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Given Cendant's actions, Drachler said that the most significant impact of the class certification at this point is that Cendant now cannot propose any type of release to franchisees ' or even talk with them about the lawsuit ' without permission of the plaintiffs. “This is stopping the signing of more releases,” he said.

FDA Issues Menu-Labeling Guidance; Enforcement Still Several Months Away

Franchisors now have a better glimpse at new requirements for restaurant menu labels, after the Food and Drug Administration (“FDA”) released two guidance documents under the massive health care bill known as the Patient Protection and Affordable Care Act (“PPACA”). The menu-labeling provisions are designed to standardize rules across the country, in response to increasing numbers of municipalities enacting individual statutes.

“The law explicitly recognizes that uniformity is designed for restaurants with 20 or more units under a similar brand that operate across multiple jurisdictions,” stated the International Franchise Association (“IFA”), adding that the organization supports uniformity.

The FDA issued two guidance documents on Aug. 25. The first document states that menus or menu boards displayed at restaurants (as well as menus on Web sites) must contain the following disclosures:

• the number of calories in each standard menu item “as usually prepared and offered for sale” in a “clear and conspicuous” manner that is “adjacent to” the name of the standard menu item;
• a statement that puts the calorie information in the context of a total daily caloric intake; and
• a statement regarding the availability of additional nutrition information (in 10 categories, such as total fat, saturated fat, cholesterol, and dietary fiber).

The guidance also states that movie theaters, coffee shops, convenience stores, and vending machines are covered by the law, and that information must be provided about meat and alcohol.

Large franchisors are probably already operating in some localities that have menu-labeling rules, said Kristin Eads, a partner with Faegre & Benson LLP (Minneapolis). “It's a natural extension of what's been going on at the local level,” she said. “Those franchisors [already operating under local labeling requirements] might have to design new menu boards and signage. Even restaurants that have not had to comply will find that it's not that tough to do ' just sitting down and figuring out the calories and nutritional content in their foods.”

Smaller restaurant chains may opt in to the PPACA requirements and seek exemptions from state or local requirements. But states and local governments may petition the FDA for exemption from federal pre-emption, too.

The biggest threat to restaurants could come from lawsuits spurred indirectly by the new legislation, said Eads. She called it “a very real possibility” that consumer groups will test the foods and challenge restaurants if the disclosures are inaccurate.

The second FDA guidance document is a draft guidance that asks for comments on matters such as disclosure for variable-ingredient items (pizza with different toppings) and custom orders. The guidance also indicates that the FDA will not enforce labeling rules in the finalized guidance document until the issues in the draft document also are finalized ' even though some of the rules became effective when the PPACA was enacted in March 2010. This position drew some criticism from the IFA. “The dual track of implementation outlined by the FDA is a regulatory 'shoot-first, ask questions later' approach that will require restaurants to change their menus twice and create confusion among small-business owners and consumers during the process,” said David French, IFA senior vice president of government relations and public policy.

The FDA said it anticipates finalizing its guidance in December 2010. “I think the FDA will be thoughtful in its enforcement of the rules because they realize they have kinks that need to be worked out,” said Eads.

Century 21 Franchisees Win Nationwide Class Certification

On Aug. 17, New Jersey Superior Court Judge Robert J. Brennan certified a national class action by current and former Century 21' franchisees who alleged that Cendant Corp., which owned Century 21, misused national advertising royalty payments and did not deliver promised support services. Cendant purchased Century 21 in 1995 and instituted a number of operational changes that led to the filing of the lawsuit in January 2002. Today, Century 21 is owned by Cendant spin-off Realogy Corp.

Attorneys for the four representative plaintiffs estimate that at least 1,000 franchisees are covered by the class action, but they say that as many as 4,000 franchisees could be included in the class. “Right now we're working with the defendants to come up with a notification plan for the potential class members,” said Dan Drachler, of counsel to the Seattle office of Zwerling, Schachter & Zwerling, LLP, which filed the lawsuit on behalf of the franchisees. “Cendant has the contact information for franchisees during the class period of 1995 to 2002.”

On Aug. 18, Realogy issued a press statement, and it would not elaborate further to FBLA. The statement said, “The assertions put forth in this litigation are unfounded and without merit. We have capably managed the Century 21 brand since its acquisition in 1995 and have continuously enhanced the brand through many market cycles, including the worst downturn in housing in the history of our country. ' The claims in this 2002 lawsuit were without merit, and they remain so today. We will aggressively defend against these erroneous claims. This is a class action in which the complaint does not properly reflect the strong relationships we have with our current franchisees.”

