Advisories & Insights

The restaurant industry provides the perfect recipe for litigation. Mix one part heavy governmental regulation, a dash of high employee turnover, a hint of disproportionately high business failure, stir in alcohol-infused vanilla extract, and you have the crème brule of legal conflict.

Prior to becoming an attorney, I owned and managed restaurants in Manhattan Beach, Calif. One was a popular coastal cantina, which did several million in annual sales, and the other was a quick-service restaurant that catered to the casts and crews of television shows, including "Ally McBeal" and "The Practice." Both successful businesses, they still found themselves in numerous legal conflicts. As an attorney, I've learned that most of these problems could have been avoided by seeking legal advice and practicing effective risk management.

Restaurants and bars face hundreds of litigation risks, and this article cannot possibly describe them all. Its purpose is to highlight common litigation risks our clients face, and provide pointers on how to minimize risk and liability. These general recommendations are no substitute for individualized advice, and if you have a specific question, consult an attorney with expertise in the respective areas.

Basic rule: Restaurants may be legally liable to customers for harm caused by the food they serve.

Litigation risk: A recent study indicated that from 1990 to 2001, food-borne outbreaks skyrocketed 295 percent, causing thousands of serious illnesses and several deaths. Outbreaks have resulted in significant litigation, costing the industry hundreds of millions. According to a federal government report, the average jury verdict where a specific pathogen or illness is alleged exceeds $80,000. One of the largest and most publicized outbreaks took place in 2003, when hundreds fell ill, and several died, after contracting hepatitis A at a Chi Chi's restaurant in Pennsylvania. The outbreak was traced to contaminated green onions that had been imported from Mexico. Now bankrupt, Chi Chi's assets are being distributed to the multitudes of claimants.

Tips to minimize risk: An outbreak of any size could devastate your business. Deal with suppliers that you know and trust. In particular, buy and serve products from vendors that have accountability and assets to indemnify your business if an incident occurs. The diligent practice of food safety in all aspects is an imperative. From the proper storage of product, to preparation, to service, ensure that the necessary processes are consistently practiced and enforced by management. A restaurant defendant with a track record of health code violations is certain to fair poorly in litigation, but a strong food-safety record will bolster a defense.

Also, prepare for the worst. A surefire plan for failure is to assume that an outbreak will not occur in your business. A delayed or flawed response to an outbreak can spell demise for your business. Consult with an attorney with experience in this area, and develop a simple plan for crisis management.

Litigation risk: Two months ago a jury returned a $105 million verdict against Aramark Corp., concluding that its employee at an NFL football stadium disregarded rules preventing the sale of more than two beers at a time to a customer. The intoxicated customer subsequently inflicted catastrophic injuries on a young girl in a drunk driving accident. As demonstrated by the Aramark case, failure to abide by alcohol service and sales rules can result in devastating financial consequences for businesses.

Tips to minimize risk: Respect, monitor, implement and enforce the rules that govern the serving of alcohol to patrons. If, as in the Aramark case, it is demonstrated that the business did not routinely abide by or enforce the rules, or failed to properly train its employees, punitive damages should be expected. Servers must be trained to understand that safety takes precedence over the server's potential gratuities (the jury found that the Aramark employee accepted a $10 tip to violate the rules), and management must grasp that additional sales are less important than ensuring the safety of customers and third parties. It is also advisable for the business to promote the use of designated drivers, and train staff to handle intoxicated patrons by calling cabs or otherwise ensuring they do not leave the establishment behind the wheel.

Basic rule: The law requires comprehensive disclosures to potential investors prior to soliciting or accepting investment capital, and either the registration or qualification from an exemption from registration under state and federal securities laws. Is it a security? The rule of thumb is that if you are taking money to use in your business from someone who will not be actively involved in the business, you're offering a security; however, it may be structured.

Litigation risk: Many restaurants and bars seek private investment money for startup or expansion, but fail to realize that even the solicitation of an investment opportunity may trigger complex laws with harsh penalties for noncompliance. The restaurant failure rate is high, which naturally leads to unhappy investors. For example, Krispy Kreme, which was the stock du jour two short years ago, is now a defendant in multiple investor lawsuits and the target of a regulatory probe, facing claims that certain information was not properly disclosed to investors.

Tips to minimize risk: Always consult with an attorney with expertise in this area prior to soliciting investors. The law that governs this area is complex, and the expertise of a lawyer is needed to avoid the severe penalties for noncompliance, which include the return of all investment money plus payment of the claimant's attorney fees. These penalties apply personally to the "promoters," which means that you might be individually liable for the return of the investment, even if you ran your business through a limited liability entity such as a corporation or limited liability company.

Basic rule: With few exceptions, playing popular recorded music without a license to entertain restaurant guests is copyright infringement.

Litigation risk: The two major North American performance rights organizations, ASCAP and BMI, actively monitor establishments to ensure that those who play recorded music are appropriately licensed. The failure to pay required licensing fees inevitably leads to litigation and significant penalties of statutory damages and attorneys' fees. Injunctive relief is also commonly granted, which essentially renders a business unable to play recorded music for its customers.

Tips to minimize risk: Pay required licensing fees. If uncertain as to whether a license is required for your business, contact your attorney, or one with expertise in this area. Note that subscription music services are often a convenient alternative to direct licensing, as such companies will usually include licensing as part of their subscription fee.

Litigation risk: Wage and hour laws, including those that pertain to rest and meal breaks, are complex and often difficult to adapt to the restaurant business. Class action lawsuits that seek to bring in all of a business's hourly employees into one giant lawsuit are now common. The Cheesecake Factory, California Pizza Kitchen, Olive Garden and Taco Bell are just a few restaurants that have found themselves defendants in such lawsuits.

Tips to minimize risk: Make sure employees clock out and in for unpaid meal breaks. If someone does not clock out, do not assume that they took their lunch, and deduct from their time card -- find out. Treat compliance with rest and meal break law as a disciplinary issue with both employees and managers.

With the recent changes in overtime exemptions, the minimum wage and discrimination law, this is a good time for hospitality businesses and their counsel to evaluate policies and procedures on all personnel issues, including rest and meal breaks.