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Sept. 25 — A federal district court properly denied a business franchise association's bid to temporarily halt Seattle from treating certain franchisees as “large employers” for purposes of a city ordinance raising the local minimum wage to $15 an hour in several steps, the U.S. Court of Appeals for the Ninth Circuit ruled Sept. 25.
Almost immediately after Seattle enacted the ordinance in 2014, the International Franchise Association sued in federal court over a provision that classifies certain franchisees as large employers subject to a steeper schedule of incremental wage increases over the next five years.
A federal district court in March denied the association's request for a preliminary injunction, ruling the business group failed to show a substantial likelihood of success on the merits of its claims that the provision violates the federal or state constitution.
On appeal, the Ninth Circuit said the district court didn't abuse its discretion by denying the preliminary relief. “While we express no view as to the ultimate merits, we affirm because IFA did not, at this stage of the proceeding, show it is likely to succeed on the merits or that a preliminary injunction is in the public interest,” Judge Michael Daly Hawkins wrote.
The franchise association expressed disappointment with the Ninth Circuit's ruling.
“The ordinance is blatantly discriminatory and affirmatively harms Seattle's hard-working franchise small business owners every day since it has gone into effect,” said Robert Cresanti, the IFA’s executive vice president of government relations and public policy, in a Sept. 25 statement.
In its opinion, the Ninth Circuit acknowledged that the U.S. Court of Appeals for the Eleventh Circuit has struck down local restrictions on franchises as unconstitutional under the commerce clause, the IFA said, referring to Cachia v. Islamorada, 542 F.3d 839 (11th Cir. 2008).
The absence of controlling U.S. Supreme Court precedent and the conflict among the circuits “suggests that Supreme Court review of the Ninth Circuit’s decision may be appropriate,” the IFA said. The association is reviewing the decision to evaluate the next steps in its appeal, Cresanti said.
Meanwhile, Seattle City Attorney Pete Holmes said the city is “heartened by the thorough and swift ruling” upholding the district court.
“Today's unanimous decision is a victory for Seattle's workers,” Mayor Ed Murray (D) said in a Sept. 25 statement. “This year, we've shown that higher wages benefit workers, their families and the local economy. This decision clears the way for Seattle's next raise to go into effect on January 1.”
The June 2014 ordinance raises the local minimum wage to $15 an hour in stages according to two schedules, one for large employers and one for small employers. The law classifies stores, restaurants or other businesses run by franchisees affiliated with “large networks” as large employers subject to faster implementation of the wage increases.
Under the ordinance, large employers had to raise the minimum wage to $11 an hour as of April 1, 2015, $13 an hour as of Jan. 1, 2016, and $15 an hour by Jan. 1, 2017. Businesses classified as small employers must raise the minimum in smaller increments and don't have to pay their employees $15 an hour until Jan. 1, 2021.
In its lawsuit, the IFA asked the district court to grant a preliminary injunction that would require the city to classify certain franchisees as small employers.
Although it did not challenge the city's authority to raise the minimum wage generally or to differentiate between large and small employers, the IFA said the franchisee classification violated the U.S. Constitution's commerce clause, equal protection clause and First Amendment. The group also contended the Lanham Act, a federal law that protects trademarks, preempts the city's treatment of franchises and the city law violates the Washington state constitution.
Denying a preliminary injunction, the U.S. District Court for the Western District of Washington said the IFA failed to show a substantial likelihood of success on the merits of its claims. The franchise association also didn't show the franchisees were likely to suffer “irreparable harm” absent a halt to Seattle's classification, that the balance of hardships tips in the franchisees' favor or that a preliminary injunction is in the public interest, the district court ruled.
On appeal, the Ninth Circuit affirmed the IFA didn't show it was likely to succeed on the merits of its federal constitutional claims.
The “dormant” commerce clause doctrine limits the power of states and localities to enact laws imposing substantial burdens on interstate commerce, the court said. Courts have applied this doctrine to strike down local regulatory measures that are designed to benefit in-state economic interests by burdening out-of-state competitors, the Ninth Circuit said.
But the IFA failed to show the Seattle classification—which distinguishes among employers based on their number of employees, business model, operation of a business associated with a trademark and payment of franchise fees—either facially discriminates against interstate commerce or has discriminatory effects on out-of-state businesses, the court said.
“A distinction drawn based on a firm's business model—a characteristic IFA contends is highly correlated with interstate commerce—does not constitute facial discrimination against out-of-state entities or interstate commerce,” the court said.
The IFA also didn't establish that Seattle franchisees, which are burdened by the ordinance but pay local taxes and have local representation, are out-of-state entities, the court said.
