Franchise terminations: legal rights and practical effects when franchisees claim the franchisor discriminates

INTRODUCTION

Franchising Growth and Regulation

By owning a franchise, as opposed to starting a small business, franchisees may substantially reduce the risk incurred in building an enterprise from the ground up, while gaining significant experience in their field through the assistance provided to them by the franchisor.(3) In addition, franchisees usually gain better name and product recognition.(4)

One set of commentators has called franchising “the most successful marketing concept ever created.”(5) If sheer growth indicates success, such a statement may not be hyperbole. Franchising has taken an increasing share of domestic and international business. Over five hundred thousand franchises operate in the United States, and they now account for about one trillion dollars in annual retail sales, with franchised outlets responsible for well over one third of total U.S. retail sales.(6) The number of franchises and of business format franchisors as well as the percentage of total retail sales, has grown rapidly, far outpacing the economy as a whole in the last few decades.(7) In addition to this continued increase in market share, the number of persons working for franchised outlets has skyrocketed from an estimated three and one half million in 1975, to about seven million in the early 1990s, to a predicted figure of ten million by the year 2000.(8)

Franchising’s “success” and resulting rapid growth have caused problems. Franchise business developments continue to outpace any attempts at developing a well-structured, orderly approach to the legal issues associated with franchising. Court decisions, administrative regulations, and legislation have failed to provide even the most basic element for nationwide legal standards: a uniformly accepted definition of franchising.(9)

Most states consider a franchise to exist whenever a franchisee, in return for paying a franchise fee, is granted the right to sell goods or services under a marketing plan prescribed by the franchisor.(10) The marketing plan must be substantially related to the franchisor’s trademark, service mark, or other commercial symbol.(11) A minority of states apply a slightly variant definition, substituting for the marketing plan a “community of interest” between the franchisor and the franchisee in the marketing of goods or services.(12)

While there is a federal rule requiring information disclosures,(13) the only federal substantive laws that presently govern the franchisor-franchisee relationship directly are those regulating gasoline service stations(14) and automobile dealerships.(15) Many federal franchise relationship bills have died without even a committee vote,(16) and the Federal Trade Commission has never modified the information disclosure rule it promulgated in 1979.(17) However, many states do comprehensively regulate franchises, olden by codifying a “good cause” standard for the franchisor’s dealings with its franchisees.(18)

The Franchisor-Franchisee Relationship

Despite franchising’s general acclaim, the franchise relationship often has become adversarial.(19) Indeed, while the word, “franchise,” is derived from the Old French word, franchir, meaning “to free from slavery,”(20) some critics have concluded that franchising is a modern form of long-term indentured servitude.(21) Because franchisors usually have the upper hand, and in recognition of the typical franchisor’s superior bargaining power, some statutes and case law seek to intervene in the relationship and protect the franchisee by imposing upon franchisors an obligation of good faith, including a duty not to terminate franchises except for “good cause.”(22)

Given the high financial commitment of business format franchise investments,(23) and the ten to twenty year term of most franchise agreements,(24) it is not surprising that the legal issues surrounding termination, renewal, and transfer of franchises are among the most controversial in franchise law.(25) Clauses governing these matters are usually set forth near the end of what is likely to be a lengthy agreement between franchisor and franchisee.(26) They are couched in highly restrictive, legalistic phraseology,(27) and frequently cover several pages.(28)

The franchisor may attempt to justify these restrictions as a reasonable means necessary to protect a business that the franchisor originated.(29) However, the relatively obscure placement of these clauses in the franchise agreement may be considered deceptive. This situation alarms many franchisees: clauses governing termination, nonrenewal, and transfer of the franchise are likely the most important provisions in the agreement, as they limit what a franchisee may do with a business that may have taken years, and a substantial amount of money, to develop.(30)

Robinson-Patman Claims

Franchisors that distribute products through both independent franchisees and company-owned units have been challenged for allegedly engaging in price discrimination. Franchisees have claimed that they pay franchisors higher prices for goods than the prices paid by company-owned units or by non-franchise retailers.(31) This price differential, the franchisees contend, violates Section 2(a) of the Robinson-Patman Act.(32)

Typically, courts have dismissed these claims on the grounds that a franchisor’s transfer of goods to company-owned units, branches, or wholly-owned subsidiaries is not a “sale,” which is a required element of the Robinson-Patman Act.(33) Some courts, though, have found a potential violation,(34) and the Supreme Court has never ruled directly on this matter. Some state franchise statutes, however, forbid such price discrimination, regardless of how the Robinson-Patman Act is interpreted.(35)

Discrimination Claims

The arguments challenging a termination as wrongful fall into three basic claims: statutory violations, breach of contract, and fraud.(36) The most commonly alleged facts are that the termination: (1) was without “good cause

Occasionally, a franchisee challenges a franchisor’s practices, including the agreement the franchisor drafted, by introducing a discrimination claim that centers around termination, renewal, or transfer of the franchise.(39) In addition, other franchise litigation, although typically focused on breach of contract,(40) antitrust law,(41) intellectual property,(42) or other “core” issues, also may involve allegations of discrimination.

Claims of discrimination usually arise because of: (1) differences in contractual rights and duties from one franchise to another in the same franchised system

The Article’s Scope

A debate rages between franchisees and franchisors. Franchisees and their advocates maintain that the franchise relationship creates rights beyond the contract itself.(47) When termination or nonrenewal of the relationship infringes upon these rights, damages should be available for such an infringement. This argument, though, assumes that franchisees or potential franchisees lack the necessary information or access to professional advice. If they have such support, as franchisors contend that they do,(48) then legal concepts rooted in consumer and employee protection have little role to play in the commercial relations of independent contractors (franchisees).

This article examines not just the alleged disparities in information, but also other matters concerning franchisors’ allegedly discriminatory treatment of terminated franchisees: statutory and case law developments, the use of class actions, and basic issues of contract and equity. It considers the implied covenant, as well as the analogous, but rarely applicable, federal laws, in terms of their impact on franchisees’ claims of franchisor discrimination.(49) It also examines state statutes on discrimination and discusses equitable principles and public policy that courts have propounded to treat franchise terminations. Courts have tried to walk a fine line by balancing the freedom and sanctity of contract against concepts of good faith and fair play. As a result, the law is often inconsistent and entirely unsatisfactory as a guide to both franchisors and franchisees.

This article demonstrates that, whether independently or as class actions, most franchisee discrimination claims have fared poorly. If the alleged dissimilar treatment of franchisees did not occur contemporaneously, or involved franchisees not similarly situated, the franchisor usually can establish justifiable reasons for treating the franchisees differently. Instead of claiming “discrimination,” a franchisee stands a far greater chance of success by pleading that its franchisor lacked “good cause” to terminate or not renew the franchise, and that such disproportionate and unfair treatment runs counter to the public policy concepts articulated by legislatures and courts as governing the franchise relationship.

This article considers the Section 1981 claims of franchisees or franchise applicants. It reviews the mix of public relations and legal problems affecting franchised systems with few minority-owned franchises. While discrimination claims have produced disappointing franchisee recoveries, they have proven a great concern to franchisors, as such claims can be extremely damaging to the corporate image. Thus, despite the apparent failure of discrimination claims themselves, the mere threat of discrimination suits and of boycotts has sparked dramatic, “voluntary” changes in the franchisee selection and retention process within many franchised systems.

The author recommends certain reforms based on business norms and commonly accepted legal concepts. He proposes a self-help measure for franchisees analogous to the “Most Favored Nation” status in international trade. He suggests a series of required disclosures to prospective franchisees, in addition to or in tandem with the disclosures already required under federal or state law. He outlines a method to delineate better the legally enforceable standards for particular franchise systems. Such standards would build upon “good cause” principles and could be brought about through a combination of state legislation, industry ethics codes, arbitration hearings, and other factfinding proceedings.

FRANCHISE TERMINATION

The Development of State Statutory Law on Termination

In the early days of franchising,(50) the grantor-franchisor usually retained the unilateral right to revoke the license at will.(51) Until the 1970s, the only existing “franchise legislation” was that body of law affecting business in general, particularly the antitrust laws and the Lanham Act.(52)

Franchisee protection law arose when courts set aside franchise agreements in a series of decisions resting upon the determination that the franchisor had used its powerful position to impose restraints on competition, in violation of federal antitrust laws.(53) Additionally, during this same period (the 1960s and early 1970s), a growing body of literature called attention to the fundamental inequities in the creation, operation, and termination of franchise relationships.(54)

Historically, the franchise agreement’s covenants and conditions could be so onerous that the franchisee was constantly at substantial risk of being in default for failing to comply with one or more contractual terms.(55) The mere threat of nonrenewal or termination could foster franchisee subservience to a franchisor’s directives, even if those orders were unfair or deceptive.(56) This in terrorem effect has been noted for covenants against competition, but it covers all situations in which a franchisor could threaten to impose onerous contract terms upon a franchisee.(57)

Some commentators contend that the unfairness continues to this day, largely unabated.(58) One also can find court decisions during this past decade that seem to support this view, albeit on a more limited, case-by-case basis.(59) Paradoxically, the more frequently a franchisee accedes to a franchisor’s demands, the greater the investment the franchisee stands to forfeit by refusing a subsequent command.(60) In effect, the power to terminate a franchise typically is also the power to destroy the franchisee’s business.(61)

In 1971, as an attempt to prevent abuse in franchise sales, the California legislature enacted the state’s Franchise Registration and Disclosure Act,(62) which established franchise registration and prospectus disclosure requirements. Since then, a third of the states have enacted similar laws.(63) The stated purposes of the Illinois Franchise Disclosure Act are representative of these state laws:

(a) to provide each prospective franchisee with the information necessary
to make an intelligent decision regarding franchises being offered for
sale

(b) to protect the franchisee and the franchisor by providing a better
understanding of the business and the legal relationship between the
franchisor and the franchisee.(64)

Even in states without a franchise disclosure or registration statute, laws requiring disclosures about business opportunities may be applied to franchisors.(65) A number of states without franchise disclosure or registration statutes have business opportunity statutes.(66)

Many other laws, though, go beyond procedural requirements of registration and disclosure. Recognizing that existing law permitted a franchisor to terminate or refuse to renew a franchise on the basis of relatively insignificant transgressions committed by the franchisee,(67) nineteen states have enacted legislation providing standards for franchise termination and non-renewal.(68) Each statute is different, however, and there is no nationwide guideline stating when a franchisor can terminate a franchise or refuse to renew a franchise agreement.(69) A federal rule does require information disclosures,(70) but no federal substantive laws govern franchises generally.(71) Moreover, the likelihood of such laws appears dim.(72)

Equity and Public Policy in Franchise Terminations

No Fiduciary Status for Franchisors

Endeavoring to confer on franchisees greater protection in equity than they received at law, some commentators have labeled the relationship between franchisors and franchisees a “fiduciary” relationship.(73) The principal case concerning the alleged fiduciary nature of a franchise relationship involved the termination of a gasoline dealer’s lease.(74) In affirming the trial court’s finding that the termination breached the franchisor’s inherent fiduciary duties, the Eighth Circuit Court of Appeals defined a fiduciary relationship as a duty of good faith and fair dealing, with “neither party exert[ing] undue influence or pressure upon the other.”(75)

The fiduciary status places on the fiduciary a trustee’s duty to serve the beneficiary with undivided loyalty and not “profit at the expense of the other.”(76) However, a significant part of the transactions (discussions, negotiations, or otherwise) between a franchisor and a potential franchisee are of a commercial nature, with each party having some access to information and some bargaining power.(77) So long as each party can recognize and take actions favoring its own best interests, judicial or legislative imposition of a fiduciary status is inappropriate. For this reason, virtually all courts issuing opinions on this subject have refused to characterize the franchise relationship as a fiduciary one.(78) In those few cases where a court has found a special relationship between franchisee and franchisor, it has been because of extraordinary circumstances specifically applicable to only that case.(79)

Nevertheless, the franchisor-franchisee relationship is by its nature interdependent and, potentially, very lengthy. Thus, since the parties have a deep, common interest in achieving successful results from the franchise operation, mutual reliance and trust are essential throughout the entire duration of the franchise relationship.(80) Consequently, although depiction of the franchise relationship as “fiduciary” has failed to win judicial converts, courts and legislatures alike have recognized the need to apply other basic equity principles to franchising.(81)

Unconscionability

The equitable doctrine of unconscionability of contract, which provides that an unconscionable contract provision is unenforceable, has been articulated in many federal and state court decisions and codified in many statutes and model laws.(82) However, it is extremely unlikely for franchise terminations to be found “unconscionable” because claims of “unfair surprise,”(83) an essential element of the test for unconscionability, usually have failed,(84) Nevertheless, the related fundamental principle, that every contract imposes an obligation of good faith and fair dealing on contracting parties, has emerged as a rule relevant in defining rights and duties governing franchise relationships.(85)

Initially, courts refused to extend to franchise cases the unconscionability of contract section of the Uniform Commercial Code (“UCC”), primarily because Article Two limits the UCC to transactions involving the sale of goods.(86) In Division of the Triple T Service, Inc. v. Mobil Oil Corp.,(87) however, a New York court upheld the terms of a franchise agreement by using the test guidelines outlined in the official comments to the UCC.(88) Increasingly, a number of courts fashioned a more expansive view of franchising contract law and thus began to require a set of implied, good faith dealings under the guise of protecting the franchisee’s investment.(89)

“Good Cause” Statutes

Statutes in many states and territories codify a “good cause” standard.(90) This approach requires franchisors to make an affirmative showing of “good cause” before terminating or otherwise affecting a franchise. This constitutes a pro-franchisee step beyond simply incorporating into the common law of contracts the implied covenant of good faith and fair dealing. Even if there is an express contractual provision about termination, for example, one that trumps any implied covenant,(91) a court looking for “good cause” must examine whether the franchisor had sufficient cause to terminate a franchise.(92)

Some states limit the application of a “good cause” standard to terminations,(93) while others apply it to both terminations and refusals to renew.(94) The standards underlying the term, “good cause,” vary among the states, but restricting termination to “good cause” is generally designed to prevent franchisors from engaging in “opportunistic behavior prior to the end of the contract term.”(95) The type of conduct constituting a breach of the duty to use “good cause” is difficult to define because “neither courts nor commentators have articulated an operational standard that distinguishes good faith performance from bad faith performance.”(96) The following definitions illustrate a general, unspecified default on the part of a franchisee, justifying a franchisor’s decision to terminate:

Arkansas: “failure by a franchisee to comply substantially with the
requirements imposed upon him by the franchisor or sought to be imposed by
the franchisor which requirements are not discriminatory as compared with
the requirements imposed on other similarly situated franchisees”
Connecticut: “failure to comply substantially with any material and
reasonable obligations of the franchise agreement”

Indiana: “any material violation of the franchise agreement”

New Jersey: “failure by the franchisee to substantially comply with lawful
and material provisions of the franchise.”(100)

Many state statutes list specific actions which constitute per se “good cause” for termination and nonrenewal for which the “good cause” requirement is waived.(101) Thus, due in large part to the lobbying activities of the franchisor community,(102) many states have set forth circumstances under which the standard notice and cure requirements of “good cause” need not be met.(103) These include situations such as: (1) failure to pay when due all or some of the royalties or fees owed to the franchisor

Although the standards underlying “good cause” vary among the states, definitions generally cite “good cause” as the failure of a franchisee to comply with any applicable law or with any lawful provision of the franchise agreement, after being given the opportunity to cure that defect. The cure period may be as short as five or ten days,(120) or as long as two months or more,(121) with it often in the middle, at thirty days.(122) Franchisors object to “good cause” requirements as impediments on their right to contract freely, arguing that trademark licenses in particular must be guarded through strict quality control.(123)

In effect, the behavior of both the franchisor and franchisee may be judged by equitable notions of fair play. Indeed, a few states even turn the question of franchisor “good cause” on its head, and find it present if the franchisee fails to act in good faith and in a commercially reasonable manner.(124) These statutes, therefore, permit a court to judge the appropriateness of a franchisor’s decision to terminate, with the court’s evaluation focusing on whether the franchisee behaved fairly toward the franchisor.

As a practical matter, however, few franchises are likely to be terminated or refused renewal without good reason, because franchisors usually benefit from successful franchise relationships at least as much as franchisees do.(125) A franchisor has little incentive to terminate a source of royalties without good cause, especially when a baseless termination would harm the franchisor’s reputation and discourage other potential franchisees from seeking that particular franchise.(126)

Of course, simply because a franchisor’s motives for a termination may be benign does not mean that the termination has no consequences harmful to the franchisees’ collective interests. In Kealey Pharmacy & Home Care Service, Inc. v. Walgreen Company,(127) the court noted, “the adverse impact upon a dealer of a unilateral termination of its dealership is not lessened because the grantor is acting in good faith for sound business reasons. Neither is the adverse impact lessened because all other similarly-situated dealers are being terminated as well.”(128) The court quoted from a contracts law expert, Ernest Gelhorn:

Analytically, the terminating party’s motives are unrelated to the
harshness of the bargain or its effect. Motives have no relationship to the
parties’ relative bargaining power. Nor would the application of a good
faith test be affected either by whether the dominant party was misusing
its power or by whether termination would have unduly harsh effects on the
terminated party. Rather, its application would be determined by the extent
to which such misuse was disclosed by improper motives. The assumption, in
other words, seems to be that fairness can be assured (or fundamental
unfairness prevented) by attention to the motives upon which a party acts.
Not only is empirical support for this assumption lacking, but it also
seems contrary to common sense. There is no evidence that a weaker party
would be protected adequately by requiring the dominant party to exhibit
proper motives in exercising the power to terminate.(129)

Kealey, though, may be an example of the adage that hard cases make bad law. The appellate court in Kealey(130) upheld the district court’s judgment that the Wisconsin Fair Dealership Law places the burden of proving “good cause” for termination on the franchisor/grantor rather than the franchisee/dealer. The appeals court refused to find “good cause” in the purely economic, nondiscriminatory reason for termination offered by Walgreen that its approximately 1400 dealers/franchisees were producing an inadequate rate of return and should thus be terminated.(131) Instead, “the only permissible good cause is defined in the [state] statute as ‘failure by a dealer to comply substantially with essential and reasonable requirements imposed upon him by the grantor [franchisor]’ or ‘bad faith by the dealer in carrying out the terms of the dealership [franchise].'”(132) In Kealey, the court in essence said that Wisconsin requires more than an economically sensible reason for termination

Kealey was followed in Wright-Moore Corp. v. Ricoh Corporation.(134) There, the Court of Appeals for the Seventh Circuit reviewed the Indiana “good cause” statute and concluded that a franchisor who decides against renewing a franchise agreement, while acting without bad faith or discrimination,(135) cannot meet the “good cause” statutory requirement simply by proving its own, internal economic justification for a termination or nonrenewal (e.g., lower costs and greater profits “for the benefit of the franchisor’s balance sheet,”(136) or a “more effective marketing plan” for the franchised system(137)). Otherwise, the court held, franchisors could too easily advance “a plausible business reason”(138) to extract rents from franchisors and thereby contravene the franchise statute’s very purpose.(139)

Discriminatory Treatment as a Lack of “Good Cause” for Termination

“Good cause” requirements in franchising have developed to compel franchisors to treat their franchisees equally and fairly.(140) If a franchisor terminates one franchise while allowing another franchise to continue, despite the same violation in each case, the terminated franchise can claim lack of “good cause” for termination. Similarly, if a franchisor denies an applicant a franchise, yet awards that franchise to a second applicant with lesser qualifications, the first applicant can claim unequal or unfair treatment. Indeed, a franchisor’s failure to treat all franchisees or potential franchisees equally, when no reasonable, discernible basis appears for distinguishing between those favored and those disfavored, may well result in a violation of the “good cause” requirement.(141) Such a violation is the basis of a discrimination claim.

There may be a direct link between disparate treatment and unfair treatment, but not necessarily. Accordingly, a finding of unequal treatment (discrimination) is not the only way a franchisee can prove a franchisor’s failure to use “good cause.” Even if a franchisor’s policies are not unequal and therefore not discriminatory, a franchisee may assert that they are nevertheless unfair, and thus still constitute a breach of the duty to use “good cause.” Therefore, failure to use “good cause” can occur as a result of either unequal (discriminatory) or unfair treatment.

