Appeals Court discusses nature of franchise agreements

A franchise can generally be described as a licensing agreement between independent persons (legal or natural) for the use of a trademark (Franquicias Martín’s BBQ Inc v García (178 DPR 978, 985-987 and 990 (2010); see also "Black's Law Dictionary" (9th ed 2009)). Such agreement is particular because the licensor controls a broader range of aspects of the licensee's business than in traditional licensing. In this context, a party is said to be independent if it has control of its work and manner of its performance (5 Am Jur Proof of Facts 2d 219, originally published in 1975).

A corollary of this definition is that, when the control of the work and manner of performance is yielded to another person, the independence disappears and an employment relationship arises (Id). To avoid crossing over to the employment pitfall, a franchise needs to balance the inherent tension between control and independence. In Díaz v Pérez (2014 WL 3819332 (June 25 2014)), the Appeals Court of Puerto Rico was confronted with this issue.

The plaintiff, a well-know basketball head coach, brought an employment claim against the team Vaqueros de Bayamón (the Bayamón Cowboys), the team manager and the Basketball League. The league was included in the claim because it was the owner of the Bayamón Cowboys - that is, it was the franchisor. According to the plaintiff, the league regulations state that the team manager representing a league franchise is not the franchise owner, since the team belongs to the league. The regulations also state that, when the agreement with the manager (franchisee) is terminated, the manager has a proprietary interest and can recoup from the new franchisee all or some of his investment in the team, including the increase in goodwill or value of the franchise (Id, p 4-5). The plaintiff reasoned that it was necessary to include the league in the complaint because the league’s interests would be affected by the eventual execution of a judgment against the manager’s interest in the increase in goodwill or value of the franchise.

The Appeals Court noted that the case law of the Puerto Rico Supreme Court usually recognises that franchise agreements are executed between independent parties. The franchisor usually receives payments for the exclusive use of the trademark in an established geographical region. The franchisee benefits from the use of a known trademark while retaining independence and, at the same time, receiving assistance and training from the franchisor.

In the case at hand, the court found that the agreement between the league and the team manager was within the bounds of a standard franchise agreement. The plaintiff did not allege facts sufficient to show that the league was liable for franchisee obligations based only on the franchise relationship. Consequently, the claim against the league was dismissed.         

Víctor Rodríguez-Reyes, Ferraiuoli LLC, Puerto Rico