International Franchise Association v. State of California

CourtDistrict Court, S.D. California
DecidedJanuary 12, 2022
Docket3:20-cv-02243
StatusUnknown

This text of International Franchise Association v. State of California (International Franchise Association v. State of California) is published on Counsel Stack Legal Research, covering District Court, S.D. California primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
International Franchise Association v. State of California, (S.D. Cal. 2022).

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 INTERNATIONAL FRANCHISE Case No. 20-cv-02243-BAS-DEB ASSOCIATION, et al., 12 ORDER GRANTING DEFENDANTS’ Plaintiffs, 13 RULE 12(b)(1) MOTION TO v. DISMISS AND DISMISSING 14 ACTION WITHOUT PREJUDICE STATE OF CALIFORNIA, et al., 15 (ECF No. 18) Defendants. 16

18 Plaintiffs, various interest groups and associations serving the franchisors and 19 franchisees in the United States, seek the Court’s pre-enforcement review of California 20 Labor Code Section 2775(b)(1). Section 2775(b)(1) codifies the “ABC Test” to determine 21 whether a worker should be classified as an employee or an independent contractor. 22 Plaintiffs argue that the ABC Test, as applied to franchises, violates the Dormant 23 Commerce Clause, constitutes regulatory taking without just compensation, and is 24 preempted by federal law. Because Plaintiffs’ action is not ripe under Article III and their 25 constitutional claims fail on prudential ripeness grounds, the Court grants Defendants’ Rule 26 12(b)(1) motion and dismisses this action without prejudice for lack of subject matter 27 jurisdiction. 28 // 1 BACKGROUND 2 I. Statutory Background 3 In 2018, the Supreme Court of California decided Dynamex Operations W. v. 4 Superior Ct., 4 Cal. 5th 903, 416 P.3d 1 (2018). The Dynamex court held that a three- 5 factor test, known as the “ABC Test,” should be applied to determine whether a worker is 6 an employee or an independent contractor. The ABC test requires that workers be 7 classified as employees unless they meet all of the following criteria: 8 (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for 9 the performance of the work and in fact; and (B) that the worker performs 10 work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established 11 trade, occupation, or business of the same nature as the work performed. 12 13 Dynamex, 416 P.3d at 35. On September 18, 2018, the California legislature enacted Labor 14 Code Section 2775, which adopted the ABC test to determine whether “a person providing 15 labor or services for remuneration” should be considered an employee or an independent 16 contractor for purposes of the Labor Code, the Unemployment Insurance Code, and wage 17 orders of the Industrial Welfare Commission.1 2019 Cal. Legis. Serv. Ch. 296 (A.B. 5) 18 (West). Section 2775(b)(1) states in full: 19 For purposes of this code and the Unemployment Insurance Code, and for the purposes of wage orders of the Industrial Welfare Commission, a person 20 providing labor or services for remuneration shall be considered an employee 21 rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied: 22

24 25 26 1 The ABC Test, by statute, has since been extended to determine the eligibility for workers’ compensation, unemployment insurance, and disability insurance. See Cal. Labor Code § 3351(i). The 27 legislature enacted statutory exceptions to the application of Section 2775 but did not carve out a separate exception for franchisors or franchisees. See id. §§ 2776–84. 28 1 (A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract 2 for the performance of the work and in fact. 3 (B) The person performs work that is outside the usual course of the 4 hiring entity's business. 5 (C) The person is customarily engaged in an independently established 6 trade, occupation, or business of the same nature as that involved in the 7 work performed.

8 Cal. Labor Code § 2775(b)(1). 9 The ABC Test replaced a prior, multi-factor test set forth in S. G. Borello & Sons, 10 Inc. v. Dep’t of Indus. Rels., 48 Cal. 3d 341, 769 P.2d 399 (1989). That test considered the 11 degree of control exerted over work and various other factors: 12 (a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, 13 the work is usually done under the direction of the principal or by a specialist 14 without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and 15 the place of work for the person doing the work; (e) the length of time for 16 which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular 17 business of the principal; and (h) whether or not the parties believe they are 18 creating the relationship of employer-employee.

19 Borello & Sons, 48 Cal. 3d at 350–51. 20 California Labor Code provides instances in which the Borello test, rather than the 21 ABC Test, governs, including when a court determines that the ABC Test “cannot be 22 applied to a particular context.” Cal. Labor Code §§ 2775(b)(3), 2785(d). 23 24 II. Procedural History 25 Plaintiffs International Franchise Association (“IFA”), Asian American Hotel 26 Owners Association (“AAHOA”), Supercuts Franchisee Association (“SFA”), and Dunkin 27 Donuts Independent Franchise Owners Association (“DDIFO”) filed the present action on 28 November 17, 2020. (Compl., ECF No. 1.) Plaintiffs’ initial pleading sought declaratory 1 and injunctive relief on the ground that the application of the ABC Test to franchises is 2 preempted by the FTC Franchise Rule and the Lanham Act. (Id.) Defendants moved to 3 dismiss the Complaint for lack of jurisdiction and for failure to state a claim, based in part 4 on Plaintiffs’ failure to establish ripeness of their claims. (Defs.’ First Mot. Dismiss, ECF 5 No. 10). 6 In response, Plaintiffs filed an Amended Complaint (First Am. Compl. (“FAC”), 7 ECF No. 14), which contains the following allegations. IFA is an advocacy organization 8 that represents the interests of the franchising industry. (FAC ¶ 40.) IFA’s members “are 9 currently subject to civil and criminal penalties for misclassification and willful 10 misclassification” because “[v]irtually all franchise agreements state that the parties are 11 independent contractors.” (Id. ¶ 47.) 12 AAHOA is an association of hotel owners, which advocates the business interests of 13 its members. (FAC ¶ 42.) SFA is an association of franchisees of the Supercuts franchise. 14 (Id. ¶ 43.) DDIFO is an association of franchisees of the Dunkin Donuts franchise. (Id. 15 ¶ 44.) AAHOA, SFA, and DDIFO allege that their right “to control their own relationships 16 with their own employees is also disrupted by the express language in Cal. Labor Code § 17 2775(b)(1).” (Id. ¶ 48.) They allege that their members—franchisees of hotels, the 18 Supercuts hair salons, and Dunkin Donuts stores—may be classified as employees under 19 Section 2775(b)(1) of the California Labor Code. (Id.) AAHOA, SFA, and DDIFO also 20 allege that their members are “at risk of losing the benefits of ownership of a franchise” 21 because if classified as employees, their earnings will become the property of the 22 employers under Section 2860 of the California Labor Code that makes everything an 23 employee acquires by virtue of employment the property of the employer.

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International Franchise Association v. State of California, Counsel Stack Legal Research, https://law.counselstack.com/opinion/international-franchise-association-v-state-of-california-casd-2022.