The Wisconsin legislature specifically placed the “equality” element of “good cause” in its Fair Dealership Law.(142) Section 135.02 of that law divides the definition of “good cause” to terminate into two elements: first, a dealer must fail to comply substantially with the manufacturer’s essential and reasonable requirements

A federal court applied the Wisconsin definition of “good cause” in L-O Distributors, Inc. v. Speed Queen Co.(144) In L-O Distributors, a terminated dealer accused its distributor of deciding to terminate on a discriminatory basis. Denying the dealer’s claim, the court noted that the distributor had a clear policy of termination when a dealer failed to increase its market share. Thus, because all dealers were required to comply with the policy and the plaintiff had not done so, the court held the termination was based on “good cause” and was not discriminatory.(145) That the distributor, Speed Queen, gave the dealer at least ninety days’ notice of the proposed termination, and sixty days in which to cure specified deficiencies, meant that Speed Queen had good cause to terminate: the dealer had failed to comply substantially with Speed Queen’s “essential and reasonable” sales goals, with the four cure requirements all found lawful.(146)

A few other states have specific, anti-discrimination laws similar to Wisconsin’s Fair Dealership Law.(147) Federal “fair franchising” bills have also included anti-discrimination provisions,(148) and so has the Model Franchise Investment Act proposed by the North American Securities Administrators Association (NASAA).(149) Federal statutes prohibit discrimination in public and private employment

No Third-Party Beneficiary Status for Franchisees

Unfortunately for the plaintiffs in Kilday v. Econo-Travel Motor Hotel Corporation,(158) there was no anti-discrimination statute in Tennessee. In Kilday, the plaintiffs, a husband-and-wife franchisee of Econo-Travel, alleged that the franchisor breached their franchise agreement by ordering the plaintiffs to comply with the standards of quality, maintenance, and cleanliness specified in their agreement, but failing to require other Econo-Travel franchisees to do the same. The federal district court, in looking at the franchise contract, dismissed this part of the plaintiffs’ case because the court found that the standards binding the franchisee-plaintiffs “did not appear to obligate the defendant to require all its franchisees to conform to the standards required of the plaintiffs.”(159)

In essence, Kilday signals that a relatively uniform franchise agreement does not grant a protected, third-party beneficiary status to franchisees as a whole, authorizing them to insist that the agreement’s provisions be enforced consistently. Instead, each franchisor-franchisee agreement stands alone, and other franchisees have no enforceable rights thereunder. Thus, courts following Kilday simply will not use contract law to require that franchisors implement franchise agreement provisions uniformly throughout the franchised system.(160)

An example of courts following the Kilday approach is Staten Island Rustproofing, Inc. v. Ziebart Rustproofing Co.(161) There, per a franchise agreement between franchisor Ziebart and franchisee Staten Island, Ziebart enforced against Staten Island certain standards in the franchise operation manual.(162) Ziebart, though, undertook no such enforcement when another franchisee, in Jersey City, New Jersey, allegedly breached the same provision in the contract between Ziebart and that franchisee.(163) The court noted that the franchisee, “like the plaintiffs in Kilday, … has not pointed to any specific provision in the [Ziebart-Staten Island franchise] agreement in which Ziebart promised to enforce its standards against other franchisees.”(164) Finding the reasoning in Kilday persuasive, the Staten Island court found that this failure in the Ziebart-Staten Island franchise agreement meant that the franchisee had no contractual grounds, including no third-party beneficiary status, on which to support a claim against the franchisor.(165) Thus, Ziebart was free to terminate the Staten Island franchise without having to take any action against the Jersey City franchise

There are several other cases similar to Kilday and Staten Island Rustproofing.(167) No decisions counter to the Kilday approach have been reported. Moreover, even when there is a statute prohibiting franchisor discrimination between franchisees, it typically furnishes no guidance about whether certain longstanding practices are acceptable. For example, the NASAA’s Model Franchise Investment Act, section 19, while going further than most anti-discrimination provisions to include the delineation of a few acceptable practices (“reasonable discrimination” stemming from the grant of franchises at different times, from efforts to cure franchise deficiencies or defaults, or from the adoption of affirmative action programs), does not furnish any guidance about whether negotiated changes or incentive programs are discriminatory.(168) A 1990 court ruling against New York’s Attorney General, however, expressly held that franchisee Southland Corporation had the right to negotiate with prospective 7-Eleven franchisees contract terms that varied from, and were more favorable to the franchisee than, the initial offering document (the registered prospectus).(169) State Supreme Court Justice Elliot Wilk rejected the Attorney General’s argument that such negotiations could hurt franchisees who had signed earlier deals at less favorable terms.(170) He ruled that to prohibit negotiations would transform the state franchise statute(171) from “a straightforward grant of flexibility into a straitjacket, to the potential detriment of all parties.”(172)

While Justice Wilk’s opinion seems intuitively correct, the Kilday approach, although legally unassailable, appears to fly in the face of franchisees’ legitimate expectations. One of the prime selling points of a franchise is that the franchisee acquires rights in a uniform system operating regionally, nationally, or even worldwide. The goods or services, the method of operation, the advertising campaigns, and most other facets of the business are the same at every outlet. It seems only natural that a franchisee would expect the standards to be enforced equally throughout the system. But the Kilday line of cases means, in effect, that “the franchisee who believes the franchisor is selectively enforcing standards against it has little in the way of remedies.”(173) The few states with franchise antidiscrimination statutes have very rarely even sought to enforce those laws.(174) Other than claims based on fraud,(175) no tort theories have surfaced to support a claim against franchisors for failing to enforce standards.(176) Moreover, franchisees cannot invoke contractual remedies except in those extremely rare instances where the franchisor expressly undertakes to enforce standards equitably.(177)

A noted franchise attorney and former editor of the Franchise Law Journal, W. Michael Garner, proposes the creation of an “implied covenant of equitable standards enforcement.”(178)

It seems logical that a franchisor with many contracts calling for the same
level of performance by franchisees be obligated to enforce standards in an
even-handed manner across the board. An implied covenant could conceivably
work two ways: as an offensive device to compel the franchisor to enforce
standards, and as a defense against arbitrary or discriminatory enforcement
of standards.(179)

No court, legislature, or administrative tribunal has adopted Garner’s suggestion. It might treat the practical problem of franchisee expectations, but apparently Garner’s proposal ventures too far afield from ordinary case law. In practice, though, a covenant of equitable standards enforcement would be quite unlikely to revolutionize franchise contract interpretation. The reason is simple: as with the implied covenant of good faith and fair dealing, the franchisor could avoid its reach simply by placing an express provision in the contract that overrides any potential implied covenant. Nonetheless, the covenant, if adopted, would serve the dual purposes of: (1) announcing a public policy favoring equal enforcement of standards throughout each franchise system

A “Reasonable Franchisor” Approach to Termination

Terminated franchisees may be more successful in pursuing litigation if they can persuade courts to adopt a “reasonable franchisor” approach: comparing the performance of the terminated franchisee with that of other, similarly situated franchisees.(180) A franchisor’s decision to terminate a franchise must be reasonable. Therefore, if the franchisor has no plausible basis for terminating a franchisee who clearly performed better than other franchisees still in operation, the court may hold the termination was not based on “good cause,” and thus was discriminatory.

In Open Pantry Food Marts of Wisconsin, Inc. v. Howell,(181) the Wisconsin State Circuit Court upheld the termination of a franchisee whose negative net worth had more than doubled in two years, and was considerably greater than that of the other twenty-three franchisees who also had negative net worth. While all of these franchisees were in violation of the franchise agreement’s minimum net worth clause, the court saw enough difference in the degree of noncompliance among them to reject the terminated franchisee’s claim of discrimination.(182) However, another franchisee being terminated at the same time was clearly in better financial condition than nineteen of the other twenty-three “negative net worth” franchisees. Therefore, as to this franchisee, the court held the franchisor had no “good cause” to terminate, and had engaged in discriminatory treatment in violation of the Wisconsin Fair Dealership Law.(183)

In another case, Canada Dry Corp. v. Nehi Beverage Co.,(184) the Seventh Circuit Court of Appeals rejected a franchisee’s claim of discrimination, stating that the franchisee introduced “no evidence of more favorable treatment of similar bottlers [franchisees] under similar marketing conditions.”(185) As in Open Pantry, the Seventh Circuit compared the deficiencies of a terminated franchise to those of the retained franchises, and upheld franchisee Nehi’s termination, at least in part, because there was no evidence that any other franchisee “had acted comparably to Nehi with respect to the full range of Nehi’s deficiencies.(186)

A more recent case shows the extent to which courts, when inquiring about a termination’s or nonrenewal’s alleged unreasonableness, may review and perhaps reverse the franchisor’s decision. In General Aviation v. Cessna Aircraft Co.,(187) General Aviation entered into a series of one-year franchise agreements allowing it to serve as a dealer selling and servicing Cessna aircraft. Each agreement was renewable at the option of the parties. When Cessna decided not to renew the contract for 1985, the franchisee claimed that Cessna had discriminated against it in violation of the Michigan Franchise Act. That Act includes a statute barring the enforcement of franchise contract clauses that let franchisors refuse to renew a franchise on terms available to other franchisees.(188) Because the statute does not require a renewal, Cessna argued that, while it could not lawfully discriminate among renewed franchisees, it had complete freedom to determine which franchisees it would renew.(189)

The Sixth Circuit Court of Appeals sided with franchisee General Aviation. Although Michigan franchisors remained free to not renew all of their franchisees, with no statutory “good cause” requirement for nonrenewal, the non-discrimination statute was interpreted as inserting into the franchise relationship a good cause requirement whenever a franchisor renews some franchisees but not others: the differential treatment among franchisees whose contracts have expired, in the form of nonrenewal instead of renewal, must meet a good cause standard.(190)

Cessna could have treated General Aviation differently if it had provided legitimate reasons for such differential treatment, but the court found insufficient grounds for nonrenewal in Cessna’s simply asserting that it “needed to cut back on the size of its operation by eliminating one dealer without any change in its policies regarding other dealers.”(191) The case was remanded to district court for further findings as to justification vel non for nonrenewal

Although the Michigan legislature presumably did not foresee the potential for arbitrary nonrenewal, at least in the same way that it dealt with arbitrary terminations (which it specifically outlawed), the court in General Aviation extended protection to nonrenewal based on the legislature’s overall intent to establish a “modicum of protection to franchisees.”(193) The court reasoned as follows:

Once a business has made substantial franchise-specific investments it
loses all or virtually all of its original bargaining power regarding
continuation of the franchise. Specifically, the franchisee cannot do
anything that risks termination, because that would result in a loss of
much or all of the value of its franchise-related investments.(194)

Therefore, the General Aviation court established a “good cause” requirement for almost all nonrenewals, one comparable to the explicit statutory standard for terminations.(195) The General Aviation standard should reach nearly all nonrenewals because, in practice, “nonrenewal disputes are unlikely to occur as across-the-board nonrenewals and likely to occur as isolated incidents.”(196)

No Discrimination on the Facts: “Equal,” But Perhaps Unfair, Treatment

The Limited Reach of Franchise Discrimination Claims

Often the biggest hurdle that franchisees alleging discrimination encounter is the difficulty in establishing the necessary fact pattern. In the employment setting, commentators have opined that systemic discrimination remains present, but is more subtle than in the past, when discriminatory behavior olden was quite overt.(197) In franchising, any evidence of systemic discrimination is likewise difficult to find, other than the conclusions drawn from statistics showing a marked underrepresentation of minorities as franchisees.(198)

Whenever there exists evidence that a franchisor evaluated numerous financial, marketing, managerial, and other business factors before making a termination decision, courts may be wary of conducting a niggling, ex post facto review. Furthermore, franchises created or terminated at different times, or in different geographic regions, may not be deemed sufficiently similar for a useful comparison of allegedly discriminatory practices. As stated in Canada Dry Corp. v. Nehi Beverage Co.(199): “A demonstration of comparability in a [franchise] termination context will no doubt olden be difficult, but we think this is no reason for sustaining discrimination claims where there is an inadequate basis of comparison.” The burden is squarely upon the franchisee alleging discrimination, and the problem may be compounded when franchisees seek to pursue a class action discrimination suit against the franchisor.(200)

In Wright-Moore Corp. v. Ricoh Corp.,(201) a franchisee claimed that its franchisor unfairly discriminated against it, in violation of Indiana Code section 23-2-2.7-2(5), in that the franchisor offered at least one other terminated franchisee a new franchise.(202) Upholding the trial judge’s grant of summary judgment for the franchisor, the Court determined that “proof of discrimination requires a showing of arbitrary disparate treatment among similarly situated individuals or entities.”(203) Indeed, state statutes are probably limited to prohibiting discrimination only between franchises within the same state.(204)

As in the federal case of L-O Distributors, where the court rejected a dealer’s discrimination claim because all dealers were required to comply with a clear policy and the plaintiff had not done so,(205) a California Superior Court in Burke v. General Motors Corp. also denied a dealer’s claim of discrimination on the facts, finding that the distributor treated all of its dealerships equally.(206) In Burke, a dealer arranged for a party to purchase its dealership, but the distributor refused to approve the sale because it had a policy of recommending only one franchise candidate at a time, and had already begun negotiations with a potential minority buyer. Ultimately, the minority candidate refused to purchase the dealership, and the dealer was forced to go out of business as a result.(207)

The dealer claimed that the distributor’s refusal to approve his arranged sale to a white person was based on a discriminatory policy, and constituted a restraint of trade in violation of the California Business and Professional Code.(208) The court noted that when the distributor had formulated its policy of only considering one party at a time, the race of the candidate was not contemplated.(209) Consequently, because the policy applied to all dealers, the court found that it was not discriminatory, and therefore rejected the dealer’s claim.(210)

In both L-O Distributors and Burke, dealers brought discrimination claims against their distributors instead of focusing on the distributor’s breach of its duty to use “good cause.”(211) In so doing, the dealers effectively forced the courts to base their holdings exclusively on the issue of equal treatment: if a court could find that the distributor had treated all of its dealers equally, the dealer’s claim would fail.(212) By focusing only on discrimination, the dealers failed to assert a potentially powerful claim against the distributor: unfair treatment.

As previously discussed, a failure to use “good cause” can be proven by establishing either unequal treatment or unfair treatment. Thus, although a distributor may have treated its dealers equally, a dealer may still be able to maintain a claim of failure to use “good cause” if it can demonstrate that such treatment, albeit equal, was unfair. For example, the plaintiff in Burke clearly could have alleged that the franchisor’s policy of considering one candidate at a time was unfair, as it forced Burke to go out of business even though he had arranged for someone to purchase his dealership.(213) Accordingly, although the policy was applied equally to all franchisees and thus was not discriminatory, it is still arguable that the policy was unfair, thus constituting a failure by the franchisor to use “good cause” or to abide by the implied covenant of good faith and fair dealing.

More recent cases than Burke demonstrate courts’ willingness to permit a much broader claim of failure to use “good cause” than is the evidentiary and legal scope allowed for a discrimination suit.(214) In such cases, franchisees chose not to allege the “attention grabbing” count of discrimination,(215) but instead maintained the broader allegation of failure to use “good cause.”(216) Thus, a franchisee could recover on a claim that the franchisor had failed to exercise “good cause” in that its treatment of the franchisee was unfair, even if such treatment was administered equally.(217) For instance, in Meyer v. Kero-Sun, Inc.,(218) the court stated that the major purpose of the Wisconsin Fair Dealership Act’s good cause provision is the continuation of franchised relationships on a fair, essentially unchanged basis for as long as the franchisee wants. The focus is thus the protection of the franchisee’s investment,(219) not simply equality of treatment. The “good cause” statutory requirements prevent the franchisor from effectively terminating a franchise by imposing unreasonable, albeit “uniform,” terms.(220)

Perhaps an unintended outcome of poorly considered employee discrimination suits may be greater judicial reluctance to entertain non-employee discrimination actions.(221) Since disputes between franchisors and franchisees are relatively common in current franchise relationships, it may become extremely difficult for courts to recognize true discrimination, as opposed to simple friction between a franchisor and one of its franchisees that just happens to be a minority. Thus, courts may be quite wary of opening the floodgates to a large number of discrimination claims because a substantial number are baseless,(222) and those of merit are better grounded in other theories of law.

Abusive Claims of Discrimination

The potential for unfounded, abusive discrimination claims can be seen in Baskin-Robbbins Ice Cream Co. v. D & L Ice Cream Co.,(223) Chesapeake Ford, Inc. v. Ohio Motor Vehicle Dealers Board,(224) and Quarles v. General Motors Corp.(225)

In Baskin-Robbins, a franchisor sued to terminate a license because of trademark infringement and unfair competition, and the franchisee counterclaimed under Section 1981 alleging that termination was sought because the franchisee is black. Since the franchisee consistently failed to pay rent or invoices for ice cream, failed to abide by the franchise agreement, and sold another brand of ice cream in the trademarked containers, it failed to show that the license had been terminated for discriminatory reasons.(226) Indeed, the franchisee’s misconduct provided the franchisor ample nondiscriminatory reasons for termination.(227)

In Chesapeake Ford, a terminated, minority-owned dealership had one of the two worst records for fraudulent warranty work, as determined by industry audits.(228) The court dismissed what it termed Chesapeake’s theory “that all Ford dealerships attempt to defraud Ford in regard to warranty work, so Ford discriminated against Chesapeake by trying to terminate its franchise.”(229) While acknowledging that other Ford dealers may have submitted erroneous billings, the court held that Chesapeake’s misconduct was so manifest that it was not “in a position to argue discrimination.”(230)

In Quarles,(231) an African-American former president of an automobile dealership brought suit against the automobile franchisor, alleging that he had been terminated on the basis of his race, in violation of 42 U.S.C. section 1981. The lower court granted the franchisor’s motion for summary judgment, and the plaintiff appealed.

The United States Court of Appeals for the Second Circuit upheld a summary judgment for the franchisor. It noted that the plaintiff had been implicated in a kickback scheme which defrauded the franchisor, had failed to submit promised reports concerning these allegations, and had failed to attend a deposition in a lawsuit to recover the money which allegedly had been improperly paid.(232) The court held that these facts justified the defendant’s actions in terminating the plaintiff.(233) Finally, the court noted that the plaintiff was terminated along with his white partner.(234) Therefore, although the court did not grant the defendant’s request for Rule 11 sanctions,(235) the court implicitly agreed with defense counsel that the plaintiffs allegations of discriminatory intent bordered on the frivolous.(236)

Quarles is a dramatic example of a franchisee who seems to have most decidedly deserved termination, yet who still claimed discrimination. Plaintiff Quarles evidently believed that he had nothing to lose by filing his action. However, such a suit should never have been filed, and it is baseless claims such as these that crowd court dockets, waste time, and perhaps encourage judicial reluctance to entertain non-employee discrimination actions.(237)

The Extreme Difficulty of Attaining Class Certification for Minority Franchisees Alleging Discrimination

Another example of heightened judicial impatience with discriminatory allegations can be illustrated by the case of Carole Hall v. Burger King Corp.(238) In this case, Carole Hall, jointly with twenty-four past and present minority franchisees of Burger King Corporation, filed suit in the United States District Court, alleging discrimination by Burger King.

The plaintiffs attempted to bring their case as a class action, pursuant to rule 23 of the Federal Rules of Civil Procedure. Attempting to have the class certified, the plaintiffs hoped that the court would view all of the minority franchisees as a group with substantially similar claims and damages. A finding in their favor would have damaged Burger King severely: not only would it have permitted minority franchisees to allege as a group that Burger King Corporation discriminated against them collectively, but it would have opened the door for any minority franchisee to levy a racial discrimination claim against Burger King Corporation.

The United States District Court for the Southern District of Florida refused to certify the class. Noting that the bare allegation of racial discrimination does not satisfy Rule 23(a)’s requirement of commonality and typicality, the court stated that “the mere fact that an aggrieved private plaintiff is a member of an identifiable class of persons of the same race or national origin is insufficient to establish his standing to litigate on their behalf all possible claims of discrimination against a common [franchisor].”(239)

The court wrote, “while plaintiffs make general across-the-board allegations of race discrimination, the alleged discrimination boils down to a laundry list of each plaintiffs highly personal and individualized grievances against Burger King Corporation.”(240) The court further noted that the plaintiffs offered no evidence of “‘system-wide’ discriminatory policies or practices.”(241) In his ruling, Judge James W. Kehoe criticized the plaintiffs for their “ipse dixit” assumptions

The ruling in Hall may prove extremely important as precedent for other franchise discrimination cases because it holds that courts should refuse to entertain class action discrimination suits when the only common thread linking the plaintiffs in their otherwise unconnected business dealings is race.(243) In this context, courts are driven by the desire to discourage hoards of individuals attempting to “free-ride” when a discrimination claim is filed.(244) Hall evinces a judicial insistence that each franchisee prove its own individual discrimination claim or present concrete evidence that the franchisor did in fact engage in discriminatory practices on a “system-wide” basis.(245) As stated by a leading, pro-franchisee commentator: “In class suits, the ultimate merits … depend entirely on proving the singularity of the franchisor’s misconduct on a class-wide basis.”(246)

Franchisee allegations of unlawful discrimination may be based on the franchisor’s violation of federal or state civil rights statutes, state statutes specifically covering franchise discrimination, or implied covenants of good faith and fair dealing. If, however, the disparate treatment does not occur contemporaneously, or involves franchisees that are not similarly situated, the franchisor usually can establish justifiable reasons for treating the franchisees differently. The ultimate effect, as occurred in Hall, may be the abandonment of most franchisees’ claims against the franchisor.(247)

SECTION 1981 CLAIMS

Minority Applicants or Franchisees

For many minorities, owning a franchise is viewed as the best means to enter, and remain a player in, the business world – a feat often difficult for any would-be entrepreneur. A franchise provides the franchisee with the opportunity to see his or her work turn into very real profits. However, many minorities have discovered that the road to riches is blocked. Some have contended that many barriers to their advancement were erected by the franchisors, the very businesses they had counted on to help them.

