Preliminary Thoughts on the Int’l Franchise Ass’n Challenge to Seattle’s $15 Minimum Wage

Just this afternoon the International Franchise Association filed a complaint in federal court challenging Seattle City Ordinance No. 124490—the $15 minimum wage ordinance. Because the plaintiffs are seeking a preliminary injunction, and because the claims are not fact-based and are therefore ripe for resolution on a motion to dismiss, I imagine the court will have the opportunity to resolve the legal challenges relatively quickly. But that’s no reason not to start speculating now!

IFA’s claim is relatively simple: The Ordinance sets up two separate timelines—one for “big” businesses and one for “small” businesses. The big businesses have to ramp up to $15 more quickly than do the the small businesses. So far, so good. The problem, from IFA’s point of view, is that in determining whether a franchisee’s business is small or big, the Ordinance counts not only the employees of the franchisee, but all the employees of all franchisees in the entire national network. IFA thinks that is unfair for a variety of reasons.

And on some level, perhaps the distinction is “unfair” in some sense of the word. If I’m a franchisee who owns a Subway sandwich shop with ten employees, why should I have to pay my workers more than Biff’s sandwich shop next door (with 100 employees!) just because I’ve opted for a franchise business model and Biff has opted for a more independent model? That’s not fair!

But generalized grievances about unfairness don’t sustain lawsuits. So how does IFA make this a federal case? It asserts eight (eight!) separate violations, some more interesting than others. At first glance, I don’t think any of the claims are likely to survive a motion to dismiss. I’ll take a quick crack at each cause of action after the jump:

Count I — Violation of the Dormant Commerce Clause

Generally, a state law cannot discriminate against out-of-state businesses to benefit the state’s own businesses. In its crudest form, the Commerce Clause prevents states from imposing protectionist tariffs against other states. Seems reasonable.

IFA claims that the Ordinance is “a form or protectionist legislation” because it “preferences small local employers and prejudices other small employers merely because of their affiliation with out-of-state operations, namely franchise networks.” (Compl. ¶¶ 126, 127.) I don’t think that’s going to fly.

On its face, the Ordinance does not treat out-of-state businesses any differently than in-state businesses. Out-of-state small businesses get the same treatment as in-state small businesses. And if Starbucks or Tully’s or Pagliacci or Caffe Vita or any other Seattle-basd chain decided to adopt a franchise model, the Ordinance would apply to them just like it would apply to an out-of-state franchisee. So I don’t see the Commerce Clause challenge.

Count II — Violation of the Equal Protection Clause of the U.S. Constitution

Usually, when we talk about Equal Protection Clause challenges, we are talking about laws that have discriminatory effects based on race, sex, or some other protected class. But the EPC applies to everyone; we generally focus on protected classes because laws adversely affecting protected classes get heightened review under the EPC. But laws affecting non-protected classes—like franchisees—get a much lower standard of review, which is known as “rational basis review.” Basically, so long as Seattle can come up with any possible reason why it would want to treat small franchisees more like “big” businesses and less like “small” businesses, then the Ordinance will survive. This is such a low standard, that virtually any law can pass it.

I can’t imagine Seattle having trouble coming up with some rational basis. Even something like this should be enough: “Well, we don’t want to incentivize large companies converting to a franchise model to avoid the impact of the Ordinance, so we treated the franchises like big businesses.” Possible? Rational even if it’s wrong? Then it’s good enough.

Count III — Violation of Article I, Section 12 of the Washington Constitution

This is where things get interesting. Unlike the U.S. Constitution, the Washington Constitution has a separate “equal protection” provision that (sort of) prohibits laws benefiting one “class of citizens” without extending those benefits to other citizens as well. Though the Washington Supreme Court used to interpret this Clause in lockstep with the U.S. Constitution’s EPC, recently the Court has given the Washington protections a bit more teeth. See, e.g.Ockletree v. Franciscan Health Sys., 179 Wash. 2d 769, 776 (2014) (describing historical interpretations of Washington’s Art. I, Sec. 12).

Under the Washington Constitution, a court must employ a two-step analysis. First, does the relevant law involve a “privilege or immunity” under Washington law? See id. If not, then Art. I, Sec. 12 has nothing to say on the matter. If so, then the law survives if “the legislature had a ‘reasonable ground’ for granting the privilege or immunity.” Id.

On the first question, what would be the relevant privilege or immunity granted by the Ordinance? The right to run a small business and pay your employees a certain wage? The right to run a business using a chosen corporate structure? The right to run a business using a chosen corporate structure without government interference? The right to choose what sort of supply-chain and marketing structure you want in connection with your sale of fast food submarine sandwiches? I’m not sure, but it doesn’t seem like a recognized privilege or immunity is at issue here.