“Nor did [the IFA] establish that franchises have such unique links to interstate commerce relative to non-franchises that the ordinance facially discriminates against interstate commerce,” the court said.
The IFA's attempts to show the Seattle ordinance was enacted with a discriminatory purpose against out-of-state entities or would effectively disadvantage interstate commerce also fall short, the court said.
Although some minimum wage advocates made anti-franchise remarks during the debate over the ordinance, neither the city council nor the mayor made such statements, the court said. Rather, the ordinance's definition of franchisee indicates the council considered them as “more akin to large employers” than small businesses and non-profits because of “their ability to accommodate increased costs,” the court said.
“In distinguishing between large and small employers, the ordinance does not use location as a factor, nor does it discuss reliance on local input or local customers,” the court said. “In contrast, statutes struck down for their impermissible purpose have contained language [about] promoting local industry or seeking to level the playing field.”
The district court considered “measures well-suited to evaluating the effects of the ordinance,” the Ninth Circuit said.
Those included the law's effect on the market share of local goods compared to out-of-state goods; whether it would cause franchisees to suffer competitive disadvantage compared to similarly situated small businesses; whether it would increase labor, business and entry costs for franchises; and if it would causes franchises to close or reduce operations.
Based on those measures, the district court didn't clearly err in finding the IFA failed to provide “substantial evidence showing the ordinance will have discriminatory effects” on out-of-state firms or interstate commerce, the Ninth Circuit said.
As for the IFA's argument that the Seattle classification violates equal protection, the court said rational basis scrutiny applies absent a suspect classification or possible infringement of fundamental rights.
Under that standard, the district court didn't err in finding “a legitimate purpose” in the classification and a “rational relationship” between franchisees and their classification as large employers, the Ninth Circuit said.
“Even if the relationship between the advantages enjoyed by franchisees and their ability to handle the faster phase-in schedule lacks strong support, the city's determination does not require empirical evidence and the classification is entitled to a ‘strong presumption of validity,' ” the court said. “[The] IFA did not negate every possible rationalization for the classification, and the district court did not clearly err in finding that the classification survived rational-basis review.”
Nor is the classification the result of “mere animus or forbidden motive,” the court said. “[T]he district court did not err in finding a legitimate, rational basis for the city's classification,” the Ninth Circuit said. “It is legitimate and rational for the city to set a minimum wage based on economic factors, such as the ability of employers to pay those wages.”
The IFA argued the ordinance discriminates based on protected speech because two of the three definitional criteria for “franchisees” are based on speech and association—that is, operating under a marketing plan prescribed by a franchisor and using the trademark associated with the franchisor.
But the court said that Seattle's minimum wage law is “plainly an economic ordinance that does not target speech or expressive conduct.”
“It is clear that the ordinance was not motivated by a desire to suppress speech, the conduct at issue is not franchisee expression, and the ordinance does not have the effect of targeting expressive activity,” the court said. “The district court did not err in finding the IFA did not show, on this record, a likelihood of success on this claim.”
No Lanham Act preemption applies because the ordinance doesn't conflict with federal trademark law, the court said.
The Washington state constitution's privileges and immunities clause doesn't apply because that provision isn't violated any time a city ordinance treats similarly situated businesses differently, the court said. Rather, only laws infringing a citizen's “fundamental” rights trigger a state constitutional violation, the court said.
The other criteria for granting a preliminary injunction on balance favor the city, the Ninth Circuit said.
The district court erred in rejecting the IFA's evidence of competitive injury to local franchisees and in finding the IFA didn't demonstrate the balance of hardships tips in its favor, compared to the city's potential hardship, the Ninth Circuit said.
But the IFA didn't show franchisees face “irreparable harm” in terms of losing customers or goodwill, as the evidence was speculative on those points, the court said.
The district court also didn't err in concluding that the public interest “disfavors” an injunction, the Ninth Circuit said.
“Granting a preliminary injunction would likely result in many workers receiving reduced wages,” the appeals court said. “Seattle voters would see part of a law passed as a result of an election enjoined.”
“IFA did not present persuasive evidence showing that the public interest would suffer as a result of allowing the ordinance to take effect,” the court said.
Bancroft PLLC represented the International Franchise Association. The Seattle City Attorney's Office and Susman Godfrey LLP represented the city and individual defendants.
To contact the reporter on this story: Kevin McGowan in Washington at email@example.com
To contact the editor responsible for this story: Susan J. McGolrick at firstname.lastname@example.org
Text of the opinion is available at http://www.bloomberglaw.com/public/document/INTERNATIONAL_FRANCHISE_ASSOCIATION_INC_CHARLES_STEMPLER_KATHERIN.
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