Many franchisees only discover after the franchise contract is signed that franchisors usually keep close control over the operations at each franchise.(248) Periodic quality and service inspections by the franchisor may become akin to final exams that the franchisee continually must pass in order to remain a franchisee. Moreover, special problems, or at least a magnified level of difficulty, may arise in the context of minorities and franchising. For instance, minority franchisees frequently have smaller cash reserves and encounter special difficulties if their stores are located in poorer, inner-city neighborhoods.(249)

Few states, though, expressly prohibit discrimination against franchisees, or prospective franchisees, on the basis of race.(250) At the federal level, section 1 of the Civil Rights Act of 1866 (hereinafter “section 1981”)(251) reads as follows:

All persons within the jurisdiction of the United States shall have the
same right in every State and Territory to make and enforce contracts, to
sue, be parties, give evidence, and to the full and equal benefit of all
laws and proceedings for the security of persons and property as is enjoyed
by white citizens, and shall be subject to like punishment, pains,
penalties, taxes, licenses, and exactions of every kind, and to no
other.(252)

Unlike Title VII of the Civil Rights Act of 1964,(253) and unlike most other discrimination statutes, section 1981 covers all contracts, not simply employment contracts. Commentators note that section 1981 long “has been employed to redress racial discrimination relating to contracts in numerous contexts other than employment.”(254) These other areas have included, inter alia, education,(255) medical treatment,(256) insurance coverage,(257) housing,(258) utility services,(259) access to roads,(260) dealings with mortuaries(261) or beauty salons,(262) commercial ventures,(263) banking transactions,(264) and use of restaurants, clubs, and recreational facilities.(265) This breadth of subject matter means that section 1981 suits “are now commonplace

Section 1981 prohibits private discrimination, not simply state action.(268) Also, the Civil Rights Act of 1991(269) ensures that “to make and enforce contracts”(270) is broadly interpreted to include “making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship.”(271) Still, although section 1981 now covers all aspects of private contracts except those contracts involving government employees,(272) employment contracts remain the predominant source of section 1981 litigation.(273)

The franchise relationship, as a contractual relationship between private individuals or organizations, does implicate section 1981. Cases involving the discriminatory termination of a franchise or the franchisor’s breach of a franchise agreement, as well as cases of discrimination during the formative stages of a potential franchise agreement,(274) can all be brought under section 1981.

While it may remain unclear precisely what falls within “the formation stage of contracting,” very little activity has to take place before that stage has been reached.(275) Section 1981’s protection of the individual’s right to “make and enforce contracts” covers conduct in the initial stages of contract formation, including the very opportunity to enter into a contract.(276) For

example, if a franchisor does not even send an application to a prospective franchisee because of that potential franchisee’s racial minority status, has this discrimination taken place during the “formation” stage, or is it too soon to fall under section 1981? The plaintiffs would have to demonstrate that they actually intended to enter into a contract.(277) Therefore, “testers” hired simply to find possible discrimination, but who would not have actually followed through on renting an apartment, buying a house, taking a job, or obtaining a franchise, may succeed in bringing other types of discrimination claims, in other fields, but not a Section 1981 claim.

According to Professor Robert E. Suggs,(278) section 1981 provides the broadest potential basis to redress claims of business discrimination. However, Suggs notes that although this provision has been interpreted broadly as reaching the making and enforcement of private contracts without requiring state action, it also has been interpreted narrowly as remedying only purposeful discrimination.(279) Thus, the burden on a prospective franchisee plaintiff is very high, requiring proof of intentional discrimination.(280)

Proof of disparate impact (as allowed under Title VII) is not enough for a section 1981 action. Unlike Title VII, section 1981 does not prohibit decisions made on facially neutral grounds even if such decisions would adversely affect minority franchisees. In other words, a franchisor does not violate section 1981 by refusing a prospective minority franchisee’s application because the prospective franchisee is small, inexperienced, or undercapitalized, even though these characteristics are the continuing effects of prior discrimination and even though rejecting such minority prospective franchisees will have a disparate impact on minority franchising in general.(281) According to Professor Suggs, even if a franchisor deliberately adopts policies or procedures because they have a disparate impact on minority franchisees, but leaves no record of its true purpose, no violation of Section 1981 could be shown.(282)

A franchisor could, therefore, choose its franchisees for noneconomic reasons such as friendship, social, political, or ethnic ties, or family connections. Prohibiting these bases of choice in the private sector would raise problems regarding freedom of association under the Constitution’s First Amendment, or of due process infringement under the Fifth and Fourteenth Amendments.(283) Just as “the courts have traditionally respected the rights of partners to freely choose their own co-owners and have been reluctant to get involved in forcing partnerships to unwillingly accept a new partner,”(284) so courts may be reluctant to force franchisees upon franchisors. However, just as in Price Waterhouse v. Hopkins,(285) in which the Supreme Court “served notice it will not be deterred by the complexity of sorting out motives and assigning burdens of proof in high-level promotion decisions,”(286) courts should not shirk such tasks involving a franchise relationship.

For now, much opinion on franchising and section 1981 is mere supposition. No case has articulated clearly the requirements under section 1981 for a prima facie showing of private business discrimination. Two cases featured African-American franchisees claiming discrimination, but who were found to have underpaid rent or other fees and committed malfeasant acts against the franchisor.(287) Of course, the franchisees’ claims were denied.(288) Virtually no decisions have even been reported involving litigation in this area. Of the few cases reported, the following four are most relevant to this analysis.

In Randle v. Lasalle Telecommunications, Inc.,(289) a minority business enterprise (MBE) claimed a violation of section 1981, but the claim was dismissed because the plaintiff failed to establish either direct evidence of discrimination or evidence indicating that the explanation the defendant offered for its actions being nondiscriminatory was pretextual.

In Chowdhury v. Marathon Oil Co.,(290) a Bengali-American applicant to operate a gasoline station sued the franchisor, Marathon Oil Company, after Marathon converted the site to a franchisor-owned store. The court held that the franchisor had a nonpretextual reason for denying the franchise application, as it had made a business decision to increase revenue from the site by operating a company store.(291) The franchisor’s decision to replace the outgoing franchisee not with the plaintiff, but with a company store, earned the court’s approval, to a substantial degree, because, after the franchisor took over the location, monthly gasoline sales increased by 125,000 gallons.(292)

In Harper v. BP Exploration & Oil Co.,(293) the petroleum franchisor, BP, refused to relocate a minority dealer in Nashville, Tennessee whose lease BP did not intend to renew. Instead, the franchisor allegedly placed a less qualified, nonminority dealer in the proposed location.(294) The court held that such conduct, the failure to select the minority dealer under the franchisor’s relocation program, constituted racial discrimination in violation of both federal civil rights laws and the Tennessee Human Rights Act.(295) The franchisor’s defense, that the plaintiff had not been a “quality dealer” entitled to relocation under the franchisor’s internal policies, was found to be pretextual given the plaintiffs faithful compliance with its franchise contract commitments over a thirteen-year relationship.(296) The court found no pattern and practice of racial discrimination simply because of BP’s current racial composition, exclusion of black dealers from white neighborhoods, or lack of a minority recruitment policy.(297) While statistics were inadequate evidence, the court found direct evidence of discrimination: that BP had passed over the plaintiff in favor of a white dealer, John Kendrick, even though BP’s own performance evaluations consistently ranked the plaintiff higher than Kendrick.(298)

In an extremely rare ruling, a federal court allowed a franchise applicant’s discrimination claim in Sud v. Import Motors Limited, Inc.(299) There, natives of India alleged that they had been denied an automobile franchise on the basis of race and national origin. The district court held that the plaintiffs made a showing sufficient for it to issue a preliminary injunction preventing the franchisor from transferring the dealership to another party.(300)

The Sud court found that the plaintiffs, when compared to other applicants, had demonstrated superior intelligence as well as imagination, energy, aggressiveness, integrity, financial stability, and business capability.(301) Despite all of these characteristics, the franchisor, Import Motors, not only refused to award the plaintiffs the franchise in question, but also refused to give their application serious consideration when new franchises opened.(302) The court found that the record strongly supported an inference that the defendant’s refusal to consider the plaintiffs’ application was based on the plaintiffs’ color and national origin, characteristics which prevented the lead plaintiff from ever being considered the “best man” for an Import Motors franchise.(303)

Sud illustrates the extraordinary lengths to which a court apparently must go if it is to permit a franchise discrimination claim. The opinion portrayed the lead plaintiff as someone who was extremely qualified(304) and took all the proper steps to obtain a franchise, but was repeatedly denied for no apparent reason. Note, also, that Sud was decided in 1974, prior to the current barrage of discrimination suits and the higher burdens placed on some discrimination claims.(305) In fact, the most prominent franchise case in which Sud was cited, Brown v. American Honda Motor Co.,(306) featured a holding against an African-American dealership applicant who claimed there was racial animus on the part of the franchisor, which had instead picked a white person. The court in Brown noted that the plaintiff heavily relied upon Sud, but found that there were factual differences between the two cases, particularly on the fundamental issue of discrimination.(307) So Brown, in noting and then distinguishing Sud indicates that the facts, the ruling, and the reasoning in Sud are unusual.

White Applicants or Franchisees

What if a white prospective franchisee sued a franchisor which, acting in accordance with its affirmative action program or set-asides, rejected that white person’s application in favor of a minority franchisee? Given that Croson(308) and Adarand(309) do not apply because the franchisor is a private entity, could the white prospective franchisee nevertheless succeed with a section 1981 claim?(310) Would the courts treat a franchisor’s existing, established affirmative action policy or set aside program as evidence of “intentional discrimination” sufficient to carry a section 1981 action? Would affirmative action (and the goals and objectives of affirmative action) qualify as a legitimate noneconomic reason for choosing a minority franchisee over a white franchisee?

Minorities and franchisors arguing in support of such private programs must be concerned about a potential spill-over affect from the set-aside cases since Croson. Judges frequently have stricken municipalities’ set-asides for their failure to meet strict-scrutiny standards requiring strong, statistical evidence of specific, past discrimination. For example, in August 1996, U.S. District Court Judge James L. Graham comprehensively reviewed six so-called disparity studies for Columbus, Ohio, and rejected each one as insufficient evidence to justify a city program awarding government construction contracts on the basis of gender or race.(311)

Because statutory law so often appears unpromising for franchisees claiming franchisor discrimination, plaintiffs may even turn to constitutional arguments, albeit ones that seem far-fetched. For example, suppose a private business’ discrimination against consumers, franchisees, or others could be considered unconstitutional by a broad reading of the commerce clause(312) granting Congress the power to regulate interstate commerce. If a business could be said to affect interstate commerce,(313) then that business’ discriminatory practices which negatively affect interstate commerce must be suspended. Could this interpretation apply to franchise relationships? Perhaps it could, but the franchisee would bear the burden of proving that the discrimination was a practice of the franchisor, and if the franchisor has some minority franchisees, then an individual case may fail because the franchisor’s rejection of an individual minority franchisee cannot, by itself, reflect a “policy” whose implementation affects interstate commerce.(314) Without a Congressional statute specifically on point,(315) and no public policy or governmental action at issue, the reach of the commerce clause appears unlikely.

STATISTICS ON MINORITY-OWNED FRANCHISES

Low Numbers Generally

For many franchisors, minority ownership of franchises has long proven a delicate, often embarrassing topic. Claims of discriminatory practices in franchise selection procedures have become commonplace. In a basic sense, the problem is amply demonstrated in simple numbers and percentages. There is a dearth of minority franchisees in many franchise systems, and this underrepresentation is spread across perhaps every industry in which franchising plays a prominent role.

For franchising generally, there are no figures. The Federal Trade Commission does not track minority ownership of franchisees,(316) nor does it require affirmative action programs for franchises.(317) Such programs effectively would require franchisors to maintain extensive records, including statistics on minority franchisees and minority franchise applicants. Instead, public interest groups, civil rights advocates, franchisees and others must depend on figures provided in media surveys or obtained by individual inquiries. Meaningful statistics are easiest to develop for large, well-known industries such as fast-food restaurants and automobile dealerships.(318)

Data on the leading fast-food franchises and automobile dealerships indicate that few, if any, of the largest franchisors have minority franchisee participation even approaching the percentage of minorities in the population as a whole.(319) That is especially disconcerting because these large, well-publicized franchisors probably face more pressure, both external and internal, to recruit and retain minority franchisees than do smaller, less notable, franchisors.

A lack of complete, accurate data makes it extremely difficult for businesses, civil rights groups, judges, and others to demonstrate whether franchisors specifically discriminate against minorities or whether other factors cause the less than representative participation of minorities.(320) It is estimated that African-Americans own only one-fourth as many businesses, 3% of the total, as is the black percentage of United States population (12%).(321) Those figures, for all businesses, suggest that the minority ownership and participation record in franchising, though far from meeting societal goals, actually may already be commendable compared to the world of business generally.(322) Given the dearth of information, it is superficial, even deceptive, to use the overall ratio of minority-owned franchises in order to establish the soundness of either particular or general discrimination claims.(323) Such claims may be valid, but so proving requires a careful examination of the facts on an individual, case-by-case basis.(324)

Despite the many protests against the low numbers of, or special problems relating to, minority franchisees,(325) the cases brought to court ordinarily have not led to judicial remedies favoring minority franchisees or franchise applicants. While a few prominent cases have settled out of court,(326) franchisors typically win challenges brought by minorities who sought, and were denied, a franchise.(327)

Inadequate Information for Particular Franchised Systems

A franchisor’s efforts to improve its “minority numbers” can backfire if not properly formulated and implemented. The classic case on point is Sperau v. Ford Motor Company,(328) concerning fraud arising from the purchase of a Ford dealership in Selma, Alabama. Samuel R. Foster, II, an African-American dealer candidate in Ford’s Minority Dealer Program, and Dee-Witt C. Sperau, Foster’s white business partner, owned and operated the Selma dealership under the name, “River City Ford,” from May 1988 until the business failed in January 1991.(329) Foster and Sperau subsequently sued Ford and alleged fraud, breach of contract, and violation of the Alabama Motor Vehicle Franchise Act.(330)

The plaintiffs in Sperau claimed that Ford had a duty, because of a confidential relationship and/or special circumstances, to disclose to them all material facts concerning the profitability, performance, and failure rates of minority dealers as reflected in the Equal Opportunity Progress Reports (“EOP Reports”) to which only Ford had access.(331) According to the court opinion, Ford derived a substantial benefit from recruiting black dealer candidates: increased sales, a method to maintain dealerships in less desirable geographic locations, and a positive corporate business image.(332) The Alabama Supreme Court, therefore, upheld the trial court’s conclusion that Ford should be liable for its failure to disclose, a failure presumably motivated by Ford’s desire not to impede sales of minority-owned dealerships. The court wrote:

There was substantial evidence from which the jury could conclude that
Ford occupied a superior position with respect to historical information,
as evidenced by the EOP Reports, which could predict future sales and
profits. Additionally, Ford had established its own guidelines regarding
initial capital requirements. The plaintiffs did not have this information
at their disposal, and thus had to rely upon [Ford’s statements] regarding
the Selma dealership. The jury had substantial evidence before it
concerning the aggressive recruitment of Foster and Ford’s manipulation of
the capitalization requirement and sales and profit forecasts.(333)

Ford evidently had represented that an astounding 65.4% sales and profit forecast was reasonable when, as decided at trial, Ford actually knew that all new dealers, both minority and non-minority alike, were predicted to be loss leaders.(334) Although the new dealers had signed disclaimers stating that no sales or profits were guaranteed, Ford’s own fraud trumped these disclaimers and left Ford liable(335) for inducing those dealers to incur over a million dollars of debt in order to acquire and operate River City Ford.(336) To make matters worse, while Ford argued that it had no duty to disclose “race-based” data and that such data was not material, the plaintiffs introduced expert testimony that anyone called upon to prepare a profit and sales forecast or a capital requirement for a newly appointed African-American dealer should take into consideration the fact that the dealer is a minority.(337)

Ford argued on appeal that the plaintiffs’ claims “boil down to the contention that Ford should have inflated the capital requirement and concomitantly reduced the projected return on investment because Foster is an African-American,” and thus the jury verdict, in effect, would require Ford to do precisely what section 1981 of the 1866 Civil Rights Act(338) prohibits: offering dealerships to black applicants on less favorable terms than are offered to white applicants.(339) The Supreme Court of Alabama rejected this contention on the facts, holding that the verdict did not require higher capitalization for an African-American dealership than a white dealership.(340) It also rejected Ford’s argument on the law, which stated that the verdict was based on a state law claim for fraud and was not preempted by federal law such as section 1981.(341)

Two of Alabama’s nine Justices dissented, principally on the grounds that the punitive damages awarded (six million dollars) were excessive.(342) At the outset of the dissent, however, Justice Gorman Houston lamented that the plaintiffs theories for the case were: (1) a person’s identity as a racial minority member impairs his ability to compete, and (2) businesses offering minorities the chance to compete, without disclosing that alleged racial handicap, can be held liable for compensatory and punitive damages when a minority member takes that chance and then fails.(343) The majority found these fears to be groundless. It noted that Ford could make a “start” toward correcting the problems noted in Sperau simply by disclosing to all prospective dealers the cyclical nature of the business and the failure rate of all new dealers,(344) not just the rate for minority dealers. The court reiterated the trial court’s conclusion that this case does not leave Ford straddling the horns of a dilemma: either being susceptible to suits of this nature, or no longer having a minority dealer development program.(345)

The court’s majority in Sperau emphasized the evidence of fraud as distinguished from the racial aspects of the case, and thus Sperau can be seen not as imposing different standards for minority dealerships, but as simply requiring more disclosure to all potential new dealers.(346) Some commentators, however, have not discerned these distinctions,(347) and only time will tell what case law, if any, springs from Sperau. Despite the court’s confidence in a compartmentalized reading of Sperau’s facts and the law, it seems obvious that some franchisor policymakers may read Sperau as a precautionary tale against the rapid development of new, financially less secure, often minority, franchisees.

PUBLIC RELATIONS

Franchisee Lawsuits and Franchisor Countermeasures

Discrimination claims have been on the rise not just in the franchising arena, but in most areas of business generally(348) In fiscal 1989, there were 7613 federal lawsuits alleging acts of employment discrimination, an increase of 2166% over the past two decades.(349) The numbers of lawsuits, and also of administrative proceedings, have continued to increase tremendously throughout the 1990s, although much more so, on a percentage basis, for allegations of sex discrimination (or other categories, such as age and religion) than for racial discrimination.(350) The Equal Employment Opportunity Commission (EEOC), though, finds no wrongdoing in about two-thirds of its cases,(351) and those remaining cases which may proceed to court are still unlikely to succeed.(352)

Because of numerous frivolous charges of discrimination,(353) and perhaps also due to special difficulties associated with claims based on race,(354) the chance of obtaining a judicial remedy against a franchisor who has acted in a discriminatory manner has likely diminished, as shown by the extremely low number of successful discrimination suits brought by franchisees. However, it is important to realize that just the filing of a discrimination claim, or the threat of such a claim, can be extremely damaging to the franchisor against which it is leveled. A charge of racial discrimination strikes at the very essence of our collective sense of morality and fair play

Charges of discrimination easily draw attention to, and perhaps sympathy for, a franchisee’s or would-be franchisee’s plight. Such charges also may draw the franchisor into a whirlwind of controversy, opprobrium, and shunning. The result is that any focus on the true nature of the charges may be lost

This broad-based movement to adopt strong affirmative-action programs has occurred even though the black-letter legal doctrine is that neither the existence nor the lack of an affirmative action program holds any persuasive, legal significance in determining whether a defendant had discriminatory intent.(361) It has occurred in an environment where government programs geared toward minority franchise recruitment are far less significant than the programs franchisors have created and tailored to their own particular systems.(362) Indeed, these privately-initiated programs often have a life of their own, irrespective of the recently burgeoning legal doctrine that ostensibly undermines all affirmative action plans.(363)

The Future of Franchisor-Initiated Affirmative Action

Should the franchisor’s affirmative action efforts increase the practical burdens on a minority franchisee or franchise applicant alleging that the franchisor engaged in discriminatory practices? By analogy, in employment law it is precisely the opposite behavior (the failure to seek out minorities) that can haunt an employer charged with discriminatory practices.(364) As for franchising, the question of how a franchisor’s pro-active plans might affect the burdens of proof or evidence in a franchise discrimination case has not been addressed in a reported decision.

While the legal effect of franchising affirmative action plans is unclear, logically the practical effect is obvious: improvements in franchisor policies and procedures should ultimately lead to a decline in incidents of franchise discrimination. Unfortunately, a lessening of incidents may not cause a corresponding decline in the number of claims. For example, as happened in Quarles v. General Motors Corporation,(365) a black franchisee terminated for completely valid reasons could nonetheless dispute those reasons, ignore the franchisor’s policy of helping African-Americans, and proceed against the franchisor with a baseless discrimination action.

Despite the efforts underlying affirmative action programs, minorities may believe they are not treated properly. Minority franchisees often contend that franchisors are not committed to the franchisees’ long-term success. According to Otis Laird, an Indianapolis Hardee’s franchisee, “you just don’t get the feeling that they want to see me grow or that they really believe that my success is their success.”(366) Some minorities go so far as to say that they are set up to fail. Minority franchisees and industry observers thus contend that franchisors need to be more committed to creating an environment that not only attracts, but retains black franchisees.(367)

These criticisms of particular franchisors or of franchising generally, though, could be applied to the overall franchisor-franchisee relationship regardless of race, sex, or ethnicity. Moreover, nationwide public opinion surveys,(368) as well as key state or local votes such as the November 1996 California referendum favoring the elimination of state affirmative action programs,(369) seem to indicate little public or small business support for affirmative action programs. On a list of business priorities, “diversity” often is viewed as — at best — an unaffordable luxury. Interviews indicate that over a third of larger businesses have affirmative action programs, while only one in eight small businesses have such programs.(370) Only fifteen percent of surveyed small business owners (a “small business” was defined as one with $2 million or less in business) favored affirmative action, while a majority believed affirmative action programs fail to benefit the small-business community.(371) Of the majority opposed to affirmative action, two-thirds favored its outright elimination.(372) Even former beneficiaries of affirmative action programs may turn against them.(373)

SEVERAL PROPOSED REFORMS

A Preliminary Self-Help Measure for Franchisees: “Most Favored Nation” Status

Apart from lawsuits, franchisees can protect themselves by engaging in group bargaining,(374) or by placing in their individual franchise contracts provisions that effectively protect the franchisee from less favorable terms or unequal enforcement of terms. Such a contract clause barring unfavorable treatment constitutes an arrangement between franchisor and franchisee comparable to international trade’s Most Favored Nation (“MFN”) status. In essence, any time the franchisor grants more favorable terms to another franchisee, it must also do so for any franchisee with MFN contractual protection.

