Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—CalCtApp: District Manager Was Not a Franchisee or Employee of Insurance Company, (Nov 9, 2012)

By John W. Arden, J.D., LLM.

A district manager for Farmers Group, Inc. was an independent contractor of the insurance company rather than either a franchisee within the California Franchise Investment Act or an employee of the insurance company, the California Court of Appeal has ruled (Zentner v. Farmers Group, Inc., November 8, 2012, Grimes, E.). Thus, the manager’s wrongful franchise termination and wrongful discharge claims were properly dismissed.

On May 1, 1981, James R. Zentner signed a District Manager’s Appointment Agreement with Farmer’s Insurance Exchange and related companies. As district manager, he agreed to recruit and train insurance agents in exchange for “overwrite” commission payments based on the amount of business generated by the agents he referred to Farmers.

The agreement provided that Zentner was an independent contractor. It specifically stated that “[n]othing contained herein is intended or shall be construed to create the relationship of employer and employee.” It also stated that the agreement “may be cancelled without cause by either the District Manager or the Companies on 30 days written notice.”

The agreement said that the companies were to exercise no control over the persons solicited by Zentner, the area where he solicited agents, or the manner in which he carried out the objectives of the agreement. Zentner leased his own office, hired his own employees, controlled how they performed their duties, and determined how to pay them. He paid his employees with W-2s that listed him as their employer. Moreover, Zentner did not pay any fee to enter the agreement and did not actually sell insurance or any other goods.

After being terminated pursuant to the agreement, Zentner brought an action against Farmers and affiliated companies for breach of contract, wrongful termination of a franchise agreement, defamation, violation of the California Unfair Competition Law, and interference with prospective business advantage. The trial court disposed of all claims on summary judgment, concluding that Zentner was an independent contractor, rather than an employee or franchisee. Zentner appealed, contending that there were triable issues of fact regarding his status as a franchisee and an employee.

Employment Status

The question of whether Zentner was an employee or an independent contractor turned on the degree of control exercised by Farmers, the appellate court noted. Although the “control” test was the most important consideration, there were other indicia of the nature of the relationship, such as the right to discharge at will, the kind of occupation involved, the skill required, the party supplying the instruments and tools, the method of payment, and the belief of the parties regarding the nature of the relationship.

Farmers introduced evidence that the parties agreed in the District Manager’s Appointment Agreement that Zentner was an independent contractor and that Farmer’s exerted very little control over his day-to-day operation. The fact that Zentner had the sole discretion over his work hours, leased his own office space, hired his own employees, controlled how they performed their duties, set the hours of work, and had sole discretion of how to pay employees all supported the conclusion that Zentner was an independent contractor.

Zentner did not dispute this evidence and cited no competing proof of the existence of an employment relationship. His arguments on appeal—that he was required to attend meetings, prepare progress reports, and issue a business plan—did not tip the scales in favor of a finding of an employment relationship. “The degree of control exercised by defendants is only that of a contracting party seeking to have the services it contracted for delivered in an acceptable manner,” in the court’s view. As a matter of law, the factors established that Zentner was an independent contractor.

Franchise Relationship

In the alternative, Zentner argued that he was a franchisee. He contended that he offered the service of recruiting agents for Farmers, provided training services to agents, and was required to pay various expenses to Farmers that should be construed as franchise fees.

Under the California Franchise Investment Law, a franchise exists when:

“A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and…the operation of the franchisee’s business pursuant to such a plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and…the franchise is required to pay, directly or indirectly, a franchise fee” of at least $500 annually.”

Right to engage in business under marketing plan. Zentner was not granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan prescribed in substantial part by Farmers, the court found. According to guidelines issued by the California Commissioner of Corporations, “the franchisee must be granted the right to offer, sell, or distribute goods or services to others rather than solely to the franchisor.” While Zentner contended on appeal that he offered recruitment and training services to prospective agents as well, this theory was not advanced in opposition to the motion for summary judgment or in the complaint, the court noted.

Franchise fee requirement. There was no evidence that Zentner paid a franchise fee, as required by the Franchise Investment Law, the court concluded. The statute defines “franchise fee” as “any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including, but not limited to, any payment for goods and services.”

In his deposition, Zentner admitted that he paid no fee at the time he entered into the District Manager’s Appointment Agreement. In his declaration, however, he asserted that he was required to pay a number of expenses, which he characterized as franchise fees, such as expenses to attend Farmers’ conferences, the costs to establish call centers to generate leads, and the costs of buying leads for his agents from Farmers. Zentner claimed that he was required to promote Farmers’ products by offering trips, cash, and gifts to agents. He was required to enter into separate contracts for “career” or full-time agents, in which he agreed to partially guarantee subsidy loans that Farmers provided to agents. Repayment of the loans was automatically deducted from Zentner’s monthly payments and amounted to more than $500, he alleged.

This evidence did not establish a triable issue of fact that Zentner paid a franchise fee rather than ordinary business expenses. Zentner risked no capital and made no unrecoverable investment in Farmers for the right to do business, the court held. Zentner’s pay records did not indicate that he incurred liability from guaranteeing portions of loans Farmers made to career agents. This “fee” was not required to engage in business; it was entirely contingent on a number of variables, including an agent’s status as a “career agent,” the term of service of an agent and number of policies written, and the agent’s repayment of the loan.

“This is more accurately viewed as a potential recruitment cost, rather than any franchise fee,” the court observed.

The case is No. B235767.

Gregory J. Wood (O’Leary Wood & Robbins, LLP) for James R. Zentner. Sanford L. Michelman (Michelman & Robinson, LLP) for Farmers Group.

Cases: FranchisingDistribution CaliforniaNews