Marshall v. Shan-An-Dan, Inc.

• Citation: 747 F.2d 1084
• Decision Date: 09 November 1984
• Docket Number: No. 83-3425,SHAN-AN-DA,INC,83-3425
• Parties: 26 Wage & Hour Cas. (BN 1594, 102 Lab.Cas. P 34,660 Ray MARSHALL, Secretary of Labor, U.S. Department of Labor, Plaintiff-Appellee, v.; Precision Transmission, Inc.; Bob Yarbrough, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 1084

747 F.2d 1084

26 Wage & Hour Cas. (BN 1594, 102 Lab.Cas. P 34,660

Ray MARSHALL, Secretary of Labor, U.S. Department of Labor, Plaintiff-Appellee, v. SHAN-AN-DAN, INC.; Precision Transmission, Inc.; Bob

Yarbrough, Defendants-Appellants.

No. 83-3425.

United States Court of Appeals, Sixth Circuit.

Argued Aug. 23, 1984.

Decided Nov. 9, 1984.

Curtis J. Butcher (argued), Carmel, Ind., for defendants-appellants.

Elizabeth W. Boncella, U.S. Dept. of Labor, Cleveland, Ohio, Ruth Peters (LC), Barbara E. Kahl (argued), Washington, D.C., for plaintiff-appellee.

Before MERRITT and WELLFORD, Circuit Judges, CELEBREZZE, Senior Circuit Judge.

WELLFORD, Circuit Judge.

Plaintiff, the Secretary of Labor, initiated this action under the Fair Labor Standards Act (Act), 29 U.S.C. Sec. 201 et seq., to recover back wages allegedly owed to certain employees of defendant, Shan-An-Dan, Inc., d/b/a "Precision Transmission" ("Shan-An-Dan," the franchisee), defendant, Bobby Yarbrough, President of Shan-An-Dan, and defendant, Precision Transmissions, Inc. ("Precision," the franchisor), and to enjoin future violations of the minimum wage, overtime and recordkeeping requirements of the Act. Defendants appeal from the Magistrate's judgment for plaintiff. ¹

The primary issue before us is whether a franchisee, Shan-An-Dan, and its franchisor, Precision, are engaged in an enterprise within the meaning of Section 3(r) of the Act, 29 U.S.C. Sec. 203(r), which applies to an "enterprise" engaged in commerce or the production of goods for commerce whose annual gross volume of sales is at least $250,000, 29 U.S.C. Sec. 203(s). Only if the franchisor and franchisee are combined and treated as a single enterprise is there sufficient annual dollar volume of business to bring the defendant franchisee within the coverage of the Act. The Magistrate found that the franchisor and franchisee constituted such an enterprise, as contemplated by the Act, recognizing at the same time, as conceded by the Secretary, that the annual dollar volume of the franchisee alone is insufficient for the Act to apply to it.

Precision is an Indiana corporation engaged in the business of selling and servicing franchises for the operation of transmission repair services. Its principal office is in Indiana. Mr. Yarbrough, President of Shan-An-Dan, entered into a franchise agreement with Precision in August of 1978, and decided to incorporate his new business in Ohio under the name Shan-An-Dan, Inc. to engage in the business of selling, servicing and repairing motor vehicle transmissions and parts. Shan-An-Dan regularly purchases and receives transmission parts from Precision.

The Magistrate held that the operations of the franchisee and franchisor constituted a single enterprise under 29 U.S.C. Sec. 203(r), which provides:

"Enterprise" means the related activities performed (either through unified operation or common control) by any person or persons for common business purposes, and includes all such activities whether performed in one or more establishments or by one or more corporation or other organizational units including departments....

The Magistrate noted the three elements that must be present to determine that an enterprise exists: "(1) related activities; (2) performed through unified operations ² or common control; (3) for a common business purpose." See, e.g., Brennan v. Arnheim and Neely Co., 410 U.S. 512, 518, 93 S.Ct. 1138, 1142, 35 L.Ed.2d 463 (1973); Wirtz v. Columbian Mutual Life Ins. Co., 380 F.2d 903 (6th Cir.1967). The Magistrate correctly observed that the Secretary has the burden of proving the existence of an enterprise by a preponderance of evidence, see, e.g., Schultz v. Morris, 315 F.Supp. 558 (M.D.Ala.1970), aff'd sub nom., Hodgson v. Morris, 437 F.2d 896 (5th Cir.1971), and that "all the facts and circumstances [must be examined] to determine if defendant is an enterprise within the meaning of the Act. Wirtz v. Hardin and Co., 253 F.Supp. 579 (M.D.Ala.1964), aff'd, 359 F.2d 792 (5th Cir.1966)." ³