To further the effect of a franchisee’s MFN protection, the contract or an amendment to the FTC Rule(375) could require the franchisor to disclose promptly, in writing, directly addressed to existing or potential franchisees, any substantive or otherwise material changes to other franchisees’ agreements or terms of enforcement. That would alert an existing franchisee to possible franchise contract improvements that it is entitled to receive under the MFN provision, while for prospective franchisees it would inform them of recent changes, perhaps against the interest of new franchisees, in the standard franchise agreement offered by the franchisor.(376)

In 1990, New York’s Attorney General, in effect, tried to facilitate an MFN approach by interpreting the New York franchise law as precluding franchisor changes to proposed contract terms absent an amended disclosure form filed with the state.(377) The state court rejected that restrictive interpretation of the franchise negotiations and contracting process.(378) For prospective or current franchisees, the lessons to be drawn, therefore, are twofold: (1) carefully review those franchisor information disclosures to which one is entitled and (2) negotiate one’s own MFN contract provision, if possible, because it is quite unlikely that any antidiscrimination law, state franchise registration law, substantive franchise regulation, or other statute or court holding will entitle the franchisee to that which he could have included, but did not, in his contract.

Required Disclosures to Prospective Franchisees

The FTC should amend its Franchise Rule(379) to require that the franchisor’s mandatory disclosures to prospective franchisees include data about women and minorities in their franchise system.(380) While franchisors may wish to include statistics on employment and suppliers, to keep the task less onerous(381) the FTC could restrict the mandated information to figures on women and minorities who are franchisees. Just as some franchisees’ names, addresses, and telephone numbers already must be provided to potential franchisees,(382) so the franchisor could easily furnish information including the names, addresses, and telephone numbers of female and minority franchisees.(383) Not only are the statistics probably already maintained by franchisors, but the FTC Rule has long required that numerous other figures be provided.(384)

These requirements pose very little, if any, burdens on the franchisor. Since the franchisor already must provide so much information under the present FTC Rule, this additional incidental, further information probably would add very little transactional cost to the marketing of franchises.(385) Moreover, if the FTC did determine that such disclosures would be unduly burdensome on a substantial number of franchisors, then the FTC could promulgate a rule permitting franchisors to leave the women/minorities information out of the disclosure statement. That omission of information could take place if, for example, the total number of franchises for a franchised system is below, say, fifty, or if, for any sized franchise system, the franchisor includes a statement in bold, large print or with all-capital letters, declaring that the women/minorities information has been omitted and that the franchise applicant has the right to request such information from the franchisor. This notice would further state the method for obtaining the information, and that the franchisor, upon the applicant’s request, must furnish the information within ten days or some other reasonable time frame given the circumstances.

Other information that should also be required by an amended FTC Rule, either via mandated disclosure or, at the very least, by another notice as to its ready availability, concerns possible redlining allegations.(386) Redlining, the restriction of minority franchisees or franchise applicants to communities, typically in the inner-city, in which minorities predominate, and where the costs of doing business are often much higher than elsewhere, is perhaps the most contentious charge leveled against many franchisors.(387) The franchisor should have to share with potential franchisees whatever demographic data or similar information the franchisor possesses or otherwise has at its control, insofar as that material can be briefly summarized and excludes any trade secrets or other confidential, business communications or privileged work-product. The data, perhaps already collected by the franchisor,(388) are revealed in order to show what credence may be placed in redlining charges. The data could list and describe markets, average costs, education levels, wage scales, and various other economic information. Franchisors might also include records about applicants and franchisees.(389) Again, because the required data, in its most basic form, would be easy to gather, there should be relatively little burden on franchisors having to provide this information. Indeed, the data may serve to prevent or resolve a possible redlining case. Therefore, an amended FTC Rule may actually reduce transactional costs because the expenses associated with redlining, whether the redlining is merely alleged or is real, are far higher than the transactional costs due to a mandatory disclosure regimen.

Refinements in the “Good Cause” Standards for Franchise Termination

State Legislation

As noted above,(390) the state “good cause” standards for termination often are vague, variable or non-existent, and thus have little impact on franchisor or franchisee behavior because clear patterns of acceptable or proscribed conduct are difficult to discern.(391) Clearly, via statute or common law, a bright-line standard can be created concerning discriminatory treatment based on a franchisee’s or franchise applicant’s race, religion, ethnicity, or sex.(392) Each state’s law should expressly declare such discrimination to be an unfair dealing, in bad faith, which subjects the franchisor to actions for damages(393) and, when appropriate, injunctions or other equitable relief designed to prevent or alleviate a wrongful termination. Evidence that a franchise operating at a particular location has repeatedly been terminated and then refranchised to a new franchisee should be presumptive evidence of franchisor bad faith.(394)

Ethics Codes, Mediation, and Arbitration

The International Franchise Association’s Code of Ethics includes a provision against discrimination,(395) but that Code is not self-executing.(396) As is the case with a pledge from approximately one-fifth of the Association’s over 800 franchisor members to work to improve opportunities for minorities within each of their systems,(397) these measures are important in terms of settings goals and moral standards, but are unlikely to attain, on their own, the force of law.(398) That is why a number of commentators have proposed new federal laws on franchising.(399)

Given the present political climate, the chances for a more detailed, federal, regulatory framework for franchised businesses appears to be nil. Instead, the Code of Ethics could gain some force through a systematic application of its principles in mediation or arbitration cases.

The National Franchise Mediation Program,(400) with over sixty franchisor members as of April 1997,(401) has in the past two years handled ninety-eight cases,(402) of which ten have involved terminations or non-renewals, thirty-two have concerned franchisor activities which allegedly encroach or otherwise impact the franchisee’s market, and forty-two have dealt with financial or other alleged violations of the franchise agreement.(403) In those and related cases, there is the opportunity for standards to be recognized by the people in that industry. While there obviously are potential problems of bias, which the program has tried to eliminate,(404) the developments in these cases, insofar as they affect a particular system, can at least establish standards for that franchisor to uphold. If the results are publicized to the system’s franchisees, they, too, may be held to have notice of these standards, and thereby have duties as well as vested rights. If the results are known even more generally,(405) then perhaps other franchisors and franchisees in that industry may turn to the mediated resolutions (or arbitration findings) as guidance.

Factfinding Proceedings

In franchise litigation, judges may turn for guidance to the well-established mediation or arbitration findings for that franchise system or the overall industry in which the franchisor operates. A judge may also call for an ancillary proceeding, to be conducted by a magistrate or some such assistant.(406) Perhaps this factfinder could call upon franchisees, anonymously and confidentially, to provide information. That would provide data for determining the franchise system’s customs

The suggested factfinding can work because, even anonymously, franchisees quizzed from a particular system would not necessarily support their fellow franchisee’s claim against the franchisor. While they may have an interest in bolstering the chances for a judicial interpretation that recognizes extensive franchisee rights, the polled franchisees actually may prefer to support the system as a whole, namely, by sounding their approval for measures designed to protect the system’s overall goodwill. If a franchise termination or some other enforcement measure is, indeed, in the best interest of the system as a whole, and thus redounds to the benefit of most other, well-performing franchisees, then the franchisees should, at some point, recognize that their interests often align with those of a standards-enforcing, goodwill-protecting franchisor, not a malfeasant or underperforming franchisee.(410) Moreover, the franchisees generally could not testify in any meaningful manner counter to what is plainly in the written documents. The implied covenant of good faith and fair dealing, toward which surveyed franchisees could furnish information, cannot contradict or somehow avoid what is explicitly stated in the written franchise documents.(411) Knowledge of that fact should place a huge damper on any franchisee’s desire to stretch the truth

Another advantage of this factfinding process is its possible tempering effect on obstinate or inappropriate behavior. The threat to use this confidential method for gathering information may introduce enough uncertainty or fear to induce more settlements between opposing parties. Most important, the potential for proceedings that result in a declaration of standards adverse to a party’s interests could cause an improvement in the franchise relationship as parties seek to avoid unremitting controversy, stalemated negotiations or other extreme, litigation-inducing difficulties.

CONCLUSION

In the 1970s, franchise regulation began in response to numerous abuses by franchisors. In their attempts to find solutions, legislatures and courts have focused their attention on the motives of the parties to the franchise agreement. More important than motives, though, are results. A struggling franchisee, minority or nonminority, typically worries intensely about his profits and losses while perhaps not even having time to consider what the franchisor’s actual intentions have been.

The bottom line may be that it is not a franchisor’s intentional misconduct, but simple inertia, a contentment with present arrangements and an emphasis on upfront costs and short-term profits, that keeps franchisors from recruiting and retaining more minority franchisees. If enough other suitable candidates actively seek franchises, many franchisors will not expend the extra effort needed to assist minority franchisees. In short, they see no need to change anything. Even with an ostensibly winning program in place, the expanding franchisor and its franchisees cannot afford to lose focus on business economics: the franchise relationship is not meant to be parasitic, but symbiotic. Thus, ordinarily, franchise applicants must bring to the bargaining table, and the ultimate franchise relationship, certain attributes such as industry experience and capital. While the minority franchise candidate, in particular, may seek mentoring,(412) money, management skills, and overall business training and experience, the franchisor often seeks an entirely different sort of franchisee: one who “provides his own investment capital, prior [industry] experience, and local market knowledge.”(413) In return, the franchisor provides “a proven business format.”(414) The franchisor-franchisee “combination of business know-how, market knowledge, capital, and manpower” is a “recipe for success,” but whenever “any one of these ingredients is missing, success cannot be achieved.”(415) If a franchisor determines that its business needs require it to “team up with” a well-financed, experienced franchisee rather than train and finance minority franchise candidates, that decision (allegedly a business necessity) is, according to franchisors, “not adopted to abandon minorities, but just a fact of economic reality.”(416)

Franchisees and their advocates typically have viewed the franchise relationship as requiring judicial or legislative intervention to protect franchisees from overreaching franchisors. The franchisees maintain that the franchise relationship creates rights beyond the contract itself, and that when termination or nonrenewal infringes upon these rights, damages should be available for such an infringement. Franchisors, on the other hand, object to good cause requirements(417) as impediments to their right to contract freely. Courts have tried to walk a fine line, balancing the freedom and sanctity of contract with concepts of good faith and fair play. The results, as one can imagine, are far from consistent or satisfactory, for any of the players involved.

Under all of the regulatory schemes affecting franchising, dealing with discrimination claims remains problematic. Franchisors must realize that any decision they make regarding termination or nonrenewal of a franchise may be second-guessed by a court of law deciding a discrimination claim. While affirmative action programs are controversial, discrimination, if proven, is demonstrably different, even, it seems, for white juries.(418) Furthermore, the rise in discrimination claims has proven very damaging to franchisors

Numerous unsubstantiated claims of discrimination may have made it more difficult for franchisees with valid discrimination claims to recover against franchisors. Those franchising disputes which happen to involve a minority franchisee ordinarily present the same opportunities for administrative, legislative, judicial, or purely private remedies that are available for the aggrieved franchisee who happens to be a white male. Mistreatment of minority franchisees often may have nothing to do with their race, religion, or ethnicity, and everything to do with the simple fact that they are franchisees, thus extremely vulnerable to the decisions of their franchisor.(419) Case law indicates that absent an unusually high level of particularity, such as an ability to craft carefully a set of very specific facts supporting a claim of purposeful discrimination,(420) plaintiffs should concentrate on such broader charges as breach of the franchise contract, violation of the covenant of good faith and fair dealing, tortious interference with contract, or other common law claims.

The mistreatment of many groups, some far worse than others, has been abysmal. As a result of that history of injustice, for example, there is substantial support for the idea that a society which once subjected African-Americans to the atrocities of slavery and then legally-mandated segregation should remain compelled to remedy the immense wrongs it once perpetrated and perpetuated.(421) Rather, the suggested approach rests on a belief that individual wrongdoing and societal wrongs are fundamentally different. Any business entity or individual that engages in discrimination is, and should be, subject to legal action and court-ordered sanctions. The most effective methods for addressing historic, economic, or social “wrongs,” though, arise outside of the courtroom. In the business setting, societal wrongs against members of an aggrieved group are generally better understood and corrected via discussion and negotiations, resulting in private agreements rather than attention-grabbing lawsuits. If there really is not much to a minority franchisee’s case alleging discrimination by a franchisor, that case is bound to stir resentment and often resistance by the franchisor, many nonminority franchisees, and perhaps even other minority franchisees. The effect thus may be to dampen the chances for effective, long-term growth in minority opportunities within that franchised system. Instead of lawsuits, a better approach often is to seek a franchisor’s acknowledgment of certain social responsibilities (in particular, to women and minorities) as part of a broad compact with the community it serves.

In a majority of states, rather than filing discrimination charges, a franchisee can bring a more general action, based on a failure to use “good cause,”(422) when the franchisee believes that he or she has not been treated fairly. Although this action may not draw the attention of a discrimination claim, it is broader, thereby allowing a franchisee a better chance of recovery. Claims invoking an alleged absence of “good cause” or a supposed breach of the implied covenant of good faith and fair dealing enable a court to avoid focusing solely on the equality of treatment, the essence of a discrimination claim, and instead decide the case based on what it considers fair.(423) Moreover, a “good cause” or “good faith and fair dealing” action gives a court an opportunity to find in favor of a franchisee without further opening the floodgates for additional, potentially frivolous discrimination suits.

Franchisees, in increasing numbers and with some success, are alleging a franchisor’s lack of “good cause” for termination or its breach of an implied covenant of good faith and fair dealing. The author has proposed a system to provide more meaning to these sometimes amorphous concepts via a mediation, arbitration or court factfinding process which includes the input of people actually working within the relevant franchise system. Moreover, public policymakers and key franchisors can see to it that any trend in favor of “good cause” or implied covenant cases leads to a corresponding diminution in discrimination claims, or at least serves to “weed out” many unsubstantiated claims, with the remaining actions better focused on core concepts of franchisor discrimination. A series of required disclosures to prospective franchisees should make it less likely that franchisors use publicity gestures, instead of facts, to indicate how they are doing in terms of selecting and retaining minority franchisees. These disclosures, in turn, should include information making it far more difficult for failing franchisees to allege later that they were misinformed and discriminated against when they had significant information before them and presumably made informed decisions based on that data.

If there remain serious problems inadequately addressed by the present case law, legislation, standard franchise agreement provisions, and privately developed programs assisting high risk franchises and undercapitalized franchisees, the problems may then be considered more comprehensively, and intelligently, by courts and legislatures. Then, their focus will be more acute, the solutions may be more apparent, and the judicial or legislative remedies more focused on solutions, not rhetoric. The battery of proposals suggested in this article should resolve most of the problems associated with the mistreatment and underrepresentation of minorities as franchisees. For any problems that continue, the courts and the legislatures should be able to build upon these proposals, and their aftermath, to develop additional reforms. For now, though, in the absence of a stronger system for reaching out to minorities without committing reverse discrimination, allegations of franchise discrimination usually operate in a factual and legal vacuum that immensely favors, instead of well-deserved thoughtfulness, a plethora of public relations posturing, economic power plays, and guesswork masked as facts. If still more reforms do prove necessary, the presently suggested improvements will give future courts, legislatures, franchisors, and franchisees the background for serious consideration and understanding of what, in fact, remains to be done.

(1) See BLACK’S LAW DICTIONARY 658 (6th ed. 1990) (“A franchise has evolved into an elaborate agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services.”). The essence of this definition has been adopted in a number of states. See, e.g., CONN. GEN. STAT. ANN. [sections] 42-133e(b) (West 1995)

(2) See Norman D. Axelrad & Lewis G. Rudnick, FRANCHISING: A PLANNING AND SALES COMPLIANCE GUIDE 7-11 (1987) (stating the many benefits and drawbacks in franchising for the franchisor)

(3) Franchisees receive training, financial assistance and business expertise in exchange for an up-front fee and a percentage of gross income. See Robert W. Emerson, Franchising and the Collective Rights of Franchisees, 43 VAND. L. REV. 1503, 1506 n.1, 1508-09 (1990).

(4) See Julie Bennett, Franchises Set to Operate at N.Y.C. Inner-City Sites, FRANCHISE TIMES, Aug. 1, 1997, at 4

(5) COMMISSION OF THE EUROPEAN COMMUNITIES, FIFTEENTH REPORT ON COMPETITION POLICY 40 (1986). The commentators list the following three positive effects from franchising: (1) enabling small retail outlets to compete with large distribution firms

(6) See U.S. DEP’T OF COMMERCE MINORITY BUS. DEV. AGENCY, FRANCHISE OPPORTUNITIES HANDBOOK vii (1995)

(7) See U.S. DEP’T OF COMMERCE MINORITY BUS. DEV. AGENCY, supra note 6, at vii

(8) See Franchise Facts, WASHINGTON POST, April 30, 1997, at C11 (noting that in the United States more than eight million people are employed by franchise establishments, that one out of 12 businesses is a franchise establishment, and that, on average, a new franchise commences every eight minutes of each business day). See also supra note 6.

(9) See Harold Brown, FRANCHISING REALITIES AND REMEDIES section 1.01[1], at 1-2 (rev. ed. 1998)

(10) In Susser v. Carve Corp., 206 F. Supp. 636, 640 (S.D.N.Y. 1962), aff’d, 332 F.2d 505 (2d Cir. 1964), District Court Judge Arch O. Dawson wrote: “The cornerstone of a franchise system must be the trademark or tradename of a product. It is this uniformity of product and control of its quality and distribution which causes the public to turn to franchise stores for the product.” States with “marketing plan or system” definitions include California, Illinois, Indiana, Maryland, Michigan, North Dakota, Oregon, Rhode Island, Virginia, and Wisconsin. See, e.g., CAL. CORP. CODE [sections] 31005 (West 1977 & Supp. 1996)

(11) See Yamaha Parts Distributors, Inc. v. Ehrman, 316 So. 2d 557, 559 (Fla. 1975) (“The right of a manufacturer to maintain the integrity of his trade name in the marketplace is a valuable right which a disreputable franchisee can quickly destroy.”). For general information on trademarks in the franchising context, see Bert A. Collison, Trademarks – The Cornerstone of a Franchise System, 24 SW. L.J. 247 (1970).

(12) Community of interest definitions are employed by a number of states, such as Connecticut, Hawaii, Minnesota, New Jersey, South Dakota and Washington. See, e.g., CONN. GEN. STAT. [sections] 42-133e(b) (1992)

(13) The Federal Trade Commission’s Franchise Rule (“FTC Rule”) entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures,” 16 C.F.R. [sections] 436 (1998), went into effect in 1979 after ten years of study. Pursuant to the FTC Rule, franchisors must make a full pre-sale disclosure by prospectus based on a format set forth in the Federal Trade Commission’s Compliance Guide. Failure to register in a given state means that franchises cannot legally be offered or sold there, and illegal offers or sales may result in stiff civil and criminal liability for both the franchisor itself, and all persons controlling the franchisor. 15 U.S.C. [sections] 45(m) (1994). There are no private enforcement rights under the FTC statute or the FTC Rule. See Mon-Shore Management, Inc., v. Family Media, Bus. Franchise Guide [paragraph] 8494 (S.D.N.Y. Dec. 23, 1985)

The FTC Rule must be considered in relation to the several state acts governing almost the identical subject matter. Although the FTC staff has asserted the power to supersede state statutes, the FTC Rule expressly forgoes such preemption, thus allowing state regulation to continue. 15 U.S.C. [sections] 45 (1994)

A proposal to amend the FTC Rule, first made on February 16, 1989, 54 Fed. Reg. 7041-7045 (1989), showed that the entire thrust of the proposal was FTC and state disclosure requirements, in particular, earnings claims, and to a lesser extent, state registration laws. See also H. Bret Lowell, The Preemption Mirage, 8 FRANCHISE L.J. 1, 23 (1989) (concluding that the FTC’s notice of proposed rulemaking “does not appear to contemplate preemption of relationship laws”). The proposed amendment was not adopted.

Presently, the FTC is considering revisions in its rule to account for the rule’s overall costs and benefits and also the current effects on the rule of changes in technology, economic conditions, and industry practices. 62 Fed. Reg. 9115 (Feb. 28, 1997). Among the new considerations are increasing sales of franchises and business opportunities via the Internet. Id. Two commentators have suggested that the FTC prescribe a disclosure format for each franchisor’s Web site. Byron E. Fox & Henry C. Su, Franchising Law, N.Y. L.J., May 5, 1997, at B4.

(14) Petroleum Marketing Practices Act, 15 U.S.C. [subsections] 2801-2806, 2821-24, 2841 (1994) (enacted in 1978).

(15) Automobile Dealers’ Day in Court Act, 15 U.S.C. [subsections] 1221-1225 (1994) (enacted in 1956).

(16) For example, in 1993-1994, a proposed Federal Fair Franchise Practices Act (H.R. 2593, 103rd Cong., 1st Sess. (1993)) was not even brought to the House or Senate floor for a vote. With the November 1994 election of a Republican Congress, and the subsequent removal of an advocate for franchisees, John J. LaFalce, as chairman of the House Small Business Committee, the chances for enactment lessened considerably. While a similar bill was introduced in the 104th Congress with the support of franchisees and other small businesses, see Brown, supra note 9, at [sections] 7.13[7], even some of the bill’s strongest proponents admitted that it might be “too complicated to engender legislative support.” Id. This bill never came up for a vote, even in committee, and the complete inaction continued in the 105th Congress (1997-98). The proposed Federal Fair Franchise Practice Act, H.R. 1717, 104th Cong., 1st Sess. (May 25, 1995), and a revised version of that bill, H.R. 2954, 105th Cong., 1st Sess. (Nov. 8, 1997), are discussed in Brown, supra note 9, at [sections] 7.13.

