Cases in Point
Lawyers offer operators tools to protect against costly litigation
By Allison Perlik, Senior Editor -- Restaurants & Institutions, 5/1/2004
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With litigation a familiar and frequent head- ache in the hospitality industry, it wouldn’t be much of a stretch for operators to perceive every guest, franchisee and competitor as a lawsuit waiting to happen. While such an exaggerated response isn’t likely, taking measures to protect against potential liability should be an integral part of every business’s game plan.
Restaurants & Institutions turned to experts to examine five legal issues that are most common to foodservice operations and provide a basic primer on how to stay in the clear and out of the courtroom.
Intellectual property
In intellectual property lawsuits, companies seek to defend trademarks,
product names, slogans and other elements that contribute to their
brand identity. There are many recent examples, including an action
filed in February by Darden Restaurants against Glendale, Calif.-based
IHOP. The Orlando-based casual-dining company charges that IHOP’s
“never-ending” pancake and shrimp campaigns infringe
on the “Never Ending Pasta Bowl” slogan Darden trademarked
in 1998.
To avoid similar litigation, operators can take several preventative actions. First, select a distinctive mark and conduct a clearance search to ensure it is available before registering with the U.S. Patent and Trademark Office. Preliminary searches can be done using Internet resources such as Google, Yahoo and the patent office’s Web site at www.uspto.gov. For a full availability search, companies often contract with third-party providers who delve more deeply into state registrations as well as common-law sources such as business directories and domain names.
R. Lee Fraley, a member of the Retail Services Group at Phoenix-based Snell & Wilmer LLP, advises restaurants to consider federally registering their main marks even if they have no current plans for multistate expansion. Such action keeps the door open for growth and also minimizes the risk of having to launch expensive defenses if later accused by a competitor of trademark infringement after expanding to another state, says Fraley, who has worked on brand protection with restaurants including two Scottsdale, Ariz.-based companies: Cold Stone Creamery and Nothing But Noodles.
Trade dress, which involves the look and feel of a concept—think McDonald’s Golden Arches—can be more complicated as a branding issue. To be protected, “it has to have been in use and become identifiable ... so when you walk into the restaurant you’d know what it was without even looking at the name,” says William P. Smith, practice group leader for intellectual property at Pittsburgh-based Doepken Keevican & Weiss.
Encroachment: alternative
channels of distribution
Encroachment disputes have expanded beyond arguments over a franchiser’s
ability to open traditional locations within agreed-upon distances
of franchisees. The latest disputes are arising in protest of
franchisers taking advantage of alternative channels of distribution
that fall inside what franchisees believe are protected areas.
Points of contention include online sales, retail stores, convention
centers, sporting events, airports and limited engagements such
as “taste of” events.
“[Encroachment] continues to be an issue because franchisers want to preserve as much of the market space for potential growth as they can,” says Kevin P. Hein, attorney and partner with Snell & Wilmer’s Retail Services Group.
Some large franchisers with the power to do so are refusing to grant any territory beyond franchisees’ exact locations, he says. For smaller companies, Snell & Wilmer advises creating a “reservation of rights” segment in the franchise agreement that notes in detail what territory is protected and what is not. This section should include numerous illustrations of distribution channels open to the franchiser to remove any potential legal challenges. “The key is thinking as creatively as possible about where you potentially might want to distribute your product,” Hein says.
“Dram-shop”
liability
Dram-shop liability cases abound in the hospitality industry,
and restaurants pay the price. In a recent case against a T.G.I.
Friday’s franchisee in Louisville, Ky., the company paid
$21 million to settle a lawsuit brought about by the parents of
two teens killed by a driver who allegedly consumed excessive
alcohol at the franchisee’s restaurant.
Typical dram-shop cases are of two types: first-party liability, where the person served at a bar or restaurant injures him or herself and sues the establishment; and third-party liability, where an intoxicated person who was served injures a party who consequently sues the establishment that served the alcohol. The latter is more common.
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Elizabeth DeConti, a partner with Tampa, Fla.-based Holland & Knight LLP, suggests responsible-server training as the first step for restaurants in protecting against such lawsuits.
Her firm also helps retailers devise training-manual chapters that spell out how employees should respond to a wide range of situations, from learning how to speak to customers demanding to be served to establishing a point at which a taxi should be called to offering free nonalcoholic drinks to designated drivers.
Because dram-shop liability laws differ by jurisdiction, DeConti recommends that all restaurants contact their local department of alcoholic beverage control (ABC) to educate themselves. Some ABC departments require certain types of training or will provide it on a free or nominal basis.
