Hospitality Law Blog

Crouching Tiger: Franchise Regulators Pounce on Franchisors

Shelley Spandorf — Fri, 12 Mar 2010 13:39:38 -0800

The following article appeared in the March/April, 2010 issue of Business Law Today.

TTAB Finds "KHORAN" for Wines Disparaging

Sheila Morrison — Thu, 11 Mar 2010 09:23:00 -0800

An interesting case; the Trademark Trial and Appeal Board (TTAB) found that "KHORAN" for wines is disparaging: thettablog.blogspot.com/2010/03/precedential-no-9-divided-ttab-panel.html.

9th Circuit Finds "Back of the House" Tip Pooling Does Not Violate FLSA

Jenna Mooney — Thu, 25 Feb 2010 13:15:02 -0800

Employers may not claim tip credit against—and must pay—minimum wage

On Feb. 23, 2010, the U.S. Court of Appeals for the 9th Circuit, in a 3-0 panel decision, held that an agreed-to tip pool requiring sharing of tips with the “back of the house” does not violate the Fair Labor Standards Act (FLSA) where no tip credit against the minimum wage is claimed. Cumbie v. Woody Woo, Inc., ___ F.3d ___ .*

The court’s decision may be helpful to employers in the hospitality and restaurant industry that want to broaden their tip pools to back of the house employees, such as dishwashers and cooks.

In Cumbie, an Oregon employer required its wait staff to pool all tips and redistribute a majority of the tips to “back of the house” staff. Under Oregon law, the employer was prohibited from claiming a tip credit against the minimum wage, but was not prohibited from requiring an employee tip pool. The employer paid its servers in excess of Oregon’s minimum wage.

The 9th Circuit concluded that nothing in the text of the FLSA restricts employee tip pooling arrangements when no tip credit is taken, thus the employer’s tip pooling arrangement in this case did not violate the FLSA. The Cumbie decision makes clear that, as long as the employer does not attempt to take a tip credit and pays at least the minimum hourly wage, an employer may, without violating the FLSA, permissibly mandate tip pooling with employees who do not customarily and regularly receive tips.

Tip pooling considerations in light of Cumbie:

An employer may require tip pooling only where no tip credit is taken to comply with federal minimum wage law. This means an employer must pay at least the minimum hourly wage in addition to any tip pooling.
Employees who are not “customarily and regularly tipped employees,” such as cooks and dishwashers, can be included in a tip pooling arrangement, so long as the employer does not claim a tip credit and pays the minimum wage.
Cumbie does not prevent a challenge to tip pooling arrangements under state law. In states that have specific tip pooling laws and regulations, employers must comply with both state and federal law. For example, California has state-specific tip pooling statutes that must be complied with. (Please see our previous advisory, "Starbucks Brews a Winning Cup: Tip Pooling in California Restaurants.")
The U.S. Department of Labor (DOL) previously took the position that tip pooling restrictions apply even if no tip credit is claimed by the employer. The DOL will now be bound by Cumbie when administering federal wage and hour laws in states in the 9th Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington).
The 9th Circuit is the first U.S. Circuit Court of Appeals to address the permissibility of tip pooling absent tip crediting under federal law. Other federal district courts that have considered the issue, including the Western District of Pennsylvania, the Southern District of New York and the District of Oregon, all concluded that the language of the FLSA does not prohibit tip pooling where the employer does not claim a tip credit.
The 9th Circuit’s decision did not discuss whether owners, managers or supervisory employees may participate in an employee tip pool, and this remains an open question.
Cumbie reiterated that in a business where tipping is customary, the tips belong to the recipient, unless there is an “explicit contrary understanding.” Because the default rule is that tips belong to the recipient in the absence of a contrary agreement, employers engaged in tip pooling arrangements should put the terms of the arrangement in writing.