(17) See supra note 13.

(18) See, e.g., ARK. CODE ANN. [sections] 4-72-204 (Michie 1995)

For more on “good cause,” see infra notes 90-146 and accompanying text.

(19) See Jeffrey A. Tannenbaum, Focus on Franchising: LaFalce Gains Allies in House to Halt Franchise Abuses, WALL ST. g., July 9, 1993, at B2 (quoting the Chief Executive Officer of the Carvel Corporation for the proposition that “franchisors and franchisees have been stopping each other from growing and improving their profitability”)

(20) See, e.g., AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 721 (3rd ed. 1992) (from old French, “franc” or “franche,” meaning “free from servitude”)

(21) See Minority Franchising: Is Discrimination a Factor? Hearings Before the House Comm. on Small Business, 103rd Cong., at 9 (1993) (statement of Kweisi Mfume: “In many respects [minority franchisees are subject to] the old master-slave relationship all over again.”).

Many commentators have opined about the disadvantageous position of franchisees generally, whether those franchisees are ethnic minorities or not. See, e.g., Stan Luxenberg, ROADSIDE EMPIRES: HOW THE CHAINS FRANCHISED AMERICA 262-63 (1985) (stating that because “the franchise contract is usually drawn up by the parent, the terms are usually one-sided”)

(22) See Emerson, supra note 3, at 1509-11.

(23) At stake for the franchisee is its investment in plant, equipment, inventory and payroll, plus foregone investment opportunities. Initial investments can be as little as $250,000 and as much as $8,000,000 for hotel franchises. See Franchise and Business Opportunities Listings, ENTREPRENEUR (SPEC. ISSUE) 1996 BUYER’S GUIDE TO FRANCHISE AND BUSINESS OPPORTUNITIES 10, 46 (listing ten hotels and motels that offer franchises in the United States). Other examples include: McDonald’s, $423,000 – $651,000

(24) See Brown, supra note 9, at 3-30 (“It is not at all unusual for franchises to be given for five, ten, or twenty years, and even then with options to renew”)

(25) As stated by long-time franchise lawyer Harold Brown: “Termination is the ‘Achilles’ heel of the entire franchise industry. Repeatedly it arises as a prime issue in the discussion of applicable state and federal law.” Brown, supra note 9, at [sections] 2.0214], at 2-12. The termination issue thus continues to be addressed in the franchise law literature. See, e.g., Michael K. Lindsey, A Practical Approach to Dealer Termination, 10 ANTITRUST 35 (1996) (noting that a manufacturer can generally implement a dealership termination “with little risk of litigation,” but only if the termination satisfies a number of standards).

(26) See W. John Moore, Franchisees Are Sizzling, NAT’L L.J., Feb. 8, 1992, at 340 (discussing lengthy franchise contract agreements and Congressional testimony by Rupert M. Barkoff, chairman of the American Bar Association’s Forum on Franchising).

(27) See Brown, supra note 9, at [sections] 12.07(1)(a) (noting that franchise agreements generally contain one-sided legal controls over termination that favor the franchisor, and such agreements frequently contain “detailed covenants governing the events associated with any termination”)

(28) See Glickman, supra note 18, at [sections] 10.167 (stating that grounds for termination “may be spread throughout the contract”). In a review of 100 franchise agreements, it was concluded that the franchisor is typically provided with numerous specific, contractual grounds for terminating a franchise, such as the franchisee’s insolvency and/or bankruptcy, loss of lease, failure to operate the business, conducting an unlawful enterprise, being found guilty of a crime, abandonment of the business, or denial of franchisor access to inspect the franchised business. Emerson, supra note 24, at 949-950. In fact, franchisors tend to have a court-recognized right to terminate, regardless of contractual provisions, whenever a franchisee’s breach threatens the viability not only of the franchisee’s own business but has, or threatens to have, an adverse impact on the entire franchised system. See, e.g., Dayan v. McDonald’s Corp., 466 N.E.2d 958, 975 (Ill. App. Ct. 1984) (finding that the franchisor had good cause to terminate regardless of contractual specifications because the franchisee had failed to maintain quality, service, and cleanliness standards).

(29) One major concern is that a franchisee’s failure to adhere to group standards will create customer bad will toward the franchised system as a whole. Economists have warned that this potential free-riding is greatest with business format franchises. Free-riding has been explained as follows:

Because the quality information [about products distributed via a
franchised system] applies to groups of franchisees using a common name,
there is a free-riding problem. If each franchisee supplies inputs that
significantly influence the quality of the product marketed, and consumers
cannot detect the quality of the product before they purchase it, then each
franchisee will have the incentive to cut costs and supply less than the
desired level of product quality. Because the product is standardized,
consumers who receive products of less than anticipated quality will blame
the entire group of retailers using the common name. The individual
franchisee directly benefits from the sales of the lower-quality product,
and the other franchisees share in the losses caused by decreased future
demand.

Benjamin Klein & Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & ECON. 345, 349-50 (1985)

Free-riding is potentially more problematic at locations (such as along an interstate highway) where the probability of repeat sales to that same customer is quite low. Courts have recognized the problem. See, e.g., Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 380 (1977). They also, however, refuse to adopt an expansive view of free-riding that might undermine the purposes of the antitrust laws. See, e.g., Eastman Kodak Co. v. Image Technical Servs., Inc., 112 S.Ct. 2072, 2092 (1992) (refusing to accept defendant Kodak’s arguments that plaintiffs, who repaired office equipment, were free-riders because they had failed to enter the equipment and parts market

(30) Because franchisors usually determine the general terms of any standardized franchise agreements, most express contractual obligations tend to fall upon the franchisee, while the express benefits typically flow to the franchisor. See Emerson, supra note 3.

(31) See, e.g., Carlock v. Pillsbury Company, 719 F. Supp. 791, 845 (D. Minn. 1989) (dismissing the plaintiffs’ Robinson-Patman claims for lack of facts supporting the claim that the defendant franchisor sold Haagen-Dazs ice cream to non-franchise retailers at prices lower than those charged to the franchisees).

(32) 15 U.S.C. [sections] 13(a) (1988).

(33) See, e.g., Cariba BMW, Inc. v. Bayerische Motoren Werke Aktiengesellschaft, 19 F.3d 745 (1st Cir. 1994)

(34) See, e.g., Zoslaw v. MCA Distrib. Corp., 693 F.2d 870, 879 (9th Cir. 1982), cert. denied, 460 U.S. 1085 (1983) (transactions with subsidiaries are not necessarily immune)

(35) See, e.g., HAW. REV. STAT. [sections] 482E-6(2)(C) (1995) (barring franchisor discrimination between franchisees in its charges for “royalties, goods, services, equipment, rentals, advertising services, or in any other business dealings,” other than for some statutory exceptions such as franchises granted at materially different times)

(36) See William N. Berkowitz, Defeating Requests for Preliminary Injunctive Relief in Franchise Termination Cases, 14 FRANCHISE L.J. 57, 73 (1995).

(37) See infra notes 90-146 and accompanying text.

(38) See Berkowitz, supra note 36.

(39) See, e.g., Burke v. General Motors Corp., 180 Cal. Rptr. 537, 540 (Cal. Ct. App. 1982) (upholding as non-discriminatory the franchisor’s refusal to approve a franchise transfer)

(40) See, e.g., Precision Enters., Inc. v. Precision Tune, Inc., Bus. Franchise Guide (CCH) [paragraph] 10,472 (W.D. Wash. Oct. 4, 1993) (enforcing a franchisee’s covenant against competition)

(41) See, e.g., American Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230 (3d Cir. 1975)

(42) See, e.g., Jiagbogu v. Popeyes Famous Fried Chicken Corp., 1994 WL 396302 (E.D. La. July 22, 1994) (a terminated franchisee alleged that the franchisor defrauded the franchisee, breached various contract obligations to the franchisee, and discriminated against the franchisee on the basis of race

(43) Franchisors often treat franchisees differently when negotiating changes to franchise agreements. Such disparate treatment could result in disfavored franchisees filing discrimination claims. See Kilday v. Econo-Travel Motor Hotel Corp., 516 F. Supp. 162 (E.D. Tenn. 1981) (holding that a uniform franchise agreement does not entitle franchisees to require that franchise provisions be enforced uniformly). See infra notes 158-167, 173 and accompanying text.

(44) See, e.g., Carole Hall v. Burger King Corporation, 1992-2 Trade Cas. (CCH) [paragraph] 70,042, 1992 WL 372354 (S.D. Fla. Oct. 26, 1992)

(45) See Kilday v. Econo-Travel Motor Hotel Corp., 516 F. Supp. 162 (E.D. Tenn. 1981)

(46) See generally Harold Brown, Franchise Equities, 63 MASS. L. REV. 109 (1978)

(47) See, e.g., Emerson, supra note 24, at 964 (stating, “a franchise relationship is much more than a written agreement”)

(48) See generally Emerson, supra note 24, at 967 (noting that a 1993 survey of 100 current franchise agreements shows that 100% provide for franchisor training of the franchisee, albeit often at the expense of the franchisee).

(49) This article does not consider the separate issue of employment discrimination, whether by franchisees or franchisors. See generally Douglas Frantz & Jim Schachter, Nissan Agrees to Settle Federal Job Bias Charges, L.A. TIMES, Feb. 3, 1989, Business, at 1 (discussing employment discrimination settlements involving several auto manufacturers, namely, Nissan, Honda, Toyota, and General Motors). Nor does it consider the franchisor’s potential liability for discriminatory actions by a franchisee. See generally Perry v. Burger King Corp., 924 F. Supp. 548 (S.D.N.Y. 1996) (finding no apparent agency relationship and thus entering summary judgment for the franchisor concerning discrimination by a franchisee that allegedly refused to let a black customer use the restaurant’s bathroom)

(50) Historically, the franchise relationship may have been termed a distributorship. Nevertheless, it contained all the elements of a typical franchise: a trademark product was licensed to be sold in an exclusive territory, with a licensee paying a royalty for the privilege of exclusivity. For a brief description of the history of franchising and additional sources to consult, see Emerson, supra note 3, at 1506-07, 1507 nn. 2-9.

(51) See, e.g., E.I. DuPont De Nemours & Co. v. Claiborne-Reno Co., 64 F.2d 224 (8th Cir. 1933), (holding that the termination-at-will clause was not actionable, even if DuPont’s motives were exercised in bad faith).

(52) See, e.g., 15 U.S.C. [subsections] 1-2 (1994) (Sherman Antitrust Act of 1890, as amended)

(53) See, e.g., United States v. Parke Davis & Co., 362 U.S. 29 (1960) (finding illegal price-fixing maintained through the leverage of franchise-type arrangements)

(54) See, e.g., Harold Brown, Franchising – A Fiduciary Relationship, 49 TEX. L. REV. 650 (1971)

(55) See Munna, supra note 2, at 111 (“At one time most franchisors took the posture that they could terminate a franchise by finding any technical violation of the franchise agreement, or no cause at all.”)

(56) For a listing of the wide variety of deceptive and unfair practices that some franchisors have engaged in, sacrificing the best interests of their franchisees, see generally Emerson, supra note 3, at 1522 & n.84, 1555-56 & nn.249-52.

(57) See Emerson, supra note 6, at 1057 & n.22 (on the in terrorem potential of franchising covenants not to compete).

(58) See, e.g., Brown, supra note 9, at 4-2 to 4-38, 5.2

(59) See, e.g., Emerson, supra note 3, at 1556 n.252.

(60) See generally J. Calamari & J. Perillo, THE LAW OF CONTRACTS, [sections] 11-22, at 477 (3d ed. 1987). Professors Calamari and Perillo conclude that most jurisdictions still “appear to adhere to the general principle that a defaulting party has no remedy notwithstanding the degree of hardship and forfeiture he may suffer.” Id. Thus, not only in franchise contracts, but in contracts generally, the defaulter who performs inordinately is “penalized” more than the defaulter who negligibly performs or doesn’t perform at all

Economists refer to this problem as opportunism, which can best be described by way of example. Once the franchisee has sunk costs into its franchise, the franchisee becomes vulnerable to the franchisor, which can exploit this advantage (behave opportunistically) in any number of ways: increase rents, raise prices on supplied goods, boost royalties via a required increase in sales volume, charge higher fees for training, marketing, or other “assistance,” and other methods. The franchisee, having already invested in the franchise with little hope of selling the invested assets for their cost, has little power to object to the franchisor’s price increases. Therefore, an opportunistic franchisor can extract a significant portion of the franchisee’s sunk costs. See Gillian K. Hadfield, Problematic Relations: Franchising and the Law of Incomplete Contracts, 42 STAN. L. REV. 927, 951-55 (1990). For a thorough, current discussion of opportunism in franchising, see Warren S. Grimes, When Do Franchisors Have Market Power? Antitrust Remedies for Franchisor Opportunism, 65 ANTITRUST L.J. 105 (1996).

(61) An ex-franchisee rarely retains the level of customer support he derived while using the franchise name. More than any other types of distribution investment, the “distributor” (franchisee) in a franchise contract is closely identified with the “manufacturer” (franchisor). The franchisee’s close association in the public eye with the franchisor’s trademark or service mark “is the hallmark of franchising.” Lee A. Rau, Implied Obligations in Franchising: Beyond Terminations, 47 BUS. LAW. 1053, 1055 n.15 (1992). Rau concludes: “Stripped of that mark, a typical franchisee’s business will have little value because it ordinarily will be very difficult for the franchisee to transfer its goodwill.” Id.

(62) 1970 Cal. Stat., c. 1400, [sections] 3, at 2645-2662 (codified at CAL. CORP. CODE [sections] 31,000-31,516 (West 1977 & Supp 1995).

(63) See, e.g., FLA. STAT. ANN. [sections] 817.416 (West 1995) (limited to prohibitions on the making of intentional misrepresentations in connection with the sale of a franchise)

(64) Illinois Franchise Disclosure Act of 1987, ILL ANN. STAT. ch. 815 [sections] 705/3 (Smith-Hurd 1995).

(65) See, e.g., Peltier v. Spaghetti Tree, Inc., 451 N.E.2d 1219 (Ohio 1983).

(66) See, e.g., ALA. CODE [sections] 8-19-5 (1995)

(67) See BROWN, supra note 9, at [sections] 2.03.

(68) See ARK. CODE ANN. [subsections] 4-72-201 to -210 (Michie 1991)

(69) Generally, most statutes provide that termination can only occur upon a failure to perform substantially on material aspects of the contract. See, e.g., CONN. GEN. STAT. ANN. [sections] 42-133f (West 1987)

(70) See supra note 13.

(71) See supra notes 14-15 and accompanying text.

(72) See supra note 16 and accompanying text.

(73) See, e.g., Brown, supra note 57, at 664

(74) Arnott v. American Oil Co., 609 F. 2d 873 (8th Cir. 1979).

(75) Id. at 884.

(76) RESTATEMENT (SECOND) OF TRUSTS [sections] 2 cmt. b (1959).

(77) See Emerson, supra note 24, at 954-55.

(78) See, e.g., Premier Wine & Spirits v. E.J. Gallo Winery, 846 F.2d 537 (9th Cir. 1988)

(79) See, e.g., Eulrich v. Snap-On Tools Corp., 853 P.2d 1350 (Or. App. 1993) (holding that Snap-On’s ongoing, intensive supervision of, extensive funding and financing for, and complete control over the dealer’s business and territory, combined with Snap-On’s promise “to take care of” its dealers, created such a fiduciary relationship between Snap-On and a dealer).

(80) General legal principles rooted in public policy and equity, as well as incorporated in contract law, do govern the relations between franchisors and franchisees. These principles are expressed in fundamental statements prohibiting unconscionable agreements, and demanding fair dealing and good faith performance. See, e.g., Gelhorn, supra note 54

(81) See Illinois Franchise Disclosure Act of 1987, ILL ANN. STAT. ch. 815 [sections] 705/3 (Smith-Hurd 1993) (stating the remedial purposes of the Illinois Franchise Disclosure Act)

(82) For instance, Uniform Commercial Code [sections] 2-302 (1991) [hereinafter “UCC”] declares that if, as a matter of law, a court finds a contract, or any clause of a contract, to have been unconscionable at the time it was made, the court may either: 1) refuse to enforce the contract, 2) enforce only the remainder of the contract without the unconscionable clause, or 3) limit the application of any unconscionable clause so as to avoid an unconscionable result. Section 208 of the Second Restatement of the Law of Contracts adopts this doctrine with substantially the same language. RESTATEMENT (SECOND) OF CONTRACTS [sections] 208 (1981).

In Australia, the regulation of franchising includes a Trade Practices Act amendment of 1992 against commercial conduct “unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.” See AUSTRL. ACTS [sections] 51.

(83) “Unfair surprise,” along with “oppression,” is a requirement for unconscionability. BLACK’S LAW DICTIONARY 1524 (6th ed. 1990) (citing Division of the Triple T Service, Inc. v. Mobil Oil Corp. 304 N.Y.S.2d 191, 201 (N.Y. Sup. Ct. 1969), aff’d, 311 N.Y.S.2d 961 (N.Y. App. Div. 1970), discussed infra notes 87-89 and accompanying text).

(84) See e.g., Zapatha v. Dairy Mart, Inc., 408 N.E.2d 1370 (Mass. 1980)

(85) This principle is codified in UCC [subsections] 1-203, 2-103(1)(b) (1990) and included in the RESTATEMENT (SECOND) OF CONTRACTS [sections] 705 (1981). For more on the implied covenant of good faith and fair dealing, see supra note 46 and accompanying text.

(86) See, e.g., Corenswet, Inc. v. Amana Refrigeration, Inc., 594 F.2d 129 (5th Cir. 1979).

(87) 304 N.Y.S.2d 191 (N.Y. Sup. Ct. 1969), aff’d, 311 N.Y.S.2d 961 (N.Y. App. Div. 1970).

(88) 304 N.Y.S.2d at 201.

(89) See William C. Owens & F. Townsend Hawkes, Franchise Agreements: Expanding Protections Against Termination and Nonrenewal, 62 FLA. B.J. 29 (1988)

Most formulations, including UCC [sections] 1-203 and the Uniform Franchise and Business Opportunities Act (U.L.A.) [sections] 201, define good faith as encompassing “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” Common law interpretations of good faith hold that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Kirke La Shelle Co. v. Paul Armstrong Co., 188 N.E. 163, 167 (N.Y. 1933). The duty of good faith is not to act “altruistically” or even to “be reasonable,” but simply “to avoid taking advantage of gaps in a contract in order to exploit the vulnerabilities that arise when performance is sequential rather than simultaneous.” Original Great Am. Chocolate Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 280 (7th Cir. 1992).

(90) See supra note 18.

(91) See McDonald’s Corp. v. Watson, 69 F.3d 36, 43 (5th Cir. 1995) (applying Illinois law)

(92) See, e.g., P & W Supply Co. v. E.I. DuPont de Nemours & Co., 747 F. Supp. 1262, 1267 (N.D. Ill. 1990) (concluding that an implied covenant effectively overturns the express language of the contract which allows termination without good cause)

(93) See CAL. BUS. & PROF. CODE section 20,020 (West 1996)

(94) See ARK. CODE ANN. [sections] 4-72-204(a) (Michie 1995)

(95) Rajiv P. Dant, et al., Ownership Redirection in Franchised Channels, 11 J. PUB. POL’Y & MARKETING 33, 33-44 (1992) (discussing an “ownership redirection hypothesis,” which postulates that powerful franchisors will reacquire the most profitable outlets and leave only the marginal units to franchisees).

Opposition to opportunism also may lie at the heart of the “good faith” concept, which combines with “fair dealing” to constitute an implied covenant extending to all aspects of the franchise relationship, not just terminations or nonrenewals. See Jones Distributing Co. v. White Consolidated Industries, Inc., 943 F. Supp. 1445, 1465 (N.D. Iowa 1996) (quoting Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357- 58 (7th Cir. 1990), which states, inter alia, that, “‘good faith’ is a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties”).

(96) Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 HARV. L. REV. 369, 369 (1980).

(97) ARK CODE ANN. [sections] 4-72-202(7)(A) Michie 1995).

(98) CONN. GEN. STAT. [sections] 42-133f (West 1994).

(99) IND. CODE [sections] 23-2-2.7-1(7) (1996).

(100) N.J. REV. STAT. [sections] 56:10-5 (1996). Several other states have similar provisions expressly limiting “good cause” for termination to a franchisee’s failure to substantially comply with the lawful and material provisions of the franchise. See, e.g., CONN. GEN. STAT. ANN. [sections] 42-133f (West 1994)

(101) See ARK. CODE ANN. [sections] 4-72-202(7) (Michie 1995)

(102) See, Luxenberg, supra note 21, at 243-46 (describing the powerful and effective lobbying efforts, both nationally and at the state level, of the franchisors’ leading trade association, the International Franchise Association).

(103) A number of these circumstances often are specified in the franchise agreement as grounds for termination.

(104) See, e.g., ARK. CODE ANN. [sections] 4-72-202(7)(E) (Michie 1994)

(105) See, e.g., NEB. REV. STAT. [sections] 87-404(2)(d) (1996). In Crosthwalt Equipment Co. v. John Deere Co., Bus. Franchise Guide (CCH) [paragraph] 10,364 (5th Cir. 1993), the franchisor terminated a farm equipment dealer who had falsified sales and credit documents that he provided to the franchisor, and the court upheld the termination as specifically permitted under the franchise contract.

(106) This voluntary abandonment of the franchised business is a “good cause” ground in a number of states. See, e.g., ARK. CODE ANN. [sections] 4-72-202(7)(C) (Michie 1994)

(107) See Webster, supra note 2, at 109. This basis for termination can be inferred from the statutes inasmuch as many franchise contracts require the correction of defects and the failure to meet contractual duties is a statutory basis for termination in numerous states. See supra notes 97-100 and accompanying text.

