What to Do When Franchisees Defy Shutdown Orders
"This is a simple rights issue. Under the constitution in the state of Texas, and the U.S. Constitution, businesses should have the right to operate," said Anthony Milton, CEO of Tune Up-The Manly Salon, shown here in his YouTube docu-series chronicling his fight against state shutdown orders.
Many attorneys are urging franchisors to take a hard line against franchisees that violate government shutdown orders. But Anthony Milton, CEO of Tune Up-The Manly Salon, is leading the defiance himself.
Milton showed up in person at one of his corporate salons in Houston to open it on May 1 for about three hours, before the cops showed up and threatened $1,000 fines for everyone in the store and jail time for Milton.
He shut the shop down again, but then enlisted two state representatives to come in for haircuts, hired a constitutional lawyer poised to file a lawsuit against the state to come along, and attracted the news media for a May 6 showdown. This time, despite 41 calls to the Montgomery County sheriff's office, he said, the cops stayed away.
"This isn't an epidemic issue and it's not a political issue either. This is a simple rights issue. Under the constitution in the state of Texas, and the U.S. Constitution, businesses should have the right to operate," he said.
"I didn't risk my personal savings, my livelihood, my kids' education fund, to have a licensing agency that isn't even elected tell me if I can or cannot run my business. That's not the American dream. That's not what I signed up for," he said, referring to the Texas Department of Licensing and Regulation.
Ultimately, Milton said, the actions pressured Gov. Greg Abbott into revising his order, moving up the date for hair salons to open by 10 days. The franchise brand even produced a docu-series on YouTube, called "When the American Dream Becomes a Nightmare."
"We are all proud having taken a stand for our entire industry in Texas that ultimately allowed all hair salons to open sooner than originally scheduled by Gov. Abbott," said Michael-David Reilly, director of marketing for the concept.
Milton is CEO of Tilted Concepts, the umbrella firm for Tune Up, Martinis & Manicures and Balanced Foods. He said he would fight "side by side with my franchisees" in other states if they wished to defy "unvoted force" laws.
'No option but to enforce'
Amy Cheng of Cheng Cohen was among several attorneys urging franchisors to take a hard line against defiance of executive orders by franchisees, on an uptick as various states begin rolling out phased reopenings.
If franchisees by law have to be closed, "I think as the franchisor you really have no option but to enforce that," she said in an interview yesterday. "It could have significant not only legal consequences but PR consequences, as well. I would advise them to default" the franchisee's contract.
"Nothing prevents a franchisor from, if necessary, going to court and ordering the franchisee to shut down. It really depends, in my opinion, on the industry, and how badly you're endangering someone's health," she said.
As for the flip side, requiring a franchisee to reopen when laws allow, "that is a more difficult situation. Legally, I think you can require the franchisee to open, because the law allows them to open and you have operating hours" in the operating manual. "You have the right to enforce it."
However, she added, if the operator is elderly or has an underlying health condition, for example, and is fearful of reopening, "I would say most franchisors are not terminating the franchisee," she said; even though it's legal, it would have bad public relations effects. "What if the person gets sick. How bad would you look then?"
Cheng says she's had franchisor clients with both situations, such as franchisees who refused to provide carryout even though the brand as a whole was offering it; or franchisees who defied government shutdown orders.
Rosati's, Anytime Fitness moves
The more difficult challenge for franchisors, as states open up across the country, will be managing the hodgepodge of cleanliness, social distancing and other strictures. "It's going to be hard to enforce," she said.
Nick Rotchadi, an attorney with Faegre Drinker, recommended in an April webinar that franchisors take swift action to terminate a franchisee violating government shutdown orders, because risk of damage to the brand is high in those cases.
That's exactly what Rosati's Pizza did in March, after the franchisee posted a sign in the restaurant's windows that said: "Gov. Pritzker Screw You," in response to the Illinois' governor executive order that would keep dining rooms closed for two weeks. (That has since been extended to the end of June, at the earliest.)
Rosati's, the franchisor, immediately sent the owner a letter terminating the agreement, according to the Decatur Herald & Review.
In West Texas, Clint Gillispie, an Anytime Fitness franchisee, allowed members back into his gym on May 1, ahead of the order there. Jim Goniea, general counsel for Self Esteem Brands, the franchise's owner, said via email: "When it came to our attention that our franchisee…was operating his Anytime Fitness Center in contravention of an executive order of the governor of Texas, we reminded him that refusing to comply with government regulations…was a violation of the terms of his franchise agreement.
"However, we understand that as of May 19, 2020, gyms have been permitted to reopen in the state. Accordingly, at the present time Mr. Gillispie's operation of his Anytime Fitness Center is no longer prohibited…so long as he complies with applicable health and safety standards."
'For the betterment of all'
In a webinar on the general topic, not specific cases, DLA Piper attorney Erik Wulff said, "The potential impact on the brand for a COVID-19 incident cannot be understated. "One of the key elements will be health and safety protocols for customers and staff. One should consider stating them to be mandatory, rather than simply guidance, and that they will need to be enforced for the betterment of all."
"As well, it should be clearly stated that franchisees must comply with local mandates and guidance that require higher and different standards," he said.
Added Nancy Sims, another DLA Piper attorney: "One question we've heard: What's the risk to the business if employees or customers get sick? This pandemic is unprecedented, I wish I had a clear answer for you," she said. "Customers have filed actions against cruise companies; and employees brought actions against employers. Pro-employer groups are trying to get legislation, urging them to take action against what they called the exploitation of the health crisis."