On balance, then, the district court correctly denied the IFA’s motion for injunctive relief.

The case is No. 15-35209.

Attorneys: Paul Clement (Bancroft PLLC) for International Franchise Association. Erin Lindsay Calkins (Susman Godfrey) and Gregory C. Narver, Seattle City Attorney’s Office, for City of Seattle.

Companies: International Franchise Association, Inc.

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