(108) CAL. BUS. & PROF. CODE [sections] 20,021(f)(g) (West 1996)

(109) See, e.g., ARK. CODE ANN. [sections] 4-7-202(7)(E) (Michie 1991)

(110) See, e.g., ARK. CODE ANN. [sections] 4-72-202(7)(D) (Michie 1995)

(111) See, e.g., ARK. CODE ANN. [sections] 4-72-202(7)(F) (Michie 1995)

(112) See, e.g., ARK. CODE ANN. [sections] 4-72-202(7) (Michie 1995)

(113) See NEB. REV. STAT. [sections] 87-404 (1996).

(114) See Webster, see supra note 2, at 109. As discussed supra note 27, franchise contracts often list many of the above actions (e.g., the franchisee’s failure to adhere to the terms of a legal instrument) as specific grounds for termination of a franchise. These bases for termination often can be inferred from state statutes because franchise contracts frequently require that the franchisee meet these terms and the failure to do so thus becomes a statutory basis for termination in several states.

(115) See, e.g., ARK. CODE ANN. [sections] 4-72-202(7)(G) (Michie 1995)

(116) See, e.g., CAL. BUS. & PROF. CODE [sections] 20021(h) (West 1996)

(117) CAL. BUS. & PROF. CODE [sections] 20021(k) (West 1996)

(118) See, e.g., Illinois Franchise Disclosure Act of 1987, ILL. REV. STAT. ch. 815, [paragraph] 1719(c)(4) (1993)

(119) See, e.g., CAL. BUS. & PROF. CODE [sections] 20021(d) (West 1996)

(120) See, e.g., CAL. BUS. & PROF. CODE [subsections] 20,021(e), 20,021(j) (West 1996)

(121) See, e.g., D.C. CODE ANN. [sections] 29-1203 (1996) (stating that the franchisee has a 60-day period to cure any cause for termination or nonrenewal)

(122) See, e.g., CAL. BUS. & PROF. CODE [sections] 20,021(h) (West 1996)

(123) See Pitegoff, supra note 94, at 309. See generally David Gurnick, Intellectual Property in Franchising: A Survey of Today’s Domestic Issues, 20 OKLA. CITY U. L. REV. 347 (1995)

(124) See, e.g., ARK. CODE ANN. [sections] 4-72-202(7)(B) (Michie 1995)

(125) Those supposedly applying merit criteria to pursue accepted marketplace objectives (e.g., profits), may, however, be affected by unconscious stereotypes that bias their perceptions. See Linda Hamilton Krieger, The Content of Our Categories: A Cognitive Bias Approach to Discrimination and Equal Employment Opportunity, 47 STAN. L. REV. 1161 (1995)

(126) See Pitegoff, supra note 94, at 310. In a recent, empirical study of approximately 1000 franchise contract scenarios, including 158 terminations, economist Darrell L. Williams concluded that the results fail to indicate that franchisors systematically terminate franchisees to convert franchised outlets to company (franchisor) ownership. Darrell L. Williams, Franchise Contract Terminations: Is There Evidence of Franchisor Abuse?, PROCEEDINGS OF THE ANNUAL CONFERENCE OF THE SOCIETY OF FRANCHISING 26 (1996). Williams concludes that the franchisor’s “propensity to terminate is not higher for profitable outlets even in unregulated states where the cost of termination is lower.” Id. Instead, the franchisor decides to terminate a franchise primarily for “disciplinary reasons,” for example, to correct problems with the franchisee such as, a continuing failure to abide by system-wide standards. Id.

(127) Kealey Pharmacy & Home Care Service, Inc. v. Walgreen Company, 539 F. Supp. 1357, 1366 (W.D. Wis. 1982).

(128) The court noted that commentators have found such a disparity in power between franchisor and franchisee that a franchisor’s good faith motives cannot insulate its actions from judicial or legislative intervention. Id. at 1366 n.7 (citing Gilbert R. Serota, Note, Constitutional Obstacles to State “Good Cause” Restrictions on Franchise Terminations, 74 COLUM. L. REV. 1487, 1493 (1974)).

(129) 539 F. Supp. at 1366 (citing Gelhorn, supra note 54, at 504-505).

(130) Kealey Pharmacy v. Walgreen Co., 761 F.2d 345 (7th Cir. 1985).

(131) Id. at 350.

(132) Id.

(133) Of course, the franchisor may have been prevented from acting because of its own bad faith. The Kealey court found that Walgreen was trying to eliminate the dealers who had built its reputation in Wisconsin, so that Walgreen could open its own stores and appropriate the goodwill that the dealers had created. Id.

(134) Wright-Moore Corp. v. Ricoh Corp., 908 F.2d 128 (7th Cir. 1990).

(135) Such bad faith behavior would violate Indiana law as stated in the Indiana Deceptive Franchise Practices Law. IND. CODE [sections] 23-2-2.7-1(5)(7) (1996).

(136) Wright-Moore, 908 F.2d at 137.

(137) Id.

(138) Id. at 138.

(139) The court stated:

[Franchise statutes] are designed to ensure fair dealing between the

parties. If the business reasons of the franchisor were sufficient, the

protections of the statute would be meaningless since it is in the

franchisor’s short term business interest (and therefore good cause) to act

opportunistically. (While this may not be effective in the long term as the

franchisor may lose reputation or good will, a court is unlikely to make

this determination.)

Id. at 137 (parentheses in original)

(140) Applying the principles of good faith, courts have concluded that a franchisor cannot terminate without good cause. These courts reflect “judicial concern over longstanding abuse in franchise relationships, particularly contract provisions giving the franchisor broad unilateral powers of termination at will.” Dayan v. McDonald’s Corp., 466 N.E.2d 958, 992 (Ill. Ct. App. 1984).

(141) See, e.g., Canada Dry Corp. v. Nehi Beverage Co., Inc., 723 F.2d 512 (7th Cir. 1983)

(142) WIS. STAT. ANN. [subsections] 135.01-135.07 (West 1996).

(143) Id. at [sections] 135.04(a) (emphasis added).

(144) 611 F. Supp. 1569 (D.Minn. 1985) (interpreting the Wisconsin Fair Dealership Act).

(145) Id. at 1581. This same reasoning can be found in Lee Beverages Co. v. I.S.C. Wines, 623 F. Supp. 867 (E.D. Wis. 1985) (withdrawal of a product from the market) and Remus v. Amoco Oil Co., 794 F.2d 1238 (7th Cir.), cert. dismissed, 479 U.S. 925 (1986) (“discount for cash” program). Here, the Wisconsin statute does not prohibit a franchisor from imposing non-discriminatory, system-wide changes. See also State Distributors, Inc. v. Glenmore Distilleries Co., 738 F.2d 405, 413-414 (10th Cir. 1984) (employing similar reasoning with reference to both Arizona and New Mexico “good cause” requirements).

(146) Plaintiff L-O’s argument that its termination was discriminatory centered on the fact that Speed Queen appointed another dealer in L-O’s territory simultaneous to notifying L-O that it would be terminated unless L-O cured its breaches. The court held that the other dealer’s appointment did not render discriminatory L-O’s termination

(147) See, e.g., McDonald’s Corp. v. Robert A. Makin, Inc., 653 F. Supp. 401, 403 (W.D.N.Y. 1986) (discussing franchise discrimination as violating Illinois law)

(148) See, e.g., Federal Fair Franchise Practice Act, H.R. 1717, 104th Cong. [sections] 4(a)(3) (1995) (provision barring racial or other discrimination in the sale, site selection, or operations of a franchise). No federal bills have been enacted.

(149) See Byron E. Fox & Peter I. Hoppenfeld, A Review of NASAA’s Model Franchise Investment Act, 9 FRANCHISE L.J. 7, 10 (1989) (barring franchisor discrimination between franchisees except for “reasonable discrimination” based on the grant of franchises at different times, on the efforts to cure franchise deficiencies or defaults, or on the adoption of affirmative action programs).

(150) See, e.g., Title VII of the Civil Rights Act of 1964, as amended, at 42 U.S.C. [sections] 2000e (1994). The law provides that an employer may not “fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment” or “to limit, segregate, or classify his employees or applicants for employment in any way which would deprive … any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s [race, color, religion, national origin, or sex].” 42 U.S.C. [sections] 2000e-2(a) (1994).

(151) See, e.g., id.

(152) See, e.g., Title VIII of the Civil Rights Act of 1968 (codified as amended at 42 U.S.C. [sections] 3605 (1988)).

(153) Voting Rights Act of 1965, Pub. L. No. 89-110, 79 Stat. 437 (codified as amended at 42 U.S.C. [subsections] 1971, 1973 to 1973gg-10 (1994)).

(154) Supra note 150 and infra note 221 and accompanying text.

(155) 42 U.S.C. [sections] 1981 (1988 & Supp. 1996).

(156) See Robert E. Suggs, Racial Discrimination in Business Transactions, 42 HASTINGS L.J. 1257, 1285 (1991).

(157) Id. at 1287 (“At best, a private sector section 1981 challenge amounts to an academic exercise. Given the difficulties presented by such a suit, only a foolhardy [minority business enterprise] would incur the wrath of potential customers by filing such a suit. As a practical matter these actions cannot succeed.”).

(158) 516 F. Supp. 162 (E.D. Tenn. 1981).

(159) Id. at 163.

(160) See In re Gainesville P-H Properties, Inc., 77 B.R. 285, 293 (Bankr. M.D. Fla. 1987) (citing Kilday in support of its holding that “any material breach of a franchise agreement which infringes on the franchisor’s rights is grounds for terminating the relationship)

(161) Bus. Franchise Guide (CCH) [paragraph] 8,492 (E.D.N.Y. 1985).

(162) Id. at 15,973.

(163) Id.

(164) Id. at 15,974.

(165) Id.

(166) Id. at 15,973 (defining “all dealers’ obligations” to mean that each dealer is individually subject to termination for failing to meet his duties, regardless of what happens to other breaching dealers).

(167) See, e.g., Creel Enters, Ltd. v. Mr. Gatti’s, Inc., 933 F.2d 1022 (11th Cir. 1991) (holding that the failure to enforce standards against other marginal franchisees did not constitute contract breach and was a mere statement of present intent to waive those standards)

(168) See Fox & Hoppenfeld, supra note 149, at 10. For a general discussion of franchise system enforcement issues, see Stephen Horn & Robert L. Zisk, Practical Considerations in Enforcing Standards, 12 FRANCHISE L.J. 97 (1993).

(169) Southland Corp. v. Abrams, 560 N.Y.S.2d 253 (N.Y. Sup. Ct. 1990).

(170) Id. at 257 (criticizing the Attorney General’s interpretation as “compromising the interests of prospective franchisees in order to protect existing franchisees”).

(171) N.Y. GEN. BUS. LAW [subsections] 680-695 (McKinney 1994).

(172) Southland Corp. v. Abrams, 560 N.Y.S.2d at 258 (noting that the Attorney General’s interpretation “would render a prospective franchisee the equivalent of a passive purchaser of a security offered to the general public, [which would] not have been the intention of the Legislature”).

(173) W. Michael Garner, Editor’s Column, 11 FRANCHISE L.J. 2, 26 (1991).

(174) Id.

(175) See, e.g., Richard Goodrich, Belleville Car Dealers Win Suit, ST. LOUIS POST-DISPATCH, Aug. 29, 1997 (noting that a jury had ordered Toyota to pay one of its franchisees $4.75 million for secretly favoring other franchisees in its distribution scheme for delivering new cars to dealerships in five Midwestern states).

(176) Id.

(177) Id. Franchise agreements frequently provide that franchise agreements may vary from franchise to franchise. See Emerson, supra note 24, at 968 (26% of surveyed franchise agreements had such a clause). Almost all franchise agreements state that the franchisor’s failure to enforce a franchise contract breach does not constitute a waiver of future franchisee defaults. Id. at 972 (87% of surveyed franchise agreements had such a clause).

(178) Garner, supra note 173, at 26.

(179) Id.

(180) Open Pantry Food Marts of Wisconsin, Inc. v. Howell, Bus. Franchise Guide (CCH) [paragraph] 8072, at 14,008 (Wis. Cir. Ct. 1983).

(181) Id.

(182) The court noted that if the performance of the terminated franchise had approximated that of the others, it would have been inclined to rule against the franchisor. Id.

(183) Id. at 14,009. But see Wisconsin Music Network, Inc. v. Muzak Limited Partnership, 822 F. Supp. 1332, 1336-1337 (E.D. Wis. 1992) (the defendant, a music service licensor, did not discriminate against one of its licensees by requiring that plaintiff-licensee to sign a new licensing agreement or else not be renewed

(184) 723 F.2d 512 (7th Cir. 1983).

(185) Id. at 521-22. The court stated: “Discrimination among franchisees means that as between two or more similar franchisees, and under similar financial and marketing conditions, a franchisor engaged in less favorable treatment towards the discriminatee than towards other franchisees.” Id. at 521. (186) Id. at 522.

(187) 13 F.3d 178 (6th Cir. 1993).

(188) MICH. COMP. LAWS [sections] 445.1527(e) (1993).

(189) 13 F.3d at 181-182.

(190) Id. at 182.

(191) Id. at 183. As noted in Jones Distributing Co. v. White Consolidated Industries, Inc., 943 F. Supp. 1445, 1478 n.21 (N.D. Iowa 1996):

[The Cessna court] considered a claim of discriminatory termination of a
dealership, and concluded that although a manufacturer had no duty to
insulate distributors from all economic hardships, it still had means to
deal effectively with its own economic hardship, such as changing the terms
of all of its franchise agreements or terminating those that are
distinguishable, without “unfairly discriminating between similarly
situated franchises when offering renewal contracts.

(192) After the Court of Appeals decision, the case was settled before any further decisions were announced on any of the plaintiffs legal theories. Letter from Roger M. Clark, attorney for defendant Cessna, to the author (January 3, 1997) (on file with author).

(193) 13 F.3d at 183 (quoting Ziegler Co. v. Rexnord, Inc., 433 N.W.2d 8, 11-12 (Wis. 1988). For more on renewals generally, see John R.F. Baer & Pamela J. Mills, Renewals: Questions and Pitfalls for Franchisors and Some Distributors, 10 FRANCHISE L.J. 1 (1990).

(194) 13 F.3d at 183.

(195) One difference remains in that the Michigan statute does not speak to notice or cure requirements for nonrenewals, but does establish written notice and an opportunity to cure as elements of compliance with the good cause requirement for terminations. MICH. COMP. LAWS [sections] 445.1527(c) (1993).

The Michigan Franchise Investment Law does mandate that franchisors fairly compensate short-term (under five years) franchisees, if those franchisees are bound by a post-term covenant against competition or they were not given six months’ notice of the nonrenewal. See generally Emerson, supra note 6. The compensation is in the form of repurchasing or otherwise paying the franchisee the fair market value of all items reasonably required to operate the franchisee. MICH. COMP. LAWS [sections] 445.1527(d)(f) (1993).

(196) David A. Eisenberg, Note, Balancing a Relationship – “Good Cause” Termination of Franchise Agreements in Michigan, 72 U. DET. MERCY L. REV. 369, 385-86 & n.100 (1995) (citing a 1992 Franchise Research, Analysis and Document Retrieval Corporation (FRANDATA) study of 600 franchisors, with a total of about 212,000 franchises, in which only 3.2% of franchises were not renewed, with only 1% deemed to have been without cause). The study is found in New Developments in Franchising: Hearings Before the House Comm. on Small Business, 102d Cong., at 117 (1992).

(197) See Leroy D. Clark, The Future Civil Rights Agenda: Speculation on Litigation, Legislation, and Organization, 38 CATH. U. L. REV. 795, 823 (1989)

(198) See Emerson, supra note 44, at 541-45 (providing tables on minority representation among fast-food restaurant franchisees and automobile dealerships).

(199) 723 F.2d 512, 522 (7th Cir. 1983).

(200) See infra notes 237-246 and accompanying text.

(201) 908 F.2d 128 (7th Cir. 1990).

(202) Id. at 139.

(203) Id. (quoting Canada Dry Corp. v. Nehi Beverage Co., 723 F.2d 512, 521 (7th Cir. 1983)). Note, however, that this requirement of a similarly situated party does not carry over to all areas of law where discrimination is prohibited. For example, a minority employee terminated because of his minority status is discriminated against even if there is no similarly situated person. Similarly, the franchisee in Wright-Moore admitted that it was the only true national distributor, and, therefore, there was no similarly situated “franchisee.” Wright-Moore, 908 F.2d at 139.

(204) Two noted franchise lawyers stated:

In enforcing these anti-discrimination provisions, the states are concerned
primarily with discrimination between two in-state Franchisees. Thus, while
technically a state could look to a franchise sale [or termination] in
another state as a basis for finding discrimination, there may be
constitutional and other infirmities in using such extraterritorial
comparisons.

Axelrad & Rudnick, supra note 2, at 144. However, in Wisconsin Music Network, Inc. v. Muzak Limited Partnership, 822 F. Supp. 1332, 1336-1337 (E.D. Wis. 1992) (described in supra note 173), the court evaluated whether the franchisor complied with Wisconsin’s anti-discrimination provision by considering whether the franchisor treated the franchisee-plaintiff, a Wisconsin corporation, similarly to that of another franchisee which was based in Washington, D.C..

(205) L-O Distributors, Inc. v. Speed Queen Co., 611 F. Supp. 1569, 1570-73, 1580-81 (D. Minn. 1985) (holding that poor sales performance in violation of an understanding between a supplier and a distributor constituted good cause for termination and did not violate the Wisconsin Fair Dealership Act, WIS. STAT. [sections] 135.02(a), which bars discriminatory terms for one dealer “as imposed on other similarly situated dealers either by their terms on the manner of their enforcement”)

(206) 180 Cal. Rptr. 537 (Cal. Ct. App. 1982).

(207) Id. at 538-39.

(208) Id. at 539 (citing CAL. BUS. & PROF. CODE [subsections] 16720(c), 16721 (West 1977 & 1990)).

(209) Id. at 540.

(210) The court granted General Motors (GM) a partial summary judgment and held:

Neither GM’s minority recruitment policy, coupled with a policy of
recommending franchise candidates one at a time, nor statements concerning
selection of franchisor’s recruited candidates, read together with the
one-at-a-time procedure, gave rise to an inference of the required racial
exclusion that is a prerequisite to finding a violation of the California
statute providing that no person shall be kept from a business transaction
on the basis of any written policy requiring racial discrimination …
Dealer Burke’s injuries, if any, due to GM’s refusal to approve the sale of
Burke’s dealership arose not from any restriction in trade or commerce, but
from GM’s alleged, wrongful act of racial exclusion, and thus partial
summary judgment on that discrimination claim meant that this claim of an
improper combination (restraint of trade) by GM and its recruited
candidates to affect the sales price of dealership assets must fail.

Id.

(211) Of course, “good cause” may not be an issue when, as in Burke, it is the sale or prospective sale of a franchise at issue rather than termination or nonrenewal. Still, broadly construed, the distributor’s actions could be considered a constructive termination. Moreover, regardless of whether “good cause” is at issue, good faith always matters.

(212) See, e.g., Dayan v. McDonald’s Corp., 466 N.E.2d 958, 992 (Ill. Ct. App. 1984) (stating that although franchisor motives may vary, and provided that there is “good cause” for its actions (e.g., termination), it is doubtful that a franchisor will have breached an implied covenant of good faith)

(213) Instead, the franchisee-plaintiff in Burke alleged that General Motors’ minority recruitment policy, operating within a policy of recommending franchise candidates one at a time, constituted racial discrimination against the white franchisee (who was trying to sell his franchise to another, nonminority candidate). In effect, the court found that to infer a policy of covert, reverse discrimination requires evidence, not speculation. Burke v. General Motors Corp., 180 Cal. Rptr. 537, 540 (Cal. Ct. App. 1982).

(214) See, e.g., Kawasaki Shop of Aurora, Inc. v. Kawasaki Motors Corp., U.S.A., 544 N.E.2d 457 (Ill. App. Ct. 1989), appeal denied, 550 N.E.2d 556 (Ill. 1990) (court allowed a dealer’s bad faith termination claim, and a jury award of over $400,000, even though the manufacturer terminated the dealer after the dealer moved to a new location in apparent violation of the dealership contract)

(215) Why would a franchisee bring a discrimination action as opposed to a more general action based on failure to use “good cause”? The answer to this question may lie in the franchisee’s belief, or that of its attorney, that key constituencies will try to take all action necessary to eradicate discrimination, including public protests and boycotts, but may not worry so much about enforcement of a “good cause” requirement. Merely alleging discrimination has an impact on society, as it disturbs many people’s deeply-held sense of fairness.

Clearly, public pressure may ensure the success of franchisee claims against franchisors. See Emerson, supra note 44, at 581-91

(216) A finding of discrimination always means that a franchisor failed to use “good cause”

(217) See supra notes 43-45 and accompanying text.

(218) 570 F. Supp. 402, 407 (W.D. Wis. 1983).

(219) See Kealey Pharmacy & Home Care Serv., Inc. v. Walgreen Co., 539 F. Supp. 1357, 1367 (W.D. Wis. 1982) (discussed supra notes 130-134 and accompanying text).

(220) See Meyer, 570 F. Supp. at 407. Because the franchisee can seek judicial review of newly imposed terms, as well as review of terminations, its bargaining position in renewal negotiations is enhanced. See Kealey Pharmacy, 539 F. Supp. at 1367.

