Ending a decade of litigation, the First Circuit ruled that a federal district court in Massachusetts, resting on principles of res judicata, correctly concluded that it was bound by a Georgia court judgment that a unit franchisee, who had no contractual relationship with a franchisor, was not an employee of the franchisor. Because the franchisor took an immediate appeal of a summary judgment award in favor of Jan-Pro, the franchisor, the state appellate decision on the summary judgment ruling was binding for purposes of res judicata under Georgia law. Moreover, on appeal to the First Circuit, the franchisee was unable to circumvent the unfavorable outcome by asserting that the Georgia courts never had jurisdiction over him. Accordingly, the decision of the Georgia appeals court was final (Depianti v. Jan-Pro Franchising International, Inc., September 29, 2017, Thompson, O.).
Multi-level franchise model. Under Jan-Pro’s franchise model, it contracts with “master franchisees” or “master owners,” who are third-party entities to whom it sells the exclusive right to use the “Jan-Pro” logo. The master owners, in turn, sell business plans to “unit franchisees.” Jan-Pro and the master owners are separate corporate entities, each with its own staff. Master owners have their own entity names, internal business structures, and are responsible for their own marketing, accounting, and general operations. Master owners may sell or transfer their individual businesses without Jan-Pro’s approval. However, Jan-Pro reserves the right to inspect any premises serviced by either a master owner or any master owner’s franchisee.
Master owners agree to provide their franchisees with an initial book of business, as well as start-up equipment and cleaning supplies. The master owners also furnish a training program and agree to (1) assist in unit franchisee’s customer relations; (2) provide unit franchisees with invoicing and billing services; (3) advance unit franchisees amounts that have been billed but not yet collected from customers; and (4) make available to unit franchisees any improvement or changes in services or business methods made available to other franchisees. The parties’ franchise agreement regarded unit franchisees as independent contractors solely in business for themselves.
Misclassification claim. In 2003, Bradley Marketing Enterprises (BME) purchased master franchise rights from Jan-Pro for a region covering parts of Massachusetts. In June 2003, the plaintiff signed a unit franchise agreement with BME. In 2008, he brought suit against Jan-Pro alleging that his status as a unit franchisee of BME was a sham, and that he was actually a direct employee of Jan-Pro. He further asserted that this misclassification denied him certain employment benefits in violation of the Massachusetts Independent Contractor Law, Mass. Gen. Laws c. 149, § 148B. Specifically, he asserted that because of his misclassification: (1) unlawful deductions were made from his pay; (2) he was forced to pay unnecessary expenses that should have been borne by Jan-Pro; (3) he was not guaranteed minimum wage and overtime pay; and (4) he was ineligible for unemployment and workers’ compensation.
State court actions. Faced with the lack of developed Massachusetts state law or controlling state precedent regarding how Section § 148B’s three-prong test applied to the multi-leveled franchise model used by Jan-Pro, the district court certified a question to the Massachusetts Supreme Court “whether a defendant may be liable for employee misclassification where there was no contract for service between the plaintiff and the defendant.”
At the same time, Jan-Pro initiated a parallel state court action in Georgia seeking a declaratory judgment that it had no employment relationship under Section § 148B with the plaintiff and with another unit franchisee, and so it was not liable in tort or contract. The Georgia trial court found that the plaintiff in this case was an employee of Jan-Pro under Massachusetts Law; however, it denied summary judgment on the other unit franchisee’s claim. Eventually, the Court of Appeals of Georgia sided with Jan-Pro, concluding that the franchisor had satisfied all three prongs of Section § 148B: (1) the plaintiff was free from the control and direction of Jan-Pro; (2) the cleaning services he performed were outside the usual court of Jan-Pro’s business; and (3) the plaintiff was engaged in an independently established business. The Georgia Supreme Court stayed consideration of the case pending the outcome of the Massachusetts high court’s answer to the question certified.
The Massachusetts high court declined to apply its holding directly to the relationship between the plaintiff here and Jan-Pro. All the Massachusetts court decided was “that the lack of a contract for service between the putative employer and putative employee does not itself preclude liability” under Section § 148B. Thereafter, Georgia’s high court declined to review the Georgia appellate court’s ruling.
Back in Massachusetts, the district court granted preclusive effect to the Georgia decision and granted Jan-Pro’s motion for summary judgment as to the Section § 148B claim.
Claim preclusion. On appeal, the plaintiff unit franchisor argued that the Georgia appellate court’s decision was not a final judgment, so the preclusive effect of res judicata did not attach. However, the First Circuit pointed out that “a state court judgment is entitled to the same preclusive effect in federal court as it would be given in the state in which it was rendered.” Under Georgia’s preclusion principles, three prerequisites must be satisfied, the First Circuit noted: “(1) identity of the parties or their privies; (2) identity of the cause of action; and (3) previous adjudication on the merits by a court of competent jurisdiction.”
The plaintiff contested only whether the judgment of the Georgia appeals court was a final adjudication on the merits. Given that the Georgia high court denied certiorari, the judgment of the appeals court was final for purposes of res judicata. In Georgia, where an immediate appeal of a summary judgment is undertaken pursuant to Ga. Code Ann. § 9-11-56(h), “then the appellate decision on the summary judgment ruling is binding” for purposes of res judicata.
Jurisdiction. Also unavailing was the plaintiff’s argument that the Georgia courts never had personal jurisdiction over him, so that the decision of the Georgia appeals court could not be considered final. The federal district court in Massachusetts correctly determined that it had no independent obligation to determine whether the Georgia courts had competent jurisdiction. Rather, it was bound by the Georgia trial court’s judgment that jurisdiction was proper.
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