Obesity allegations
While lawsuits blaming foodservice companies for obesity-related
health issues have yet to make it to trial, restaurateurs must
remain vigilant to potential future liability.
Attorney Robert E. Fields III of Womble, Carlyle, Sandridge & Rice PLLC in Raleigh, N.C., compares the potential legal hassles to those of major manufacturers in industries such as pharmaceuticals, automobiles and tobacco.
“The big issue is second-guessing the choices that were made in putting the products together in the first place, and second-guessing the way the products are described and marketed,” he says. “The suits will probably start out as individual lawsuits for personal injuries and medical problems because people are saying food is making them overweight and obese.”
... Then they’ll spread into mass torts. If this takes hold, it becomes a pattern where you have thousands of people showing up and the suits are consolidated and dealt with as class actions.”
Fields suggests five steps operators can take. First, he says, conduct a risk assessment that includes examining past actions such as marketing, advertising and products and how they may be construed in light of new knowledge and/or changes in public opinion. For example, given new information about trans fats, restaurants may choose to remove the ingredient from menu items or introduce new products without it, as did Boston-based chain Au Bon Pain with the introduction of a new trans-fat-free muffin in October 2003.
Providing menu choices and nutritional information are the next steps.“What [restaurants] are doing with those two things is empowering customers to make knowledgeable choices,” Fields says.
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Fourth, by promoting exercise, restaurants help combat the trend among the population toward reduced physical activity. Larger chains can employ mass marketing and sponsorships of national programs to encourage exercise, while those with fewer resources can use Web sites and get involved on the local level with sponsorships of sports teams, races and other charity events.
Finally, Fields says, train employees who come in contact with the public and media to spread a positive message about the company. “If you’re sponsoring baseball teams and have been doing it for 30 years, now is a good time to start talking about it,” he says.
Food safety
Lapses in food safety can cost operators a lot more than negative
publicity, as evidenced by recent lawsuits filed against Sherman
Oaks, Calif.-based Worldwide Restaurant Concepts (WRC) and Louisville,
Ky.-based Chi-Chi’s Inc. Although health officials traced
the two unrelated foodborne-illness outbreaks at WRC’s Pat
& Oscar’s and Chi-Chi’s locations to produce suppliers,
both chains remain liable.
Former Sizzler Corp. executive Kathryn McGuigan, who headed the chain’s crisis management team through a rash of E. coli outbreaks and now is a certified law student slated to become an associate with Sherman Oaks, Calif.-based Tharpe & Howell, says a thorough Hazard Analysis and Critical Control Point (HACCP) program is the best defense. With HACCP in place, she says, operators can respond to foodborne-illness allegations by referencing details about ingredient sources, temperatures during receiving and holding, where food was stored, how many guests consumed it and other details.
Other proactive steps can be taken. In addition to placing greater emphasis on staff training and more carefully screening suppliers, Snell & Wilmer’s Hein advises that operators have crisis-management programs already in place and create effective reporting procedures for foodborne-illness incidents so potential outbreaks quickly can be tracked.
Another basis for food-safety litigation involves customers finding foreign objects in food. McGuigan, who believes more than 80% of such objects are purposefully introduced by customers, advises operators to seek laboratory testing to verify the possibility of customers’ claims. She cites an example in which a diner claimed to find a prophylactic in a bowl of clam chowder. At the lab, all 25 brands tested dissolved upon placement in the soup, proving the restaurant’s innocence.
Also on the Docket
When it comes to potential foodservice litigation, the five legal issues addressed in this article represent just a fraction of the docket. Senior partner Victor A. Cavanaugh and associate Sanford A. Posner of Elarbee, Thompson, Sapp & Wilson LLP in Atlanta identify three additional areas of concern for restaurant operators.
- Americans with Disabilities Act (ADA): Cavanaugh’s firm provides clients an accessibility checklist that covers areas such as parking lot, restrooms, ramps, doors and other such requirements. “It’s expensive to comply, but if you get into a lawsuit that goes through trial, it’s not unusual to spend $100,000 in defense fees,” he says.
- Harassment: Make sure training on how to avoid harassment does not fall through the cracks, especially at large franchise operations. Cavanaugh advises operators to make sure their policies go beyond sexual issues to cover other types of employment harassment relating to race, religion or national origin.
- Worker Eligibility: To prove they are eligible to work in the United States, all potential employees must complete a form I-9. If these forms are properly filled out with appropriate documentation, Posner warns, employers are not allowed to discriminate based on an applicant’s apparent race or national origin and ask for further verification.
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