(221) See, e.g., Emerson, supra note 3, at 1547 & n.204. Because true franchisees are not employees, no Title VII (42 U.S.C. [sections] 2000e (1988)) protections extend to them.

Title VI of the Civil Rights Act of 1964 provides: “No person … shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving federal financial assistance.” 42 U.S.C. [sections] 2000d (1994). This statute would not generally apply to franchise relationships because such relationships are commonly contractual transactions between wholly private actors. However, according to Professor Robert E. Suggs, for a business firm (such as a franchisor) all operations of the firm are covered by Title VI’s prohibition against discrimination if (1) the firm as a whole is extended federal assistance, or (2) the firm receiving financial assistance is engaged principally in the business of providing education, health care, housing, social, or recreational services. If the firm is not engaged principally in one of those areas, then only that geographically separate portion of a private firm receiving assistance is covered. Suggs, supra note 159, at 1268 & n.74 (citing an amendment to Title VI codified at 42 U.S.C. [sections] 2000d-4a (1994)). Thus, if a franchisor “receives federal financial assistance,” i.e., is the intended beneficiary of a government grant or subsidy, it may be subject to the prohibition against discrimination contained in Title VI and may have to answer in court to a franchisee against which it discriminated. Id. at 1271-72.

(222) See infra notes 223-237 and accompanying text. In the area of employment discrimination, perhaps such fear of baseless suits has led to higher, judicially-constructed burdens for plaintiffs to meet, whether procedurally, substantively, or both. See, e.g., Patterson v. McLean Credit Union, 491 U.S. 164 (1989)

(223) 576 F. Supp. 1055 (E.D.N.Y. 1983).

(224) 660 N.E.2d 481 (Ohio Ct. App. 1995).

(225) 758 F.2d 839 (2d Cir. 1985).

(226) See 576 F. Supp. at 1058-1061.

(227) Even if the franchisee had been wrongfully terminated, it had no right to continue using the franchisor’s trademarks without permission. See Burger King Corp. v. Agad, 911 F. Supp. 1499 (S.D. Fla. 1995) (issuing a permanent injunction against use of the franchisor’s trademarks by a former franchisee who claimed that the franchisor had wrongfully terminated the franchise)

(228) 660 N.E.2d at 485.

(229) Id.

(230) Id.

(231) Quarles v. General Motors Corp., 758 F.2d 839 (2d Cir. 1985).

(232) Id. at 840.

(233) Id.

(234) Id.

(235) FED. R. CIV. P. 11.

(236) 758 F.2d at 840.

(237) Systemically, each frivolous discrimination suit raises the strain on the court system and increases the burdens on parties with legitimate claims. Of course, there are potential remedies, such as Rule 11 proceedings (FED. R. CIV. P. 11) or their state court equivalent.

(238) Bus. Franchise Guide (CCH) [paragraph] 10,127 (S.D. Fla. 1992) (also reported at 1992-2 Trade Cas. (CCH) [paragraph] 70,042)).

(239) Bus. Franchise Guide (CCH) [paragraph] 10,127, at 23,891 (quoting General Tel. Co. v. Falcon, 457 U.S. 147, 159 n.1 (1982)).

(240) Bus. Franchise Guide (CCH) [paragraph] 10,127, at 23,890. Later, the court notes that “the claims and circumstances vary wildly from plaintiff to plaintiff.” Id. at 23,894 (emphasis added).

(241) Id. at 23,891. As the court stated later in its opinion, “plaintiffs’ claims do not lend themselves to generalized proof. That is because the decisions challenged here were not made by BKC [Burger King Corporation] on an institutional basis.” Id. at 23,892.

(242) Id. If the suit involves a matter in which the franchisor’s uniform treatment of its franchisees is a fundamental assumption of the franchising arrangement (e.g., the franchisor’s absolute control over franchisee use of the system’s trademarks) then it should be easier to obtain class certification. Each member of the franchisee class can realistically claim to have suffered the same treatment from the franchisor. See Brown, supra note 9, [sections] 11.1212], at 11-62.1.

(243) Bus. Franchise Guide (CCH) [paragraph] 10,127, at 23,890. The court further stated: “plaintiffs’ own pleadings demonstrate that this action is about the highly individual grievances of each of the plaintiffs, grievances which share nothing in common except an alleged racial animus.” Id. at 23,893 (quoting Nelson v. United States Steel Corp., 709 F.2d 675, 679 (11th Cir. 1983) for the proposition that “the bare allegation of race discrimination does not satisfy Rule 23(a)’s requirement of commonality”.

Three recent examples of a franchisee group certified as a class are: Collins v. International Dairy Queen, Inc., 168 F.R.D. 668 (M.D. Ga. 1996)

In Collins, the franchisees claimed that the franchisor uniformly violated antitrust laws by tying the grant or renewal of its franchise to the compulsory purchase of almost all franchise product and service requirements on less favorable price and quality terms than the franchisees could obtain from other sources. The court granted class certification. Collins, supra. Subsequently, it denied Dairy Queen’s motion for a partial summary judgment on the tying claims. Collins v. International Dairy Queen, Inc., Bus. Franchise Guide (CCH) [paragraph] 11,007 (M.D. Ga. 1996). For a ruling about arbitration clauses and which franchisees were entitled to notice of the class action, see Collins v. International Dairy Queen, Inc., 169 F.R.D. 690 (M.D. Ga. 1997).

In Little Caesar, on September 30, 1996, a magistrate recommended that the district court grant class certification for the franchisees’ antitrust tying claims insofar as those claims concerned terms for new and renewed franchise agreements which expressly precluded the use of alternate sources for foodstuff supplies and for “logo-ed” articles containing the franchisor’s marks. Little Caesar Enters, supra. On March 31, 1997, the district court adopted the magistrate’s report and recommendation. Little Caesar Enters., Inc. v. Smith, 172 F.R.D. 236, 238 (E.D. Mich. 1997). In the same proceeding, class certification previously had been denied for claims involving an earlier version of the franchise agreement, which had allowed franchisees to request Little Caesar’s permission to use alternate suppliers. Little Caesar Enters., Inc. v. Smith, 895 F. Supp. 884 (E.D. Mich. 1995).

In Broussard, over 700 automotive repair franchisees sought class certification of their action against the franchisor for alleged mismanagement of the annual $30 million advertising fund created by franchisee contributions. The court found that the mismanagement issue presented a sufficient number of common questions of law and fact to satisfy the commonality requirement for class certification. Although franchisor Meineke noted that its franchisees varied in the terms of their franchise agreements and in the contents of the offering circulars that they received, the court determined that the thrust of the franchisees’ claim was that the franchisor’s conduct and statements had been uniformly fraudulent and each franchisee’s injuries were similar

(244) See supra note 29.

(245) Under Rule 23 of the Federal Rules of Civil Procedure, certified class actions, must have large enough groupings so that the joinder of all potential class members is impractical, class representatives are adequately representing the class (e.g., their claims are typical of absent class members), and class members share common claims and defenses rather than having a greater interest in individual claims (e.g., for individual compensatory and punitive damages). See, e.g., Jackson v. City of Belle Glade, 95 F.R.D. 384, 385 (S.D. Fla. 1982) (cited in Carole Hall v. Burger King Corp., Bus. Franchise Guide (CCH) [paragraph] 10,127 at 23,891).

(246) Brown, supra note 9, [sections] 11.1212] at 11-62.1.

(247) Soon after the trial judge denied certifying the class in Hall, seventeen of the twenty-four plaintiff-franchisees either discontinued or abandoned their individual claims against Burger King. Hall v. Burger King Corp., 912 F. Supp. 1509, 1515 (1995). In Burger King Corp. v. Majeed, 805 F. Supp. 994 (S.D. Fla. 1992), Judge Kehoe stated:

Shortly before the filing [in October 1988] of their alleged damage action
against BKC [Burger King Corporation], defendants [the franchisees] stopped
paying their monthly financial obligations to BKC under their Franchise and
Lease Agreements. Apparently believing that, once having filed a putative
class action against BKC, they could simply ignore their contractual

obligations, defendants refused to pay their royalties, advertising
contributions and rent to BKC. Defendants’ refusal to pay their contractual
obligations constituted a clear and unequivocal act of default under the
terms of each of their respective Franchise and Lease Agreements.

Id. at 999 (citations omitted and emphasis added). Therefore, the court granted Burger King’s motion to enjoin the defendants from using Burger King’s registered trademarks and service marks. The same judge, in Burger King Corp. v. Hall, 770 F. Supp. 633, 638-639 (S.D. Fla. 1991), found that franchisee Carole Hall’s refusal to pay her monthly royalties and advertising contributions effectively terminated her franchise

(248) Emerson, supra note 24, at 967-68, 972 (surveyed franchise agreements evince extensive franchisor control over site selection, business layout, franchisee training, operations manuals, product quality control standards, advertising, employees hired by the franchisee, and inspections and auditing of the franchisee’s business).

(249) See Emerson, supra note 44, at 563 & n.262.

(250) One of the few states explicitly to prohibit franchisor discrimination against minority franchisees has been California. See Bernstein, The 80’s: Rapid Growth, Saturation

(251) 42 U.S.C. [sections] 1981 (1994).

(252) Id.

(253) 42 U.S.C. [subsections] 2000e to 2000e-17 (1994).

(254) Brief of the States of New York, et al., as Amici Curiae in Support of Petitioner at 23, Patterson v. McLean Credit Union, 491 U.S. 164 (1989) (No. 87-107) (emphasis added). This brief was filed by the Attorneys General of 47 states and four territories.

In St. Francis College v. Al-Khazraji, 481 U.S. 604 (1987), the Supreme Court unanimously concluded that while section 1981 does not reach religious or national origin discrimination, it broadly covers all racial discrimination, which includes “intentional discrimination solely because of [a plaintiffs] ancestry or ethnic characteristics.” Id. at 613. In Shaare Tefila Congregation v. Cobb, 481 U.S. 615, 617 (1987), the Supreme Court unanimously applied that same reasoning to claims against private or public racial discrimination in violation of section 1982, 42 U.S.C. section 1982 (1988), which guarantees to all citizens “the same right … as is enjoyed by white citizens … to inherit, purchase, lease, sell, hold, and convey real and personal property.”

(255) See Runyon v. McCrary, 427 U.S. 160 (1976) (holding that private non-sectarian schools cannot deprive admission to prospective students because they are African-American)

(256) See Hall v. Bio-Medical Application, Inc., 671 F.2d 300 (8th Cir. 1982) (medical facility’s racially discriminatory refusal to treat an African-American patient)

(257) See Sims v. Order of United Commercial Travelers of Am., 343 F. Supp. 112 (D. Mass 1972) (alleging discrimination by the defendants when rejecting applications for insurance). But see Mackey v. Nationwide Ins. Cos., 724 F.2d

419 (4th Cir. 1984).

(258) See Marable v. H. Walker & Assocs., 644 F.2d 390 (5th Cir. 1981)

(259) See Cody v. Union Electric, 518 F.2d 978 (8th Cir. 1975) (utility’s racially discriminatory policy on the amount of security deposit required to obtain service).

(260) See Jennings v. Patterson, 488 F.2d 436 (5th Cir. 1974). But see Memphis v. Greene, 451 U.S. 100 (1981).

(261) See Scott v. Eversole Mortuary, 522 F.2d 1110 (9th Cir. 1975) (section 1981 claim by relatives of deceased Native Americans, brought against a mortuary for refusing to provide funeral services or sell caskets to them)

(262) See Perry v. Command Performance, 913 F.2d 99 (3d Cir. 1990) (action by an African-American woman who was refused service by the defendant salon’s hairdresser).

(263) See Fraser v. Doubleday & Co., 587 F. Supp. 1284 (S.D.N.Y. 1984)

(264) See Hall v. Pennsylvania State Police, 570 F.2d 86, 92 (3d Cir. 1978) (bank’s policy to offer services on different terms depending on race).

(265) See Tillman v. Wheaton-Haven Recreation Ass’n, Inc., 410 U.S. 431 (1973) (finding that section 1981 barred a community recreation facility from denying membership based on race)

(266) Brief of the States of New York, et al., as Amici Curiae in Support of Petitioner at 22, Patterson v. McLean Credit Union, 491 U.S. 164 (1989) (No. 87-107). Studies have shown section 1981 to be one of the most commonly invoked civil rights laws. Theodore Eisenberg & Stewart Schwab, Comment, The Importance of Section 1981, 73 CORNELL L. REV. 596, 599-601 (1988) (reporting on a study that found section 1981 to be the third most frequently relied on civil rights statute, after section 1983 and Title VII

(267) Brief, supra note 266.

(268) See Runyon v. McCrary, 427 U.S. 160, 169-172 (1976). Likewise, section 1982 (42 U.S.C. [sections] 1982 (1994)) reaches private, discriminatory interference with property rights. See Jones v. Alfred H. Mayer Co., 392 U.S. 409, 422-437 (1968). Section 1983 claims (42 U.S.C. [sections] 1983 (1994)) may be brought by a franchisee or class of franchisees, but to succeed these claims require some overt and significant state participation in the action which allegedly deprived the plaintiff(s) of a right secured by the U.S. Constitution or federal laws. See Hoai v. Vo, 935 F.2d 308 (D.C. Cir. 1991).

In his concurrence in Runyon, Justice Powell concluded that section 1981 reaches private (“no state action”) matters involving a commercial relationship, such as advertising or otherwise extending an open offer of one’s services to the public. Runyon, 427 U.S. at 186, 188-89 (Powell, J., concurring). While admitting that no “‘bright line’ can be drawn that easily separates the type of contract offer within the reach of section 1981 from the type without,” id. at 188, Powell opined that only those entering into a relationship not offered generally or widely, or that is “a personal relationship,” fall outside of section 1981. Id. at 189. See Peter Brandon Bayer, Rationality — and the Irrational Underinclusiveness of the Civil Rights Laws, 45 WASH. & LEE L. REV. 1, 118 (1988) (arguing that the advertising element in Runyon was not dispositive, that the school’s actions fell under section 1981 unless the school was, in fact, a “private club” or protected under a “right of privacy” exception), and that the significance of advertising is that such activity indicates the defendant was not a private club).

The Runyon interpretation was reaffirmed in Patterson v. McLean Credit Union, 491 U.S. 164, 171-72 (1989).

(269) Pub. L. No. 102-166, 105 Stat. 1071 (1991).

(270) 42 U.S.C. [sections] 1981(a) (1994).

(271) Id. at (b) (enacted via the Civil Rights Act of 1991, Pub. L. No. 102-166, [sections] 101(2), 105 Stat. 1071, 1072). This provision directly overturns the Supreme Court’s holding in Patterson v. McLean Credit Union, 491 U.S. 164, 175-85 (1989), which had limited section 1981 to the formation and enforcement of contracts and thereby excluded from coverage any postformation conduct. See Rodriguez v. General Motors Corp., 27 F.3d 396, 397 (9th Cir. 1994) (stating that the 1991 Civil Rights Act’s [sections] 101, codified at 42 U.S.C. [sections] 1981(b), “explicitly rejected Patterson’s restrictive reading of section 1981)

(272) Brown v. General Servs. Admin., 425 U.S. 820, 825 (1976) (declaring that Title VI covers federal employees).

(273) See Anthony R. Chase, Race, Culture, and Contract Law: From the Cottonfield to the Courtroom, 28 CONN. L. REV. 1, 35-36 n.227 (1995) (stating that approximately 77% of all section 1981 claims involve employment contracts, citing Comment, Eisenberg & Schwab, supra note 269, at 601)

(274) This would include, for example, a franchisor’s discrimination against a prospective franchisee.

(275) In Runyon v. McCrary, 427 U.S. 160 (1976), a private nonsectarian school was found to have violated section 1981 by excluding African-American applicants who responded to the school’s advertisement. Private, commercial goods or services must not be advertised or otherwise presented for consideration by members of the general public, if they are not offered on an equal basis to whites or nonwhites because of their race. Id. at 170-71.

(276) See Loren Page Ambinder, Note, Dispelling the Myth of Rationality: Racial Discrimination in Taxicab Service and the Efficacy of Litigation Under 42 U.S.C. Section 1981, 64 GEO. WASH. L. REV. 342, 351 (1996) (citing Patterson v. McLean Credit Union, 491 U.S. 164, 176-77 (1989)).

Note that the 1991 amendment of section 1981 (Civil Rights Act of 1991, Pub. L. No. 102-166, [sections] 101(2), 105 Stat. 1071, 1072 (codified at 42 U.S.C. [sections] 1981(b) (1994)) overruled Patterson by explicitly extending section 1981 coverage to the post-formation stage of the contracting process

(277) See Fair Employment Council, Inc. v. BMC Marketing Corp., 28 F.3d 1268, 1270-72 (D.C. Cir. 1994) (finding that because testers applying for employment lacked the intent to enter into employment contracts, they lacked standing under section 1981).

(278) Robert E. Suggs, supra note 156, at 1276-78, 1284-85 & n.156.

(279) See General Bldg. Contractors Ass’n v. Pennsylvania, 458 U.S. 375, 390-391 (1982). Thus, unlike Title VII employment discrimination cases, section 1981 cases cannot simply invoke a disparate impact, or disparate effect, standard of proof.

(280) The court in T & S Service Assocs., Inc. v. Crenson, 666 F.2d 722, 725 (1st Cir. 1981), outlined the burden on a minority-owned business alleging that it was denied a contract on the basis of race. Its prima facie case must include evidence that (1) it is, in fact, a minority-owned firm, (2) its bid met specifications required of all those competing for the contract, (3) its bid was significantly more advantageous to the contracting authority than the bid actually awarded, whether in terms of price or some other relevant factor, and (4) the contracting authority selected another contractor. Once the minority-owned business makes out its prima facie case, the contracting authority carries the burden of articulating a legitimate, nondiscriminatory reason for rejecting the minority business’ bid. Id. at 725-26. This burden is one of production, not persuasion. Id. If the defendant satisfies the burden of production, the minority business must demonstrate by a preponderance of the evidence that the defendant’s asserted reason is a pretext, either because the defendant’s actions more likely were prompted by discriminatory motives than by its asserted, nondiscriminatory reason, or because the defendant’s asserted criterion actually was applied in a discriminatory fashion or otherwise insufficiently explains the defendant’s decision. Id. at 727.

(281) In Meyers v. Ford Motor Co., 659 F.2d 91 (8th Cir. 1981), the court rejected a white automobile dealer’s claim of racial discrimination premised upon Ford’s providing more favorable terms to a black dealer who ended his franchise than to the white dealer, who also had terminated his franchise. Ford’s payment of $20,000 to the black dealer, rather than just the one dollar paid to the white dealer, was “rational economic behavior,” and the two dealers were not similarly situated. Id. at 94.

(282) Suggs, supra note 156, at 1277.

(283) See, e.g., McAlpine v. AAMCO Automatic Transmissions, Inc., 461 F. Supp. 1232, 1273 (E.D. Mich. 1978) (noting that franchisees have a First Amendment freedom to associate)

(284) See Gerald A. Madek & Christine Neylon O’Brien, Women Denied Partnerships: From Hishon to Price Waterhouse v. Hopkins, 7 HOFSTRA LABOR L.J. 257, 262 (1990) (citing Note, Tenure and Partnership as Title VII Remedies, 94 HARV. L. REV. 457, 460-61 & n.24 (1980)).

(285) 109 S.Ct. 1175 (1989).

(286) Madek & O’Brien, supra note 284, at 301.

(287) See Baskin-Robbins Ice Cream Co. v. D & L Ice Cream Co., 576 F. Supp. 1055 (E.D.N.Y. 1983) (discussed supra notes 226-227 and accompanying text)

(288) See id.

(289) 697 F. Supp. 1474 (N.D. Ill. 1988), aff’d, 876 F.2d 563 (7th Cir. 1989).

(290) 949 F. Supp. 1353 (N.D. Ill. 1997).

(291) Id.

(292) Id.

(293) 896 F. Supp. 743 (N.D. Tenn. 1995).

(294) Id. at 749.

(295) Id. at 747. The court held, though, that certain other theories advanced by the plaintiff, such as breach of contract, did not arise because BP’s decision against renewal of Harper’s lease could be construed as a strictly financial decision, a nondiscriminatory choice intended to divest BP of certain low-volume stores. Id. at 748.

(296) Id. at 750-751.

(297) Id. at 751.

(298) Id. at 749. Ultimately, BP was ordered to pay Harper, its only African-American dealer in Tennessee, $630,287. See Catherine Trevison, Racial discrimination to Cost BP $630,287, THE TENNESSEAN-NASHVILLE, May 16, 1996, at 1B.

(299) 299 379 F. Supp. 1064 (W.D. Mich. 1974).

(300) Id. at 1072-75.

(301) Id. at 1072.

(302) Id. at 1072-73.

(303) Id. at 1073.

(304) Id. at 1072.

(305) Some would argue that these increased burdens are the result of a large, recent rise in frivolous actions. See infra notes 351-357 and accompanying text.

(306) Empl. Prac. Dec. (CCH) [paragraph] 36,585, 1986 WL 15491 (N.D. Ga. March 28, 1986).

(307) Id.

(308) City of Richmond v. J.A. Croson Co., 480 U.S. 469 (1989).

(309) Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995).

(310) That is, discrimination on the basis of race during the formation stage of a contract.

(311) See Stephanie N. Mehta, A Ruling in Ohio Could Invalidate Minority-Contracting Plans in Other Cities, WALL ST. J., Sept. 3, 1996, at B2

(312) U.S. CONST. art. I, section 8, cl. 3.

(313) The supposition depends on how broadly the commerce clause is read. Under a broad interpretation, almost all businesses, no matter how small, must affect interstate commerce.

