Seattle

Seattle

By now you have likely read that the U.S. District Court for the Western District of Washington denied the International Franchise Association and five franchisees’ motion for a preliminary injunction. The plaintiffs sought the Court’s relief to enjoin the April 1st implementation of the City of Seattle’s minimum wage ordinance. The IFA announced on Friday that the plaintiffs plan to appeal the court’s decision to the 9th Circuit.

The minimum wage ordinance created a $15 minimum wage for businesses located in the City of Seattle. The ordinance set a multi-year phase-in based on the number of people a business employs; small employers have seven years to increase wages and large employers have three years (four years if also providing health insurance). Large employers are defined as companies employing more than 500 employees in the United States and “all franchisees associated with a franchisor or network of franchises with franchisees that employ more than 500 employees in aggregate in the United States.” Small employees are companies that employ 500 or fewer employees.

In order to prevail at the preliminary injunction stage, the IFA had the burden of showing, among other things, that the plaintiffs were likely to prove the ordinance violates the dormant commerce clause (success on the merits) and that the franchisees are likely to suffer irreparable harm if relief is not granted. We note here that the IFA made several other federal claims including violation of the Equal Protection Act, the Lanham Act, First Amendment, and ERISA, none of which we will discuss here. The vast majority of both the oral arguments and the court’s opinion focus on the dormant Commerce Clause issue.

The majority of the 43-page order analyzes the plaintiffs’ argument that the definition of a large business (“Schedule 1 Employer” as used in the ordinance) is unconstitutional under the dormant Commerce Clause. The court rejected plaintiffs’ claims that the ordinance is discriminatory on its face, in its purpose, or in its effects. The court failed to find a discriminatory intent by Seattle lawmakers despite statements such as:

“[F]ranchises like subway and McDonalds really are not very good for our local economy . . . A city dominated by independent, locally owned, unique sandwich and hamburger restaurants will be more economically, civically and culturally rich that one dominated by extractive national chains.” – Nick Hanauer, Mayor’s Income Inequality Advisory Committee

“If we lose franchises in Seattle, I wouldn’t be sad . . .” Robert Feldstein, mayoral staffer

“Franchise owners: enough with the blame game! Organize, go to CorpHQ & renegotiate your rents.” – Kshama Sawant, Seattle City Council

“I don’t believe that the large parent companies of these franchises will allow their businesses in Seattle to fail and give up the market to the competition and I expect over time adjustments will need to be made to accommodate the new minimum wage . . .” – Mike O’Brien, Seattle City Council

“Franchise restaurants have menus that are developed by a corporate national entity, a food supply and products that are provided by a corporate national entity, training provided by a corporate national entity, and advertising provided by a corporate national entity. They are not the same as a local sandwich shop that opens up or a new local restaurant that opens up in the city. Our process for reaching $15 an hour in Seattle recognizes that difference.” – Mayor Ed Murray

The court held that these statements were not sufficient to show a discriminatory intent by the City Council because they “do not expressly suggest an intent to discriminate against out-of-state interests.” It appears that based on the court’s reasoning, the only evidence the plaintiffs could have proffered to support their discrimination claim was a statement by the Mayor or other city council members that the law was written with intent to exclude all out-of-state franchisors from operating within the city limits. Far more subtle attempts at local protectionism have been struck down.

Further, at oral arguments, plaintiffs’ counsel repeatedly reminded the court that the defendants failed to produce a single declaration from any member of the City Council or the Mayor refuting their seemingly discriminatory statements. The court asked defendant’s counsel why no such declaration was provided; the City’s response was that it didn’t have the burden of showing that the law had no discriminatory intent.

With respect to a discriminatory effect, the plaintiffs presented evidence that of the 600+ franchisees operating within the city, more than 96% of them are associated with out-of-state franchisors. This fact did not persuade the court that the law will have a disproportionate effect on businesses viewed by the City Council and the Mayor as “non-local.”

Under the Commerce Clause, a law that is held to be discriminatory on its face, in its intent, or in effect would trigger a burden shift requiring the legislative body to show there are no other alternatives in which it could achieve a compelling governmental objective. By convincing the court to disregard the seemingly discriminatory comments of the Mayor, his staff, and members of the City Council, the City was never forced to make that showing.