Contacts:

Kaley L. Fendall
Michelle D. Fife
Janet Grumer
James H. Juliussen
J. Riley Lagesen
John P. LeCrone
Jenna L. Mooney
Amy H. Pannoni

* Please note: The appellate process is not yet complete; an appellant may seek en banc review, a panel rehearing or even certiorari. While Cumbie is now the state of the law in the 9th Circuit, the mandate will not issue until at lease seven days after the time to petition for rehearing (14 days) expires.

Disclaimer: This advisory is a publication of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Scam Alert: Oregon Restaurants and Bars Are Being Targeted!

Duke Tufty — Tue, 23 Feb 2010 07:49:47 -0800

A new scam is targeting Oregon restaurants and bars!

Oregon restaurants and bars should be aware of a new scam targeting them. The scam preys on those who may have inadvertently let their business registration status or license lapse. The scammer sends threatening letters to these businesses and demands money in exchange for not filing complaints with the OLCC. The scammer claims the business's failure to keep government paperwork up-to-date threatens its licensing status with the OLCC.

The scammer’s threats are largely empty. In most instances, updating your business information and corporate status with the Oregon Secretary of State and the OLCC are relatively straight forward. It is highly advisable to contact your attorney, the Oregon Secretary of State or the OLCC before responding to any such requests for money.

A business who receives this type of threatening letter is being advised by the Oregon Secretary of State to contact 1) their local police department to file a criminal complaint, 2) the OLCC at 800-452-6522, and 3) the Oregon Secretary of State Corporation Division at 503-986-2200, for assistance updating and renewing business registrations.

For more information, visit the Oregon Secretary of State at www.sos.state.or.us/corporation/scam_alert/inactive_business_OLCC_scam.htm.

DWT Congratulates its 2010 James Beard Foundation Awards Restaurant and Chef Award Semifinalists

Riley Lagesen — Tue, 23 Feb 2010 07:23:20 -0800

OUTSTANDING RESTAURATEUR
Michael Dellar, Lark Creek Restaurant Group (San Francisco)
Tom Douglas, Dahlia Bakery, Dahlia Lounge, Etta’s, Lola, Palace Kitchen, Serious Pie (Seattle)

OUTSTANDING RESTAURANT
Delfina (San Francisco)

BEST NEW RESTAURANT
Ping (Portland, Ore.)

OUTSTANDING WINE AND SPIRITS PROFESSIONAL
Stephen R. McCarthy, Clear Creek Distillery (Portland, Ore.)

BEST CHEF: NORTHWEST
Jenn Louis, Lincoln (Portland, Ore.)
Andy Ricker, Pok Pok (Portland, Ore.)

Samuelsson to Open Red Rooster Harlem

Riley Lagesen — Mon, 22 Feb 2010 10:35:13 -0800

Chef Marcus Samuelsson is set to open his new restaurant, Red Rooster Harlem, this fall:
www.nytimes.com/2010/02/21/fashion/21night.html

California Pizza Kitchen Announces New Franchise Partnership with USC Hospitality

Riley Lagesen — Mon, 22 Feb 2010 10:28:09 -0800

DWT helps bring client California Pizza Kitchen to the University of Southern California:
www.marketwatch.com/story/california-pizza-kitchen-to-open-at-the-university-of-southern-california-2010-02-18?reflink=MW_news_stmp

10 Stress-Reducing Tips for Updating Franchise Disclosure Documents and Renewing State Registrations

Shelley Spandorf — Fri, 19 Feb 2010 10:20:00 -0800

Federal law requires all franchisors to update their franchise disclosure document (FDD) within 120 days after their fiscal year end (FYE). Likewise, state registrations must be renewed annually. Since most franchisors have a December 31 FYE, this is “renewal season,” the annual rite of racing the clock to meet updating and filing deadlines to prevent the lights from going out on franchise sales activities. Whether 12/31 or some other date is your company’s FYE, here are 10 stress-reducing tips for getting the job done right.