On the second question, the “reasonable ground” test is a bit more strict than the federal “rational basis” test, so Seattle would have to come up with something better than a plausible-sounding hypothetical. But they can probably do that. Here’s Seattle’s Mayor just this afternoon, explaining why franchisees are different, via Gene Johnson of the AP:

But Seattle Mayor Ed Murray rejected any assertion of unfairness, saying that the franchises have advantages unavailable to other local businesses. For example, fast food franchises have menus, a supply chain, training and advertising provided by national corporate entities, he noted.

Count IV — The Lanham Act???

This one… I can’t really get my head around this one. The IFA notes that one of the purposes of the federal Lanham Act is to “protect registered [trade]marks used in [interstate] commerce from interference by State, or territorial legislation.” (Compl. ¶ 141.) By regulating franchisees, who often use trademarks in their businesses, the IFA claims that the Ordinance “frustrates the objectives of the Lanham Act” and is therefore “preempted.” (Id. ¶ 142.)

Huh? I am not an IP lawyer, but this claim seems frivolous to me. Franchisees generally use federally registered trademarks, and so a city ordinance that applies to “big” businesses, including franchisees, violates a “purpose” of the Lanham Act? True, the Ordinance does mention the word “trademark” in the definition of “Franchise,” but it is mentioned along with other common traits of franchises, such as common “trade name, advertising, or other commercial symbol; designating, owned by, or licensed by the grantor or its affiliate.” In other words: One way to determine if you are a Subway franchise is that you’re using a big Subway trademark in your business. How that definition constitutes a Lanham Act violation is beyond me. IP folks? Care to help me out here?

Count V — ERISA Preemption?

I spent most of my career in federal civil practice (and clerking) avoiding ERISA cases. The Ordinance does refer to medical benefits in calculating what goes into an employee’s “wage.” But whether those references somehow interfere with ERISA…. I leave that to ERISA practitioners/scholars.

Count VI — Violation of State Corporation Law

Under state corporate law, the separate corporate form is respected absent some sort of fraud or abuse. Individual franchises operate as separate individual corporations, so the IFA claims that the Ordinance “violates this doctrine of corporate separateness” by grouping separate franchises into a single unit when determining whether the franchise is a “big” or “small” business.

This argument seems like a non sequitur. The Ordinance doesn’t disregard the corporate form. It just doesn’t think the corporate form is the end-all-be-all when determining how to apply its minimum wage law. What’s wrong with that? I don’t see how such a categorization “violates” state law regarding the corporate form.

Count VII — Violation of the Contracts Clause of the U.S. Constitution (and Washington Constitution)

As far as I can tell, IFA’s claim is this: The Ordinance is going to make it difficult for franchisees to run their businesses in compliance with their franchise contracts. Therefore, the ordinance is going to unconstitutionally interfere with those franchise contracts.

But that argument would apply regardless of whether franchisees were treated as “big” or “small” businesses. The franchisees just think the minimum wage is too high. That’s not a constitutional claim. And for what it’s worth, the Complaint hardly supports this cause of action; it gets two explanatory paragraphs. (See Compl. ¶¶ 164, 165.) Once again, this one seems frivolous to me.

Count VIII — Violation of the Freedom of Speech under the First Amendment

This one is my favorite. According to the Complaint, the increased minimum wage “will curtail franchisee commercial speech in at least three important respects.” (Compl. ¶ 169.) First, by having to pay their employees more money, the franchisees will have less money for “the promotion of their businesses and their brands.” (Id.) Seriously. Second, paying a $15 might drive some franchisees out of business, thereby “reducing the amount of relevant commercial speech they engage in to zero.” (Id.) Again, seriously. And third, hypothetical not-yet-in-existence potential franchise purchasers might not purchase a franchise now, which means they will never exist, which would “eliminat[e] all associated speech.” (Id.) Wowsa. Seriously.

The IFA claims that the minimum wage increase violates the rights of potential hypothetical future purchasers who will now not purchase a franchise and therefore will be unconstitutionally prevented from saying things such as “Come in here and buy a Subway sandwich.”

I can’t imagine that claim has much (read: “any”) merit.

*   *   *   *

So my quick take is that there’s not much merit here. But please weigh in if you see something I’m missing. Paul Clement signed this thing after all, so my guess is there’s at least half a good claim in here somewhere.

 

 

One thought on “Preliminary Thoughts on the Int’l Franchise Ass’n Challenge to Seattle’s $15 Minimum Wage

  1. Pingback: Does Article I, Section 12 of the Washington Constitution Apply to Classes of Corporations? | Ziff Blog

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