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International Franchise Association, Inc. v. City of Seattle

United States District Court, W.D. Washington

March 17, 2015

CITY OF SEATTLE, et al., Defendants

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For International Franchise Association, Inc., Charles Stempler, Katherine Lyons, Mark Lyons, Michael Park, Ronald Oh, Plaintiffs: H. Christopher Bartolomucci, Paul D Clement, Viet D Dinh, LEAD ATTORNEYS, PRO HAC VICE, BANCROFT PLLC, WASHINGTON, DC; David Groesbeck, DAVID J GROESBECK PS, OLYMPIA, WA.

For City of Seattle, a Municipal Corporation, Fred Podesta, Director of the Department of Finance and Administratve Services, Defendants: Drew Derrick Hansen, Edgar Guy Sargent, Justin A Nelson, LEAD ATTORNEYS, SUSMAN GODFREY (WA), SEATTLE, WA; Gregory Colin Narver, John B Schochet, LEAD ATTORNEYS, Gary T Smith, SEATTLE CITY ATTORNEY'S OFFICE, SEATTLE, WA; Parker C Folse, III, LEAD ATTORNEY, SUSMAN GODFREY LLP, SEATTLE, WA.

For Chamber of Commerce of the United States of America, American Hotel & Lodging Association, Asian American Hotels Owners Association, National Restaurant Association, Home Care Association of America, Washington Retail Association, Amicii: Nicole J Owren-Wiest, WILEY REIN LLP, WASHINGTON, DC.


For Martina Phelps, Crystal Thompson, Service Employees International Union Healthcare 1199NW, OPEIU Local 8, SEIU Healthcare 775NW, SEIU Local 6, UFCW Local 21, OneAmerica, Working Washington, Amicii: Dmitri Iglitzin, LEAD ATTORNEY, SCHWERIN CAMPBELL BARNARD IGLITZIN & LAVITT LLP, SEATTLE, WA; Danielle E Leonard, Michael Rubin, Stacey Leyton, PRO HAC VICE, ALTSHULER BERZON LLP, SAN FRANCISCO, CA.

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Honorable Richard A. Jones, United States District Judge.


On June 3, 2014, the City of Seattle (" the City" or " Seattle" ), enacted Ordinance Number 124490 (" the Ordinance" ), which establishes a $15 minimum hourly wage. In doing so, Seattle joined dozens of other cities nationwide that have increased the minimum wage beyond both federal and state minimums.[1] The City's stated reason for increasing the minimum wage was to reduce income inequality. Additionally, the increased minimum wage was intended to " promote the general welfare, health, and prosperity of Seattle by ensuring that workers can better support and care for their families and fully participate in Seattle's civic, cultural and economic life." Ordinance, WHEREAS clauses 1-12, § 1.

The current minimum wage in Seattle is $9.47.[2] Although the Ordinance goes into effect on April 1, 2015, the shift to a $15 minimum wage will not happen overnight. There are two phase-in schedules under

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the Ordinance: a faster phase-in, applicable to large businesses and a slower phase-in, applicable to small businesses. Large businesses will be required to incrementally raise the minimum wage to $15 in just three years ( i.e., reaching $15 by January 1, 2017) whereas small businesses will be allowed seven years (i.e., reaching $15 by January 1, 2021). Ordinance, § 4. Small businesses were given this extra time because they lack the same resources as large businesses and will face particular challenges in implementing the law. Ordinance, § 1, ¶ 9; (Feldstein Decl.) Dkt. # 63, ¶ 10.[3]

Seattle's power to raise the minimum wage to $15 is not at issue in this lawsuit.[4] Indeed, the plaintiffs accept that eventually all Seattle employers will be required to pay their employees at least $15. The issue the court has been asked to address relates solely to how fast this increase will happen for employees of a specific type of business model: franchises ( e.g., your local Subways, McDonalds, and Holiday Inns, among many others).