Click here to view full article

Who is Lending to Hotels? - Program Summary

Matt Le Master — Wed, 17 Feb 2010 10:08:00 -0800

The second in a series of executive roundtables moderated by Gerry Adams of Clothier and Head and directed at the opportunities and challenges facing hotel owners and operators in the current economic environment was held on February 1, 2010 at the offices of Davis Wright Tremaine LLP in Seattle.

To view the entire summary, click here.

Q&A on Restaurant Investments

Matt Le Master — Wed, 10 Feb 2010 12:31:03 -0800

The following is a pithy discussion on investment in the restaurant space: http://www.pehub.com/63260/qa-on-ma-roarks-steve-romaniello-on-restaurant-deals

PKF's U.S. Lodging Industry Overview for 2010

Matt Le Master — Tue, 09 Feb 2010 14:11:53 -0800

Please review PKF Capital's 's U.S. Lodging Industry Overview for 2010 as presented at the American Lodging Investment Summit (ALIS): www.dwthospitalitylaw.com/uploads/file/ALIS 2010 Woodworth FINAL.pdf. The consensus seems to be this year will remain tough, with real improvement starting in 2011.

"My landlord wants me to sign a personal guaranty ... should I?"

John Benazzi — Fri, 05 Feb 2010 16:12:55 -0800

As published in Santé Magazine

My brother, a chef, has been looking to open his own place for a number of years now. He tells me that when he finds the perfect space, he is going to jump on it. If that happens, I’m sure that I will get a call from him asking if I have time to review his lease. He will tell me that it’s the perfect space and that I need to take only a “quick look.” He also will probably tell me that, because he’s taken my advice and set up his business as a limited liability entity, the landlord wants him to sign a personal guaranty. He will want to know what that means and whether he should sign it. Here’s what I’ll tell him: www.dwthospitalitylaw.com/uploads/file/GuestCheck-Benazzi.pdf

Daphne's Greek Café Opens on USC Campus

Riley Lagesen — Wed, 20 Jan 2010 10:31:05 -0800

DWT client Daphne's Greek Café opens on the campus of USC:
http://dailytrojan.com/2010/01/15/cafe-84-adds-two-international-options

Simon Confirmed as Chef at LA's New JW Marriott

Riley Lagesen — Wed, 20 Jan 2010 10:21:23 -0800

DWT client Kerry Simon confirmed as chef at the new JW Marriott Hotel in Los Angeles, which opens February 15, 2010:
http://la.eater.com/archives/2010/01/15/kerry_simon_chef_for_la_lives_jw_marriott.php

Top 10 Considerations When Negotiating a Minority Interest Investment in a Hospitality Enterprise

Jake Heth — Wed, 13 Jan 2010 16:00:25 -0800

With valuations for hospitality enterprises becoming more attractive to investors, many expect private equity investments to increase in 2010. Many of these transactions will result in investors holding a minority interest. Summarized in this post are some of the more important considerations for these types of investments, including:

Governance and voting
Preferred distribution rights
Regulatory considerations
Redemption rights
Registration rights
IPO participation right
Preemptive rights
Antidilution protection
Co-sale rights
Drag-along rights

