Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—E.D. Pa.: Cleaning service franchisee’s claims of employee misclassification scheme not subject to remand, (Nov 5, 2014)

By Linda O’Brien, J.D., LL.M.

A cleaning service franchisee was not entitled to remand of his putative class action against a commercial cleaning service franchisor and its two sub-franchisors for allegedly engaging in a misclassification scheme to enlist employees as franchisees and misclassify them as independent contractors in order to avoid employer obligations,the federal district court in Philadelphia has held (Torres v. CleanNet, U.S.A., Inc., November 4, 2014, Brody, A.).

CleanNet U.S.A. is a commercial cleaning service franchisor that operates through two sub-franchisors, MKH Services and CleanNet Systems of Pennsylvania (CleanNet PA), in Pennsylvania. In March 2012, Eddy Torres entered into a franchise agreement with MKH to become a CleanNet franchisee. In the agreement, MKH agreed to provide Torres with a certain amount of gross monthly billings if Torres paid an initial franchise fee. When CleanNet failed to provide Torres with the required gross monthly billings, Torres sought a refund of the franchise fee. After CleanNet refused to issue a refund, Torres filed suit against CleanNet, MKH, and CleanNet PA, alleging violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, among other claims. Torres alleged that CleanNet misrepresented the terms of the relationship between CleanNet and its franchisees, misclassified them as independent contractors, and evaded obligations of an employer under state law. Torres also contended that CleanNet maintained control over all aspects of the janitorial service performed by Torres and, as a result of the misclassification scheme, owed Torres wages.

Torres originally filed the case in state court; however, the defendants removed the diversity class action to the district court pursuant to the Class Action Fairness Act (CAFA). Subsequently, Torres moved to remand based on the home state and local controversy exceptions to subject matter jurisdiction under CAFA.

Home state exception. The court found that the home state exception did not apply. To prove that this exception applies, a party seeking remand must: (1) show that two-thirds or more of the putative class are citizens of the state where the action was originally filed; (2) establish the citizenship of the defendants; (3) identify the primary defendants; and (4) show that two-thirds or more of the putative class are citizens of the same state as the primary defendants.

In this case, more than two-thirds of the putative class members, MKH, and CleanNet PA were citizens of Pennsylvania, while CleanNet, the primary defendant, was a citizen of Virginia. According to the court, Torres’ allegations that – the defendants operated as joint employers of Torres and the class, MKH and CleanNet PA were uniformly controlled by CleanNet, and CleanNet maintained controlled all aspects of the janitorial services performed by franchisees – established that CleanNet was the real target of Torres’ complaint and Torres sought to hold CleanNet directly liable for each alleged violation. Additionally, CleanNet would sustain the greatest loss if found liable as the mastermind of the scheme and joint employer of all class members. Since CleanNet was the primary defendant, the exception did not apply, the court noted.

Local controversy exception. A party seeking remand under the local controversy exception must show: (1) that two-thirds or more of the putative class are citizens of the state where the action was originally filed; (2) at least one defendant is a citizen of the state where the action was originally filed; (3) the local defendant’s conduct forms a significant basis for the claims asserted; (4) the plaintiff is seeking significant relief from the local defendant; (5) the injuries occurred in the state where the action was originally filed; and (6) no other class action asserting the same or similar allegations against any of the defendants has been filed in the preceding three years.

According to the court, several weeks before Torres filed his action, a class action was filed against CleanNet and an Illinois operator in the Northern District of Illinois, titled Sanchez v. CleanNet U.S.A., Inc. In Sanchez, the plaintiff made factually and legally similar allegations against CleanNet. It was indisputable that Torres’ suit and the Sanchez litigation contained very similar factual allegations and analogous legal claims against the same defendant. Torres’ decision to limit the class to Pennsylvania franchisees and bring only state law claims did not remove the similarities. Torres’ suit was not truly a local controversy that affected only Pennsylvania since, as alleged in both complaints, CleanNet controlled operations in franchises nationwide and misclassified all of its franchisees. Thus, the local controversy exception did not apply since the Sanchez litigation was an “other class action,” the court concluded.

The case is No. 14-2818.

Attorneys: Charles J. Kocher (Saltz Mongeluzzi Barrett & Bendesky PC) for Eddy Torres. Martha J. Keon (Littler Mendelson, PC) for CleanNet U.S.A., Inc. and CleanNet Systems of Pennsylvania, Inc. David Kraut (Kraut Harris PC) for MKH Services, Inc.

Companies: CleanNet U.S.A., Inc.; MKH Services, Inc.; CleanNet Systems of Pennsylvania, Inc.

Cases: StateUnfairTradePractices FranchisingDistribution PennsylvaniaNews