The crux of this lawsuit is the Ordinance's categorization of franchisees as large businesses. Because these businesses are considered large, they will be subject to the faster three-year phase-in schedule. The plaintiffs object to this categorization. Although franchisees are connected to large franchisors, they are technically separate entities under the law. Additionally, individual franchisee outlets often employ only a handful of workers. According to plaintiffs, this makes them more similar to small businesses and equally likely to suffer challenges in implementing the new law. (Compl.) Dkt. # 1, ¶ ¶ 3, 4; (Pls.' Mot.) Dkt. # 37, p. 18.

Plaintiffs are the International Franchise Association (" IFA" ), which is an organization of franchisors, franchisees, and suppliers, and five individual franchisee owners and/or managers. Together, they are seeking a preliminary injunction compelling the City to treat franchisees as " small" businesses rather than " large" businesses. They do not seek to invalidate the entire Ordinance; rather, they ask only that franchisees be subject to the slower (seven year) phase-in schedule applicable to small businesses.

Defendants are the City of Seattle and Fred Podesta, the Director of the Department of Finance and Administrative Service (" the Department" ). The Department and its Director are responsible for implementing and enforcing the Ordinance. Defendants will be referred to collectively as " the City" or " Seattle."

For the reasons stated below, the court DENIES plaintiffs' motion for a preliminary injunction.[5]


A. History of the Ordinance

Shortly after taking office, the Mayor of Seattle assembled an Income Inequality Advisory Committee (the " Advisory Committee" ), which consisted of twenty-four members, including representatives of business interests and labor unions. Ordinance, § 1, ¶ 6. The Mayor formed the Advisory Committee to " address the pressing issue of income inequality in Seattle"

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and to seek input regarding a potential increase in the minimum wage. Ordinance, § 1, ¶ ¶ 6, 7; (Feldstein Decl.) Dkt. # 63, ¶ 8. The Advisory Committee reviewed scholarly studies on the impact of minimum wage laws in other cities and hosted numerous public engagement forums, including industry-specific forums. Ordinance, § 1, ¶ 8. In May 2014, the Advisory Committee transmitted its formal recommendation to the Mayor. The recommendation advocated for a phased increase in the minimum wage and acknowledged that small businesses should be subject to a slower phase-in schedule. Ordinance, § 1, ¶ 9; (Feldstein Decl.) Dkt. # 63, ¶ ¶ 10, 11. The recommendation said nothing specific about the categorization of franchisees.

B. The Franchise Business Model

The term " franchise business model" refers to a long-term business relationship in which one company (the franchisor) grants other companies (the franchisees) the right to sell products under its brand, using its business model and intellectual property, generally in exchange for ongoing royalty payments and other fees. (Gordon Decl.) Dkt. # 70-2, ¶ 6.[6] Although franchisees are part of the larger organization of the franchisor, they are legally separate entities. (Shane Dep.) Dkt. # 81-4, p. 9.[7] This business model provides the franchisor with the benefits of vertical control over retail units without the investment in assets required by full integration. Mick Carney and Eric Gedajlovic, Vertical Integration in Franchise Systems: Agency Theory and Resource Explanations, 12 Strategic Mgmt. J. 607 (1991). The employees of a franchisee are not employees of the franchisor. (Shane Dep.) Dkt. # 81-4, p. 10. Franchisees manage the day-to-day aspects of their business, including making decisions regarding which workers to hire, how many to hire, the benefits they will offer, and how much to pay their employees. Id., p. 19.

Despite this legal separateness, however, franchisees are not free to do as they please. Most franchise agreements heavily regulate the conduct of the franchisee and include statements about how the franchisee is expected to run the franchise, whether or not the franchisee has an exclusive territory, and when and where the franchisee may open another business. (Shane Decl.) Dkt. # 62, ¶ 22. Franchise agreements also contain clauses that outline acceptable outlet " appearance, hours of operation, location, and product quality" and typically allow franchisors to conduct " inspections, audits, mystery shopper programs, and so on" of the franchisees. (Shane Decl.) Dkt. # 62, ¶ ¶ 22-31.