Governance and voting
Investors will often negotiate for the right to appoint a member (or members) of the company’s board of directors or other governing body. If granting such a right is not appropriate, due to the small size of an investment or otherwise, it is common for investors to request board observer rights, information rights and/or inspection rights. Voting rights are typically equivalent with the rights of common equity holders, meaning that investors will vote their preferred equity on an as-converted to common basis. Unless investors acquire a majority interest, they will not control the vote. Therefore, many investors negotiate for provisions requiring the consent of their equity class, voting as a separate class, in order to approve certain non-ordinary course transactions, such as liquidation transactions, amendments to governing documents, or distributions outside the ordinary course of business. Lastly, there may be situations where management rights should be bifurcated. For instance, it may make sense for a seasoned operator to have control over day to day operations, while the investment fund controls financial components of the enterprise.
Preferred distribution rights
Investors will virtually always receive a preferential right to distributions. This means holders of junior equity will not receive distributions until each investor has received a specified return, usually equal to its capital contribution plus a percentage return. If the preferred equity is “participating”, it will continue to receive distributions after its preferred return is satisfied, usually on a pro rata basis with junior equity holders. Because granting such a participation right is investor-favorable, it is not uncommon to place a ceiling on the total return payable to an investor.
Regulatory considerations
It is crucial to identify and address early on any regulatory concerns with the investment. For instance, under most state liquor laws, holders of a financial interest in entities that own or operate establishments serving alcohol must pass regulatory scrutiny. Regulators can condition or deny licensure if the investor (or a manager or significant owner of an entity holding the investment) fails to satisfy regulatory requirements geared toward criminal history and other relevant background factors. States can take time to work through licensing issues, so it is important to start the process early in order to avoid delays in closing.
Redemption rights
In situations where an investor has leverage, it may negotiate a redemption right. A redemption right allows the investor to force the company to redeem its interest, often in periodic tranches with a specified rate of return. Companies will typically resist a redemption feature on the theory that the expected liquidity will be achieved when the company goes public or is acquired. Plus, it can place a significant amount of financial strain on a company. From the perspective of investors, they want the right to force the company to cash them out at some point if other liquidity events (namely, an IPO or acquisition) have not occurred.
Registration rights
Investors will often negotiate for the right to compel the company to register their equity interests, thereby helping to create a path to liquidity in the public markets. These rights typically take two forms – “piggy-back” rights and “demand” rights. “Piggy-back” registration rights allow the investor to participate in, but not to compel, a registration by the company, subject to customary cutback provisions. “Demand” registration rights permit a specified percentage of the preferred equity to vote to compel the company to file a registration statement covering the equity interests. Demand rights are typically not exercisable for a specified period of time, usually at least two years after issuance of the securities (or earlier if an IPO has occurred).
IPO participation right
An IPO participation right is an investor-favorable term that allows an investor to purchase a preallocated amount in an IPO. Because of underwriter concerns in marketing the IPO, as well as the need to ensure compliance with federal and state securities laws, care should be taken in granting an IPO participation right.
Preemptive rights
Investors are commonly granted preemptive rights, meaning they can participate in future equity financings on a pro rata basis and therefore avoid dilution. These rights are usually granted by contract. However, many state statutes address preemptive rights, and it is important to review the default rules under the applicable statutes.
Antidilution protection
Generally speaking, antidilution protection prevents dilution in the event the company issues additional equity at a price that is less than the price paid by the investor. This is achieved by adjusting the amount of common equity into which the preferred equity will be converted. Certain types of issuances typically do not trigger antidilution protection, such as issuances under equity incentive plans, and securities issued in an acquisition transaction.
Co-sale rights
Co-sale rights permit investors to participate on a pro rata basis in a sale by other interest holders (such as founders or other holders of common equity). This helps to ensure that investors are not “left behind” in a liquidation event involving the other interest holders. It is important to clearly define the respective rights and obligations of the parties, so as to not unduly impact the ability of equity holders to sell their interests.
Drag-along rights
Majority owners want to avoid a situation where minority interest holders can hold up a sale of the company. Drag-along rights achieve this by requiring minority interest holders to participate in and vote for a liquidation transaction in the event a specified percentage of interest holders are in favor of the transaction. Without this right, investors get a fair amount of leverage due to their ability to potentially hold up a transaction. This is especially true when a purchaser is not willing to acquire a target with equity interest holders surviving the transaction.

The OLCC Proposes a Final Staff Draft Regarding Its New Happy Hour Rules

Duke Tufty — Sun, 20 Dec 2009 19:58:07 -0800

The OLCC has proposed a final draft of its new rules regarding the advertising and promotion of happy hour in Oregon. The rule making hearing regarding the proposed rules is scheduled for Tuesday, February 9, 2010 at 10:00 am in Room 103A at the Commission offices, but the record will remain open for written comments until February 23, 2010. You can contact Jennifer Huntsman at (503) 872-5004 or Jennifer.Huntsman@state.or.us with questions or comments.

