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Roundup: 4th, 6th, 8th and 11th Circuits

Court sides with franchisor seeking lost profits; SLC must prove independence 'beyond approach'; employers can't pay sub-minimum wage for nontip tasks; court throws out two bribery convictions

4th Circuit: Court sides with franchisor seeking lost profits

On April 14, in Meineke Car Care Centers, Inc. v. RLB Holdings, the 4th Circuitruled that a franchisor can recover lost profits and other prospective damages from a terminated franchisee even if the agreement did not speak to such recovery.

The court’s ruling resolves the question of whether a franchisor can recover lost profits when it has taken action to terminate a franchisee following the latter’s breach of the franchise agreement.

Although at district court ruled against Meineke, the 4th Circuit reversed and remanded, stating, “No principle of North Carolina contract law suggests that in all circumstances a contract must specifically provide for recovery of future damages in order to preserve a party’s right to recover them.” Furthermore, despite RLB’s claim that its franchises weren’t “commercially feasible” to operate, the court ruled that Meineke needed only to show that the franchises would have generated revenue on which royalty payments could be based, not profitability.  

6th Circuit: SLC must prove independence "beyond approach"

A special litigation committee (SLC) of a company’s board of directors must be independent of management for its recommendation of dismissal of litigation to stand, the 6th Circuit reaffirmed on April 5 in Booth Family Trust v. Jeffries.

In Booth, shareholders of Abercrombie & Fitch Co. filed a derivative suit against certain of the company’s officers and directors based on allegations that they caused Abercrombie to make misleading public statements. The suit alleges that despite Abercrombie’s states business model of selling cheaply made goods for high prices, it was amassing a surplus of inventory that would require a substantial markdown in prices and cause shares to fall. Furthermore, the shareholders claim that officers, including CEO Robert Singer, acted on insider information to sell their personal shares in the company.

The board of directors appointed two board members to an SLC to investigate the claims. The SLC retained outside counsel, who conducted the bulk of the review and made recommendations on how to proceed. Ultimately, one of the board members recused himself based on prior personal and business relationships.

Although the district court determined that the SLC was independent and granted Abercrombie’s motion to dismiss, the 6th Circuit disagreed and took the SLC member’s recusal as evidence that the committee did not meet the high standard of independence required by law.

8th Circuit: Employers can't pay sub-minimum wage for nontip tasks

An employer cannot pay an employee the sub-minimum wage rate for time spent performing nontip-producing tasks if the employee spends more than 20 percent of his time performing such duties, the 8th Circuit ruled April 21 in Fast v. Applebee’s International Inc.

The plaintiffs, former and current employees of Applebee’s, claimed the company violated provisions of the Fair Labor Standards Act by improperly paying servers and bartenders the tip-credit wage for all hours worked, including those spent on nontip-producing activities such as stocking and cleaning. Applebee’s claimed that because the tipped employees were compensated at or above minimum wage for all hours worked, it was entitled to pay the lower rate for time spent on incidental activities. The plaintiffs cited the DOL Wage and Hour Division’s Field Operations Handbook in arguing that Applebee’s acted improperly in applying the pay rate to employees who spent more than 20 percent of their time on nontip-producing duties. The district court deferred to the DOL Handbook.

The 8th Circuit affirmed, granting deference to the DOL’s interpretation of the regulations that an employee may not spend more than 20 percent of his time on “general preparation or maintenance” work if the tip credit is applied to his wages.

11th Circuit: Court throws out two bribery convictions

The 11th Circuit ruled on May 10 to throw out two bribery convictions against former Alabama Gov. Don Siegelman and former HealthSouth CEO Richard Scrushy but upheld most of their 2006 convictions in USA v. Siegelman.

In 2006, Siegelman and Scrushy were convicted on multiple corruption charges. Siegelman was accused of appointing Scrushy to a state hospital regulatory board in return for $500,000 in donations to the then- governor’s campaign. Both men were sentenced to seven years or more in prison.

When it first heard the case, the 11th Circuit threw out two counts against Siegelman, but not against Scrushy. The appeal then went to the Supreme Court, which remanded the case for further consideration based on the “honest services bribery” law, which prohibits a public official from depriving citizens of honest services while in office. On remand, the 11th Circuit ruled 3-0 to throw out the two counts against both men, saying there wasn’t enough evidence to convict.

Kayleigh Roberts

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