Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Wash.: Seattle not enjoined from enforcing minimum wage law against franchisees, (Mar 18, 2015)

By Jody Coultas, J.D.

International Franchise Association, Inc. (IFA), an organization of franchisors, franchisees, and suppliers, was denied an injunction that would have compelled the City of Seattle to treat franchisees as “small” businesses rather than “large” businesses under its minimum wage ordinance by the federal district court in Seattle (International Franchise Association, Inc. v. City of Seattle, March 17, 2015, Jones, R.). The court found that it was unlikely IFA would prevail on the merits of its claims against the City.

In 2014, the City of Seattle increased the minimum hourly wage from $9.47 to $15. The increase goes into effect April 1, 2015, with a faster phase-in applicable to large businesses (defined as those with 500 or more employees nationwide) and a slower phase-in applicable to small businesses. Because franchisees were considered large if their franchise network collectively employs more than 500 employees nationwide, they are subject to the faster, three-year phase-in schedule. IFA has filed suit against the City, arguing that the categorization of franchisees as large businesses discriminates against those businesses, and sought to enjoin those provisions that allegedly discriminated against small franchised businesses.

Specifically, IFA argued the City’s wage ordinance violated the: (1) Commerce Clause; (2) Equal Protection Clause; (3) First Amendment; and (4) Privileges and Immunities Clause of the Washington State Constitution. IFA also argued the ordinance was preempted by the Lanham Act and ERISA.

Commerce Clause. The dormant Commerce Clause bars state and local governments from erecting taxes, tariffs, or regulations that favor local businesses at the expense of interstate commerce. If a statute discriminates facially, has a discriminatory purpose, or has a discriminatory effect against interstate commerce, the state must justify that discrimination by showing the discrimination is necessary to achieve a legitimate local purpose and that there is no reasonable non-discriminatory means for accomplishing the same objective. The law will only be invalidated if plaintiffs can show that the burden on interstate commerce is clearly excessive in relation to the putative local benefits.

The minimum wage ordinance did not discriminate against interstate commerce, according to the court. Statements made by City councilmembers did not expressly suggest an intent to discriminate against out-of-state interests, but merely distinguished between entities with more resources and those with fewer resources. Also, the few, isolated statements submitted by IFA could not construed as evidence of a discriminatory motivation that would override the Council’s formal statement of purpose in the ordinance itself. The record also did not reveal any significant departures from normal procedures in enacting the ordinance. The findings by the Mayor and other lawmakers regarding the benefits flowing to franchisees from their franchisors supported the conclusion that franchisees were categorized as “large” employers based upon a determination that they could handle the faster phase-in schedule, not by any protectionist motive.

There was no evidence that the ordinance would have an impact on interstate commerce one way or the other, and the court declined to infer that it will necessarily have a negative one. IFA argued the ordinance overwhelmingly burdened out-of-state entities because most franchises in Seattle had out-of-state franchisors, and that the ordinance would put franchisees at a competitive disadvantage as compared to other similarly situated small businesses by increasing their labor costs. However, franchises and small businesses are not similarly situated and comparisons between the two business models were difficult. IFA could not show that the faster phase-in schedule would cause local goods to constitute a larger share and goods with an out-of-state source to constitute a smaller share of the market.

Equal Protection. Because a “reasonably conceivable state of facts” supported the City’s decision, the court could not change that decision. IFA alleged that the ordinance arbitrarily and irrationally discriminated against franchisees because it treated franchisees employing only 5-10 employees as “large” employers and subjected them to the faster phase-in schedule than a small business with 5-10 employees. Courts must respect the legislative branch’s “rightful independence and its ability to function,” and absent some reason to “infer antipathy,” a court cannot replace its judgment for the judgment of lawmakers. The facts presented confirmed that there was a rational basis for the City’s decision to classify franchisees as “large” businesses, and the City could have reasonably felt that franchisees are in a better position than independent small businesses to deal with wage increases.

First Amendment. The ordinance does not penalize speech or association, according to the court. IFA argued that the faster phase-in schedule violated their freedoms of speech and association under the First Amendment, and penalized franchisees for their association with franchisors and “their decision to engage in protected speech.” The definitions used by the City were no different than many other federal and state laws which regulate franchises. If the court were to accept IFA’ argument, it would mean that any regulation that impacts a franchisee’s operation costs implicates the First Amendment because it would necessarily reduce funds that would otherwise be available for “coordinated marketing and advertising” and other forms of commercial speech.

Privileges and Immunities under Washington State Constitution. IFA alleged that the ordinance infringed their fundamental right to “carry on business” in Seattle. Washington courts have often construed the privileges and immunities clause of the Washington State Constitution consistent with the federal Equal Protection Clause. However, if the matter at issue is one of particular local concern—such as the power to regulate wages—an independent analysis is warranted.

Because the ordinance did not implicate a privilege under the Washington Constitution, the court’s reasoning regarding the Equal Protection clause claim applied. While IFA was correct that the slower phase-in schedule favored small independent businesses over other types of businesses in Seattle, it failed to show that this benefit was a “privilege” that implicated the Washington Constitution.

Even if the ordinance implicated a “privilege or immunity,” the claim would fail because there were reasonable grounds for the distinction between franchisees and small independent businesses.

Lanham Act preemption. The Lanham Act did not preempt the ordinance, according to the court. There is a presumption against preemption in areas where states have traditionally exercised their police powers. Also, nothing in the ordinance conflicted with the purposes of the Lanham Act. The ordinance relied on trademark use as one indicator that a business is a franchise. IFA was unable to cite any case that held that such a categorization “interferes” with the use of trademarks in violation of the Lanham Act.

ERISA preemption. ERISA did not preempt the ordinance, according to the court. IFA alleged that provisions allowing large employers who offer employees health plans classified as “silver” or “gold” under the federal Affordable Care Act, the opportunity to take advantage of an alternative, more favorable, wage schedule were preempted by the Employment Retirement Income Security Act (ERISA). This argument was not relevant to the pending motion because the health plan-related provisions had no impact on the franchise-related provisions at issue. Regardless, the court found that IFA would not succeed on the merits of the claim.

The case is No. C14-848 RAJ.

Attorneys: H. Christopher Bartolomucci (Bancroft PLLC) for International Franchise Association, Inc. Drew Derrick Hansen (Susman Godfrey LLP) and Gregory Colin Narver, Seattle City Attorney's Office, for City of Seattle.

Companies: International Franchise Association, Inc.

Cases: FranchisingDistribution WashingtonNews