The proposed rules lift the long-standing prohibition regarding the advertisement of “happy hours” or other similar terms outside of the establishment. The rules would allow references to happy hour and a description of when it is offered provided that there is no reference to the price of or discount to happy hour drinks. For example, Catalon could advertise a happy hour seven days a week from 4:00-6:00, but could not advertise a happy hour sever days a week from 4:00-6:00 featuring half price beer and wine. These rules would be applicable to information available on the establishment’s website and answering machines. Of course, a full description of the happy hour specials is still allowed inside the establishment. The new rules expressly prohibit any advertising of drinks that requires or implies that a guest must purchase more than one drink to obtain the discount, such as “two for the price of one.”

These changes are motivated in part by the Commission’s desire to strike a balance between meeting public safety concerns and providing licensed businesses with the flexibility to operate and compete. The internet is full of drink advertising by non-licensees that are not subject to the OLCC’s jurisdiction. This levels the playing field and allows licensees to take greater control over the promotion of their own happy hours, but protects the public from advertising that competes solely on the basis of cheap drink prices.

For more information, see http://www.oregon.gov/OLCC/happy_hour_rulemaking.shtml.

Jesse Lyon, Partner at Davis Wright Tremaine, Is Named as One of Oregon's Preeminent Wine Industry Legal Experts

Duke Tufty — Fri, 18 Dec 2009 12:06:26 -0800

Jesse Lyon, partner at Davis Wright Tremaine LLP, was named as one of Oregon's preeminent wine industry legal experts in the December 18, 2009 edition of the Portland Business Journal.

FDA, TTB and Caffeine...

Jesse Lyon — Fri, 13 Nov 2009 10:36:01 -0800

The Food and Drug Administration (FDA) is joining the regulatory movement against products marketed as "energy" alcohol drinks. "Espresso stouts" and other craft beers and spirits are not the intended target of these sorts of things...but this is a movement even those producers should keep an eye on. The U.S. Government's food regulators—FDA (and USDA, too)—often like to take a heavy-handed approach to their role in alcoholic beverage products (when asked by TTB or pushed by state attorney generals or interest groups), because unlike every other food/beverage category, alcohol is the one segment where they can have an up-front role in preventing products from getting to market—the TTB's Certificate of Label Approval process.

Vine to Cellar Event - Friday, November 6

Jesse Lyon — Tue, 27 Oct 2009 11:10:42 -0800

I have volunteered to help pull together some last-minute details and rally a few more attendees for the " Vine to Cellar" wine industry event at the Allison Inn & Spa in Newberg, Ore. on November 6-7. The event is intended to provide both something of a celebration at this beautiful new hospitality venue as well as substantive vineyard/wine business discussion forums. Moss Adams' wine industry accountants from Santa Rosa, Silicon Valley Bank's wine division leaders, and Tanner Creek Energy will be sharing insights, along with some of our industry's founders. Should be good food, good content, and good company.

Please register and make plans to join us if you can.

Break Bread

Riley Lagesen — Tue, 06 Oct 2009 20:56:08 -0800

On September 23, top restaurant executives from around the country joined DWT and their co-hosts in Beverly Hills to "Break Bread," discussing the compelling business and legal issues facing the restaurant industry today.

Presenters included Kevin Brown, President of Lettuce Entertain You, Inc., Dick Rivera, CEO of RealMex, Jim Parrish of Parrish Partners, Mario Del Pero, President, Mendocino Farms, Tony Shure, co-founder Chop't Creative Salad Company, and chef Jose Andreas.

The presentation was followed by a lively reception.

It was DWT's third annual event in Los Angeles, hosted by national restaurant practice group chair Riley Lagesen. It has quickly become one of the "must attend" events in the restaurant industry.