On Sept. 7, Realogy filed with the appellate court, seeking to appeal to dismiss the class action.

Among the many twists and turns in the litigation, the franchisees at one point were denied class action standing, and they filed an appeal, which was denied. The judge who declined to certify the class action retired, and new opinions from the New Jersey Supreme Court changed the landscape for class actions in the state ' both of which developments possibly contributed to the certification this time, according to Drachler.

Franchisees have two primary complaints. The first is about alleged misuse and misappropriation of the National Advertising Fund (“NAF”). Century 21's Master Franchise Agreements required franchisees to contribute 2% of their gross revenue to the NAF. Those fees exceeded $40 million per year at their peak, and franchisees allege that some funds were used by Cendant for purposes not allowed under the terms of the NAF trust.

“All of this started when Cendant bought Century 21 in 1995,” said Drachler. “Shortly thereafter, it also bought two of Century 21's competitors, Coldwell Banker and ERA. Coldwell Banker came with a large number of company-owned stores ' and franchisees were told that these would be walled-off so that they would not compete with franchises. ' Instead, those company-owned stores eventually became part of National Realty Trust when Cendant acquired NRT in 2002. NRT is the world's largest residential real estate brokerage, and a big competitor of Century 21. Funds from the NAF were used by Cendant for its overhead and other expenses that benefited competitors of Century 21, instead of the Century 21 franchisees.”

As an example, the lawsuit cites use of NAF funds to pay the salaries of Cendant employees and the breach of the “85-15 Rule” that required that 85% of NAF spending be used to directly promote the Century 21 brand. Also, the franchisees allege that the Century 21 NAF developed a popular real estate Web site, Move.com, which was later sold for a significant profit to Homestore.com. Cendant kept the money, which the franchisees argue belongs to the NAF.

The second set of complaints relates to the 6% “franchise service fee” that franchisees are assessed. “Franchisees allege that Cendant has not been providing the services called for in the franchise agreement and paid for with the service fee, which has now been renamed a 'royalty fee,'” said Drachler. “At the time of Cendant's purchase, Century 21 had an extensive network of regional offices that provided training and support. It had about 5,000 employees. Cendant centralized in New Jersey and reduced staffing to a few hundred people. They eliminated the very successful broker training program, and they did not reduce the service fees to reflect the much lower level of support.”

In some ways, it's been a bitter fight, according to Drachler. “Usually, when we work on a class action, it's difficult to get current franchisees who will take on the franchisor; they fear repercussions. The former franchisees are the ones who want to 'get' those guys,” said Drachler. “In this situation, it's the opposite. I can't tell you how many active franchisees over the years have called me to say, 'I love Century 21. I hate what's going on now, what Cendant is doing to us.'”

One of the uncertainties in the lawsuit is the number of franchisees who are in the class ' the wide discrepancy between the 1,000 identified franchisees and the 4,000 franchisees that plaintiffs' attorneys estimate might be eligible. The discrepancy reflects developments since the lawsuit was filed in January 2002. “Cendant has been trying to whittle down the class by including a release in any modification of a franchise contract,” said Drachler, citing specifically franchise renewals that were offered to franchisees in which the only language that was changed was a release about the lawsuit. The first judge in the case prohibited Cendant from presenting those releases, on the grounds that franchisees were not fully informed about the possible class action.

A few years later, according to Drachler, franchisees were offered another modification of the franchise agreement in which Cendant would not enforce the payment of the monthly required minimum royalty fee ' which can be difficult for small franchisees working in an industry in which sales are so unpredictable. In exchange for the fee accommodation, franchisees had to release Cendant from the lawsuit. “The original judge allowed these offers to be made because he said he did not want to get involved in the day-to-day interaction of franchisor and franchisee,” said Drachler. “Cendant says as many as 2,000 franchisees have signed this agreement, but we don't know at this time.”

Given Cendant's actions, Drachler said that the most significant impact of the class certification at this point is that Cendant now cannot propose any type of release to franchisees ' or even talk with them about the lawsuit ' without permission of the plaintiffs. “This is stopping the signing of more releases,” he said.