Freedom Of Association

ERIC H. KARP, ESQ., GENERAL COUNSEL TO NCASEF

One would think that the right of franchisees to freely associate, and to be free from harassment, intimidation and discrimination by reason of membership in or leadership of a  franchisee association would be beyond doubt. But in the aftermath of the dismissal of the misclassification claim brought in California, which is now on appeal to the Ninth Circuit, there is a concern on the part of some franchisees that they can no longer take these freedoms for granted.

In 1978, a United States District Court judge in the Eastern District of Michigan, in an opinion regarding a group of AAMCO franchisees that had bolted from the franchise system, stated: “One of the traditional control mechanisms of a franchisor has been to keep its franchisees disorganized.”

The court went on to state, “Franchisees, by necessity, must have access to the franchise group in order to act together to deal with common problems, whether those problems be the oppressiveness of the franchisor or some less momentous concern.”

Over the last 40 years, the law regarding the protection of franchisee collective action has developed on a path perfectly consistent with these prescient words from the federal court.

In a 1982 case, a Massachusetts appellate court stated that the activities of an association of Subaru automobile dealers did not violate applicable antitrust or anticompetition laws. These cases make clear that even such activities as creating a channel for the expression of grievances and support of litigation, if necessary, are perfectly legitimate and legal activities for an association.

Thus, the only two cases decided in the United States on the issue of the legitimacy of franchisee associations and the collective actions in which they engage were decided in favor of franchisee associations. Currently, 11 states have laws which protect the right of franchisees to freely associate: Arkansas, California, Minnesota, Nebraska, New Jersey, Illinois, Washington, Hawaii, Michigan, Iowa, and Rhode Island. All of these laws guarantee the right of franchisees to join and participate in franchisee associations. The laws of Iowa and Rhode Island specifically outlaw retaliation.

In addition, the current United States Federal Trade Commission Franchise Rule requires franchisors, upon the written request of an independent association of franchisees, to disclose the name, address, telephone number, email address and web address of any independent association in the franchise system. This rule is a de facto recognition of the legitimacy of  franchisee associations and their role in the due diligence process and a legitimate source of information for prospective franchisees who may be considering an investment in a particular franchise system.

On top of that, based on our research, eight cases have been decided in the United States over the years involving credible allegations by franchisees that they suffered harassment, intimidation, or discrimination by reason of their connection to an independent franchisee association. These cases involved conduct by a franchisor intended to harm the franchisees and which had no legitimate business purpose. In some of the cases, the franchisor had publicly expressed hostility to the association. In four of these cases, the franchisor’s motion seeking to dismiss those claims was denied. In the other four cases, the franchisee or franchisees recovered a verdict after a trial.

Here is a brief summary of those cases:

1. Pepperidge Farm—1989
Allegations: Franchisor surveyed and photographed member stores, put product at the back of the shelves and filed a groundless contract claim to try to cause emotional distress and “make an example” of the members.
Result: A jury returned a verdict of $1 million in punitive damages, later reduced by the court to $750,000.

2. Polar Corporation—1996
Allegations: Franchisor sent notices of termination to all members effective on the eve of their organizing meeting, using admittedly pretextual grounds, designed to put members out of business.
Result: A jury returned a verdict of $225,000, which was affirmed on appeal.

3. New England Toyota—1983
Allegations: In response to an association list of demands, the manufacturer falsely accused a dealer of improper sales promotions, filed a false complaint with the state Attorney General and shorted the delivery of cars.
Result: A jury returned a verdict of $1.4 million, later reduced on appeal to approximately $1 million.

4. Dunkin’ Donuts—2003
Allegations: Franchisor alleged that a member of the regional franchisee association had engaged in tax fraud, and terminated their franchise agreement. Other members of the  association received similar treatment. The tax fraud allegation was disproved at trial.
Result: Jury verdict for the franchisee.

5. Taco Bell—1996
Allegations: Franchisor alleged that franchisee association leaders were “renegades and scum” and complained that they had spoken of their complaints to the United States Congress and to the media. It declared one of their leaders ineligible for expansion because of a “poor attitude”—a newly invented criteria.
Result: Franchisor motion for summary judgment denied.

6. Popeye’s Chicken—1993
Allegations: Franchisor revised store evaluation reports, made derogatory comments about the franchisee association, and terminated the development rights of the franchisee.
Result: Franchisor motion for summary judgment denied.

7. Carvel Corporation—1981
Allegations: Franchisor confronted members at the entrance of the meeting, threatening serious consequences for attendance and demanded to address the meeting.
Result: Lawsuit brought by the state Attorney General; Franchisor motion for summary judgment denied.

8. Quiznos—2007
Allegations: Franchisee association posted a suicide note from a distraught franchisee on its website. Franchisor sent termination notices to all members of the association board.
Result: Court determines that the terminations were “impulsive and retaliatory.” Injunction against termination granted.

In each of these eight cases a franchisee, franchisee association or in one case the Massachusetts Attorney General prevailed in litigation where a franchisor did not honor but instead  tried to undermine the unquestioned right of franchisees to freely associate and to express and seek redress of their grievances. Of course, the point of this article is not to threaten  litigation against 7-Eleven, Inc. but to be clear that these rights of association are not in doubt anywhere in United States.

A better course on the part of your franchisor would be to accept the many and varied invitations it has received to reset the relationship with its franchisee community, to treat its franchisees as stakeholders rather than glorified store managers, to be open and transparent about its strategic plans and the store level economic consequences of them, and to engage in good faith negotiations to arrive at a truly fair and balanced franchise agreement with its franchisees.