The Magistrate set out his principal basis for finding related activities:

The franchisor and franchisee in the instant case engaged in joint advertising activities to establish a favorable public perception of the Precision Transmission name. Both businesses sell transmission parts to other dealers at wholesale rates. The franchisor sells transmission parts to the franchisee in a wholesaler/retailer relationship, thus establishing a vertical structure for the delivery of automotive repair services. See, e.g., Wirtz v. Barnes Grocer Company, 398 F.2d 718 (8th Cir.1968). Moreover, the franchisor has substantial control over a chain of transmission repair service centers which perform the same business activities.

The Magistrate then considered whether the franchisee and the franchisor had a common business purpose. The Magistrate first noted that activities are performed for a common business purpose when the operation of one business furthers that of another business through the internal operation of the business and through the establishment of a favorable public image. The Magistrate recognized, however, that profit motive alone is not justification for finding a common business purpose. See Columbian Mutual Life, supra, and Sideris, supra. The Magistrate also found the Secretary's determination, see 29 C.F.R. Sec. 779.213 (1983), that activities of Precision and Shan-An-Dan were performed with a common business purpose when directed to the same business objective or to similar objectives in which the group has an interest, to be a reasonable interpretation and thus entitled to great deference.

The Magistrate, applying these principles to the instant case, held that the franchisor and franchisee had a common business purpose:

The franchisor's profits are derived on a percentage basis from the receipts generated by the franchisee. In addition to profit motive, they engage in joint advertising efforts to further the name Precision Transmission as a tradename of quality in the public mind. The objective of both the franchisor and franchisee is to establish an efficient and successful transmission repair shop. The franchisee benefits monetarily, as does the franchisor. The franchisor also benefits through the enhancement of the tradename and orders for additional parts by the franchisee. Moreover, the franchise agreement shows the parties have contemplated a long-term working relationship to create a profitable and growing concern for their mutual benefit.

Dunlop v. Ashy establishes that the test for common control is "whether there is a common control center with the ultimate power to make binding policy decisions for all units of the enterprise." 555 F.2d at 1231, citing Schultz v. Mack Farland, 413 F.2d at 1296 (5th Cir.1969). In Ashy, both district and circuit courts concluded that a "related" Downtowner Motor Inn and a restaurant situated therein did not meet the above common control test, because, among other things, the restaurant operators determined the items on the menu and did their own hiring and firing, despite the fact that the managers of the motel and the restaurant worked "closely" together and the former "made suggestions about the restaurant which [the latter] often follows." Id. at 1231. Many factors present in Ashy that were favorable to the Secretary are missing in the instant controversy:

(1) the separate operations worked out of the same location (2) daily receipts from the restaurant were placed in the motel safe;

(3) the businesses worked closely together and "cooperated" with continuing daily personal relationship between the two managers; and

(4) the motel's auditor prepared the restaurant's daily report of operations.

Despite the existence of these factors, "practical and realistic factors" outweighed the above considerations in the decision in Ashy that there was no common control within the meaning of the Act. This case should have been recognized as strong authority for appellant, since none of the above four considerations favorable to the Secretary are present: first, the entities are not only in separate locations, they are in different states; second, no daily recordkeeping or safekeeping activities are conducted by one entity for the other; and, third, there was no demonstrated close and continuous personal relationships existed between the two managers of the franchisor-franchisee business.

Precision and Shan-An-Dan have entirely different stockholders, directors, officers, and they share no managers, auditors, or common facilities for storage or recordkeeping. It is difficult to perceive, in light of these circumstances, the existence of common control in light of these "practical and realistic" factors. The Magistrate mistakenly relied upon provisions in the franchise agreement that he perceived as containing "restrictions on products, prices, profit and management which establish the franchisor's common control and deny the franchise owner the essential prerogatives of an ordinary businessman." The "restrictions" on profits, however, were found to be based on the existence of franchise fees, and royalty and warranty fund payments, which are common in the franchising field. These fees and payments, however, do not restrict profits in the sense of controlling or limiting them--the success of the franchisee in terms of profitability depends upon the sales it generates and its ability to manage costs successfully. Likewise, the "restriction" on "products" found by the Magistrate was based on a franchise...