Franchisees accede to the franchisor's restrictions because being part of a larger network provides significant benefits. Participation in a franchise system often affords brand recognition and customer loyalty, as well as access to, advertising, trade secrets, software, lower material costs, site selection assistance, financing, and extensive operational support and training. (Shane Decl.) Dkt. # 62, ¶ 10. Participation in this system also often affords franchisees more profit than they would earn as individual business owners. (Shane Decl.) Dkt. # 62, ¶ 9. In addition to these factors, franchisors also have the ability to use their greater financial resources to support the franchise by aiding franchisees during time of business stress, including identifying and responding to

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changed business conditions. (Gordon Decl.) Dkt. # 70-2, ¶ 9.

C. Mechanics of the Ordinance

1. The Two Phase-In Tracks: " Large" and " Small" Businesses

The Ordinance goes into effect on April 1, 2015. The law provides for two core tracks leading to the $15 minimum wage. The first track applies to Schedule One or " large" businesses (defined as those with 500 or more employees nationwide).[8] These businesses will have three years to implement the new law. Large businesses also have the opportunity to take advantage of an alternative Schedule One track if they choose to offer certain health benefits to their employees. If they offer a qualifying health plan, they will be given four years to implement the new law.

The second track applies to Schedule Two or " small" businesses (defined as those with 500 or fewer employees nationwide).[9] These smaller businesses will have seven years to implement the new law. The exact incremental increases for each track are set forth below:

Schedule One -- large employers (> 500 employees)
o April 1, 2015 -- $11
o January 1, 2016 -- $13
o January 1, 2017 -- $15
Schedule One -- large employers offering health benefits
o April 1, 2015 -- $11
o January 1, 2016 -- $12.50
o January 1, 2017 -- $13.50
o January 1, 2018 -- $15
Schedule Two -- small employers ([< =] 500 employees)
o April 1, 2015 -- $10
o January 1, 2016 -- $10.50
o January 1, 2017 -- $11
o January 1, 2018 -- $11.50
o January 1, 2019 -- $12
o January 1, 2020 -- $13.50
o January 1, 2021 -- $15

Ordinance § 4.

By 2021, all employers will be subject to a minimum wage of at least $15 per hour.

2. Franchisees and Integrated Enterprises

Under the law, a wholly independent business with more than 500 employees falls into the " large" category and a wholly independent business with 500 or fewer employees falls into the " small" category. Certain types of businesses, however, are not considered independent: franchisees and integrated enterprises.

A franchisee is considered a " large" business if its franchisor and/or its network of franchisees employ more than 500 employees in aggregate in the United States. Ordinance, § 3. This means that the owner of a Subway outlet with only 10 employees will be considered a " large" employer because of his relationship with the Subway franchisor and other Subway franchisees.

Additionally, entities that appear separate but in fact form an " integrated enterprise"

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are also considered " large" businesses under the Ordinance. Separate entities are considered an " integrated enterprise" if there is a significant degree of: (1) interrelation between the operations of the entities, (2) common management, (3) centralized control over labor relations, and (4) common ownership or financial control over the entities. There is a presumption, however, that separate entities are actually separate employers if: (1) the entities operate substantially in separate physical locations from one another, and (2) each entity has partially different ultimate ownership. Ordinance, § 3. This test applies only to non -franchise businesses.


Plaintiffs seek a preliminary injunction compelling the City to treat franchisees as small businesses under the new law. " A preliminary injunction is an extraordinary and drastic remedy; it is never awarded as of right...." Munaf v. Geren, 553 U.S. 674, 689, 128 S.Ct. 2207, 171 L.Ed.2d 1 (2008) (citation and internal quotation marks omitted). To obtain a preliminary injunction, the moving party must establish that: (1) it is likely to succeed on the merits; (2) it is likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in its favor; and (4) an injunction is in the public interest. Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008).

Alternatively, " serious questions going to the merits" and a balance of hardships that tips sharply towards the plaintiffs can support issuance of a preliminary injunction, so long as plaintiffs also show that there is a likelihood of irreparable injury and that the injunction is in the public interest. Alliance ...

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