(314) The Supreme Court’s decision in Lopez v. United States, 115 S.Ct. 1624 (1995) indicates that what constitutes interstate commerce may no longer be interpreted as broadly as had been courts’ practice since the late 1930s.

(315) Congress could enact a franchising statute barring discrimination and mandating certain franchisor activities, something perhaps similar to the numerous employment statutes. See, e.g., 42 U.S.C. [sections] 2000e (1994) (Title VII of the 1964 Civil Rights Act).

There have been many proposed federal statutes on franchising generally, but none have been enacted. See supra note 16 and accompanying text

(316) See Bill McKeown, Re/Max Accused of Bias: Rejection Was Racist, Black Says, COLO. SPRINGS GAZETTE TELEGRAPH, Mar. 10, 1997, at A1 (citing FTC attorney Steve Toporoff).

(317) Id.

(318) For tables, see Emerson, supra note 44, at 541-45.

(319) Women also are underrepresented as franchisees. See Emerson, supra note 44, at 540 n. 149.

(320) In the much larger area of employment law, there likewise exists a relative dearth of failure-to-hire proceedings, as opposed to termination lawsuits. See Michael J. Yelnosky, Filling an Enforcement Void: Using Testers to Uncover and Remedy Discrimination in Hiring for Lower-skilled, Entry Level Jobs, 26 U. MICH. J.L. REFORM 403, 410-415 (1993). In fact, from 1974 to 1985, failure to hire charges decreased from 12% of all charges filed with the Equal Employment Opportunity Commission to 6%, while discriminatory firing complaints increased for 23% to 37%. See Minna J. Kotkin, Public Remedies for Private Wrongs: Rethinking the Title VII Back Pay Remedy, 41 HASTINGS L.J. 1301, 1346-1347 (1990). Following this trend, it appears that franchise legislation and case law have reflected concerns, and fostered actions, involving allegations about wrongfully terminated franchises more often wrongfully denied franchise applicants.

(321) See Cynthia Barnes Leslie, A Night of Success Stories and a Call for Black Unity, WASH. BUS. J., Feb. 24, 1995.

(322) No one knows precisely the percentage of minority franchisees in the United States. Congressman John J. LaFalce, then Chairman of the House Committee on Small Business, noted that from the mid-1980s to 1993 the percentage had gone from less than 2% to below 3%. Minority Franchising: Is Discrimination a Factor? Hearing before the Committee on Small Business, supra note 21, at 1. However, the figures in the tables, Emerson, supra note 44, at 542-45, evince that for at least two very large industries, fastfood and automobile dealerships, the minority share is far higher than LaFalce’s estimate.

(323) The defense franchisors frequently raise is, in fact, that courts, as well as public opinion, must consider the actual applicant pool, not overall numbers. See, e.g., McKeown, supra note 316 (noting Re/Max’s defenses to discrimination charges: (1) it has granted many franchises to minorities in parts of the country where they comprise a larger proportion of the population

(324) “The court’s rejection of plaintiffs’ prima facie showing of discrimination is a typical example of why many disparate impact cases fail. Plaintiffs must concentrate on ‘fine-tuning’ the statistical evidence of discrimination.” Andrew M. Dansicker, A Sheep in Wolf’s Clothing: Affirmative Action, Disparate Impact, Quotas and the Civil Rights Act, 25 COLUM. J.L. & SOC. PROBS. 1, 25 (1991).

(325) See, e.g., Minority Auto Dealers Call for U.S. Assistance, L.A. TIMES, June 6, 1992, at D1 (reporting the National Association for Minority Automobile Dealers’ claim that about 20% of all minority-owned dealerships had gone out of business in the prior two years, a rate perhaps twice as high as the overall rate of dealership failures for that time period

(326) See, e.g., Griffis v. McDonald’s Corp., No. 83-1739-LEW KX (C.D. Cal. 1983) (A black Los Angeles franchisee, Charles Griffis, sued McDonald’s for failing to sell him an additional franchise in a white neighborhood. Griffis’ discrimination claim included section 1981 counts and was settled for $4.7 Million. The case is discussed in Emerson, supra note 44, at 569 & nn.298-302 and accompanying text)

(327) See, e.g., Sandhu v. AAMCO Transmissions, Inc., 782 F.2d 1043 (6th Cir. 1985), cert. denied, 476 U.S. 1105 (1986) (affirming a summary judgment against a franchisee who claimed he was denied an additional franchise and otherwise mistreated by the franchisor due to racial animus against him, an American citizen from India, in violation of Section 1981). But see Sud v. Import Motors, Ltd., 379 F. Supp. 1064 (W.D. Mich. 1974) (winning franchisee selection claim discussed supra notes 299-304 and accompanying text)

(328) 674 So.2d 24 (Ala. 1995), vacated (as to punitive damages), 116 S.Ct. 1843 (1996).

(329) 647 So.2d at 26.

(330) ALA. CODE [sections] 8-20-1 (1988).

(331) 674 So.2d at 27.

(332) Id. at 39.

(333) Id. at 34 (emphasis added).

(334) Id.

(335) Id. at 35 (“To refuse relief [because of the disclaimers] would result in a multitude of frauds and in thwarting the general policy of the law.”) (citations omitted).

(336) Id. at 36.

(337) Id. at 34.

(338) 42 U.S.C. [sections] 1981 (1994).

(339) 674 So.2d at 36.

(340) Id.

(341) Id. As stated by the trial court: “Although a Program designed to give black dealer candidates the opportunity to acquire an automobile dealership may be a laudable objective, the end of meeting an extremely aggressive black dealer count does not justify the perpetration of an intentional fraud.” Id. at 39 (emphasis added).

(342) Id. at 42 (Houston, J., dissenting).

(343) Id.

(344) Id. at 39.

(345) Id.

(346) See id. at 35-36, 38-39.

(347) See, e.g., Theodore J. Boutrous, Jr., Alabama’s New Affirmative Action Tort, WALL ST. J., Aug. 16, 1995, at All (lambasting the Alabama court for placing responsible, socially pro-active businesses such as Ford in a no-win situation). But see Chaka M. Patterson, Letters to the Editor: Ford Gave Him a Raw Dealership, WALL ST. J., Sept. 12, 1995, at A27 (vehemently disputing Boutrous’ contentions

(348) The Civil Rights Act of 1991 was foreseen as likely to increase dramatically the number of employment discrimination lawsuits and the size of judgments in those lawsuits, because of provisions in the act that make a jury trial available and increase the amount of potential damages recoverable. See Janell Kurtz et al., The Civil Rights Act of 1991: What Every Small Business Needs to Know, J. SMALL BUS. MGMT., July 1993, at 103

(349) See Daniel Moskowitz, Changes in Equal Opportunity to Spark Debate, WASH. POST, Jan. 1, 1990, Business, at 31. This article suggested that every time a woman, black, Hispanic, or older worker is let go, even for the most legitimate of reasons, there is a strong possibility that a lawsuit will be filed.

(350) See Alan L. Rupe & Jane Holt, Who Is Disabled in Kansas? 35 WASHBURN L.J. 272, 276 (1996) (table listing employment discrimination complaints filed annually with the Equal Employment Opportunity Commission from 1990 through late 1995). The figures show an overall increase in each category (age, disability, equal pay, national origin, race, religion, retaliation, and sex), with most categories increasing each year. Id. The total number of complaints went from less than 80,000 in 1991 to well over 200,000 in 1995. Id. While the number of racial discrimination complaints stayed about the same for the years 1990 through 1994, it then shot up by over 70% in 1995

(351) See Evan Ramstad & Louise Lee, Circuit City Suit Shows Problems in Proving Bias, WALL ST. J., Nov. 18, 1996, at B1.

(352) See id. Note, also, that the EEOC simply counts as “resolved” the thousands of complaints annually withdrawn unilaterally by the claimants. See Race Cases, WALL ST. J., Nov. 18, 1996, at B2 (listing EEOC race-discrimination complaints and resolutions data for the period from September 1991 to September 1996). Only 15% to 25% of complaints result in some compensation for the employee. See Barbara Rosewicz, EEOC Flexes New Muscles in Mitsubishi Case, But It Lacks the Bulk to Push Business Around, WALL ST. J., April 29, 1996, at A24.

EEOC-filed lawsuits remain rare. In 1990, for example, the EEOC filed suit for only one percent of the discrimination complaints filed with the agency. See Saltzman & Gest, supra note 351. By 1995, the number of lawsuits had fallen to only 315, about 0.3% of the complaints filed, and the lowest level in ten years. See Rosewicz, supra. One reason for the EEOC’s relative inactivity is, as former EEOC general counsel Don Livingston puts it, the EEOC is “understaffed, underfunded, and most of its efforts are spent trying to keep up. There’s not a lot of time there for a proactive or activist approach.” Id.

(353) One may analogize to employment cases. The vast majority of employment discrimination cases are processed by the Equal Employment Opportunity Commission (EEOC). See Michael Selmi, The Value of the EEOC: Reexamining the Agency’s Role in Employment Discrimination Law, 57 OHIO ST. L.J. 1, 1 (1996). Of those cases that annually lead to a full investigation and an EEOC determination on the merits, for the past two decades the rate of findings for the claimant has hovered each year between about 3.8% and 7.2%. See id. at 13 & n.51. The defendant thus has had, on average about a 95% chance of winning a finding on the merits. See id. at 13. Even if one expands the pool of causes beyond determinations on the merits and also counts all settlements (conciliations), the claimant only obtains a favorable resolution less than 14% of the time. See id. at 13 & n.47. See, generally, Richard A. Epstein, FORBIDDEN GROUNDS: THE CASE AGAINST EMPLOYMENT DISCRIMINATION LAWS 159-181 (1992) (arguing that Title VII distorts labor markets, and that employment discrimination laws are too easily invoked or “overenforced”)

(354) In the field of employment law, the largest number of cases filed with the EEOC (over 40%) involve alleged racial discrimination, but they result in the fewest number of lawsuits, only about 19%. See Selmi, supra note 353, at 17 & n.69.

(355) In modern sociology and jurisprudence, this view initially may have first come to prominence in the works of the Swedish sociologist, Gunnar Myrdal, who suggested that Americans belief in fairness and equality should undermine their discriminatory practices. See generally Gunnar Myrdal, AN AMERICAN DILEMMA: THE NEGRO PROBLEM AND MODERN DEMOCRACY (1962).

(356) See NAACP Considers Launching Boycott of McDonald’s Over Minorities Issues, BUREAU NAT’L AFFAIRS, DAILY LAB. REP., May 17, 1984.

(357) See Lauren B. Edelman, Legal Ambiguity and Symbolic Structures: Organizational Mediation of Civil Rights Law, in EQUAL EMPLOYMENT OPPORTUNITY: LABOR MARKET DISCRIMINATION AND PUBLIC POLICY 247, 253 (Paul Burstein ed. 1994) (noting that a business’ failure to look compliant with anti-discrimination laws carries “an increased risk of legal liability and social disapproval”). For an analysis of the economic theory that discrimination will disappear, or at least become quite rare, in market economies driven to eradicate economic inefficiency, see Gary Becker, THE ECONOMICS OF DISCRIMINATION (2d ed. 1971)

(358) See, e.g., Brown, supra note 9, at iii, [subsections] 2.02[3], 4.01, 4.02[3][b], 6.01[2], 7.07[7], 9.14[1], 9.14[5], 9.16[6], 9.16[10] (detailing numerous instances of egregious practices by franchisors and the gross disparities between powerful, ruthless franchisors and uninformed, weak franchisees)

(359) See Emerson, supra note 44, at 578-91. In 1985, after more than nine months of negotiations, the McDonald’s Corporation and the National Association for the Advancement of Colored People (NAACP) announced McDonald’s pledge “to establish 100 new black-owned restaurants over the [following] four years.” Sandy Banks & Eric Malnic, Wider Role for Blacks Pledged by McDonald’s, L.A. TIMES, Feb. 17, 1985, Metro Section, at 1. See also Amy Saltzman & Ted Gest, Your New Civil Rights: Female, Minority, and Disabled Employees Get More Power to Fight Back, U.S. NEWS & WORLD REP., Nov. 18, 1991, at 93. A group of officials from both the NAACP and McDonald’s were appointed to monitor the success of the plan, which followed a 1984 “fair share” agreement between the NAACP and the Adolph Coors Company. See Saltzman & Gest, supra.

Given that there were approximately 300 black-owned McDonald’s franchises as of the beginning of 1985, see id., and that this number rose to 418 as of September 1989, see Bradford Wernle, Black Franchisees Say Inner City Is Tough Turf, CRAIN’S DETROIT BUS., Aug. 13, 1990, at 1, it appears that McDonald’s met the target. By 1992, the McDonald’s African-American franchisee total had risen to 658, another dramatic increase. For the current figures, see Emerson, supra note 44.

McDonald’s, Burger King, and KFC all have independent, formal black franchisee associations. See Brown, supra note 6

(360) After stating that franchisors and franchisees must not discriminate based on race, color, religion, national origin, sex, sexual preference, or disability, the Code of Ethics further provides:

Franchisors and franchisees may utilize reasonable criteria in determining
eligibility for its franchisees and employees and may grant franchises to
some franchisees and hire some employees on more favorable terms than are
granted to other franchisees or employees as part of a program to make
franchises and employment opportunities available to persons lacking
capital, training,business experience or other qualifications ordinarily
required of franchisees and employees. A franchisor and its franchisees may
implement other affirmative action programs.

International Franchise Association, Code of Principles and Standards of Conduct, Section V, Part 10 (Sept. 19, 1996 ed.).

(361) See, e.g., Green v. Kinky Shoe Corp., 49 FE Cases 1283 (D.D.C. April 19, 1989).

(362) In addition to franchisors offering assistance, some states have joined the program to assist minorities in obtaining franchises. By 1992, Florida had seven Black Business Investment Councils offering up to 70% guarantees on loans. See Restaurant Business, PR NEWSWIRE, July 1, 1992

Although voluntary corporate concessions are always best, some franchisee advocates are pushing for legislation to increase not only the number of minorities employed by companies, but also the level at which they are employed. For example, Rep. Henry B. Gonzales and Rep. Augustus F. Hawkins drafted legislation in 1990 which would have blocked any takeover or merger unless the acquiring corporation could demonstrate its commitment to equal opportunity. See George Dean & Robert Gueizda, Greenlining: An Equal-Opportunity, Grass-Roots Antidote to Redlining Economics, L.A. TIMES, May 13, 1990, at M5. This proposal died in committee. There has been no similar legislative activity since then.

(363) See, generally, Emerson, supra note 44

(364) See, Kurtz et al., supra note 348, at 105 (“It is more important than ever for employers to adhere to solid nondiscriminatory employment practices and to be able to document those policies.”).

(365) 758 F.2d 839 (2d Cir. 1985) (discussed supra notes 231-237 and accompanying text).

(366) Milford Prewitt, Hardee’s Renews Minority-Franchisee Pledge, NATION’S RESTAURANT NEWS, Oct. 26, 1992, at 9.

(367) See BLACK ENTERPRISE, Sept. 1992, at 54. From 1993 to 1995, the International Franchise Association, the United States’ largest and most significant franchise lobbying and educational organization, gathered from more than 130 franchisors’ pledges to boost their number of minority franchisees and vendors. See Brown, supra note 6.

(368) See Affirmative Action Views, WALL ST. J., Jan. 1995 (reporting a Wall Street Journal/NBC News Poll that showed 61% of all adults favored the elimination of affirmative action based on race or gender in deciding admissions to state universities, hiring for government jobs, and awarding federal contracts, while only 32% opposed such a move).

(369) See California Civil Rights Initiative (Californians Against Discrimination and Preferences, L.A., Cal.) (adding Section 31 to Article I of the California Constitution). The electorate passed the initiative on November 5, 1996. See generally Edward W. Pempinen & Pamela Burdman, Measure to Cut Back Affirmative Action Wins, S.F. CHRON., Nov. 6, 1996, at Al. The operative language reads: “The state shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.” CAL. CONST. art. I, section 31(a).

(370) See Vicki Torres, Diversity Not Top Priority for Small Firms, L.A. TIMES, Sept. 12, 1995, at A12.

(371) See Tracey Rosenthal, Survey Shows Little Support for Affirmative Action, BUSINESS FIRST-BUFFALO, Nov. 6, 1995, at 7.

(372) Id.

(373) See, e.g., Albert R. Karr, Major Beneficiary of Set-Aside Policies Turns Against Them: Converse Construction Thrived With Affirmative Action, Then Lost Minority Status, WALL ST. J., July 3, 1995, at B4.

(374) See Emerson, supra note 3. The author proposes, inter alia, franchisee state statutory rights to form bargaining associations and also a federal antitrust law exemption for franchisee association activities that are comparable to exempted labor union activities. Id. at 1557-66.

(375) 16 C.F.R. [sections] 436 (1996) (described supra note 13).

(376) That requirement has already been imposed by courts in certain situations. For example, in Jones Distributing Co. v. White Consolidated Industries, Inc., 943 F. Supp. 1445, 1478 (N.D. Iowa 1996), the court held that a franchisor could be liable for fraud based on the franchisor’s cover letter to the franchisee stating that an enclosed new franchise agreement was for the purpose of completing the franchisor’s files when the actual intent was to introduce a new clause in the agreement which would permit either party to terminate the franchise on 60 days’ notice without cause. The new agreement itself disclosed that fact, but the much shorter, cover letter did not. Similarly, the proposed information about systemic changes in the standard franchise agreement would seek to avoid ambiguous, misleading statements or omissions and require the franchisor to provide meaningful information in a clearly marked disclosure rather than buried in an extremely lengthy document.

(377) Southland Corp. v. Abrams, 560 N.Y.S.2d 253 (N.Y. Sup. Ct. 1990).

(378) Id. The case is discussed supra notes 169-172 and accompanying text.

(379) 16 C.F.R. [sections] 436 (1996) (discussed supra note 13).

(380) Others also have proposed the mandatory disclosure of the number of minority franchisees in a franchise system. See, e.g., Minorities and Franchising: Hearing Before the House Comm. on Small Business, 102d Cong., at 9 (1991) (testimony of Susan P. Kezios, President and Founder, Women in Franchising, Inc.)

(381) Such record-keeping may already be required by EEOC regulation, state law, judicial order, a case settlement, it may be corporate practice anyway.

(382) See 16 C.F.R. [sections] 436.1(a)(16)(iii) (1998).

(383) Although the Rule presently does not provide for franchisee requests to preserve their anonymity and not be disclosed to inquiring, potential franchisees, perhaps female or minority franchisees could provide special reasons why they should not be singled out for naming, and could, on request, have their names omitted from the list of female and minority franchisees.

(384) See 16 C.F.R. [sections] 436.1(a)(16)(i-ii) (1996). The Rule requires a statement disclosing the total number, for the end of the preceding fiscal year, of operating franchises and operating franchisor-owned outlets. Id. Other required statistics include the number of franchises for each of the following actions in the prior fiscal year: terminations, nonrenewals, and reacquisitions by the franchisor. Id. at section 436.1(a)(16)(iv-vii).

(385) Besides the information discussed supra note 387, required disclosures concern, inter alia: Franchisor trademarks and service marks, business experience, criminal and civil liabilities, bankruptcies, and audited balance sheets

(386) Commentators have recommended additional disclosures. For example, a former official at the franchisor, American Speedy Printing, who was also Vice Chairman of the International Franchise Association’s minority committee, recommends that all franchisors be required to furnish “truth in lending,” namely, accurate franchisee dropout rates, reasons for those drop-outs, and profitability numbers per region and outlet. Minorities and Franchising: Hearing Before the Comm. on Small Business, supra note 380, at 99 (statement of Andrew Petress, Senior Vice President for Government Relations, The PM Group, Brighton, Michigan).

(387) For a comprehensive discussion of this topic, see Emerson, supra note 44, at 559-75.

(388) Or they are otherwise easily available to the franchisor.

(389) In one redlining lawsuit won by franchisee Cornelious Howard against franchisor BP, the court ordered BP to keep such information, namely, “records about the [franchise] applicants – who they are and what happens to their applications.” Ernest Holsendolph, Courts Seem Willing to Address Discrimination, ATLANTA J. & CONST., Aug. 13, 1995, at G1. For BP, that approach may have occurred simply in response to the damages awards against BP, see supra notes 293-298 and accompanying text, without any other prodding necessary. See Holsendolph, Courts Reshaping Corporate Thinking on Discrimination, ATLANTA J. & CONST., Dec. 9, 1996, at E12 (reporting that although BP found the court holdings against it unfair, a BP spokeswoman stated that BP had changed its behavior: “since that time we have formalized our procedures for dealership applications, and we will be able to prove fairness in the way the stations are awarded”).

(390) See supra notes 90-146 and accompanying text.

(391) The same can be said of “good faith” and “fair dealing,” standards so they provide only a general guide. See, e.g., Carvel Corp. v. Diversified Management Group, Inc., 930 F.2d 228, 230-31 (2d Cir. 1991) (holding that considerable discretion about advertising, store location, wholesale sales, and other matters “did not relieve Carvel of its duty to act in good faith”)

(392) A law against franchise discrimination should proscribe redlining by implication. Some franchisee advocates, however, have argued the need for a statute specifically prohibiting franchise redlining. See, e.g., Minorities and Franchising: Hearing Before the Comm. on Small Business, supra note 380, at 37 (testimony of Franklin M. Lee, Chief Counsel, Minority Business Enterprise Legal Defense and Education Fund, Inc.)

(393) Examples would include wrongful termination and failure to award a franchise.

(394) See, e.g., Minorities and Franchising: Hearing Before the Comm. on Small Business, supra note 380, at 36-37 (testimony of Franklin M. Lee, Chief Counsel, Minority Business Enterprise Legal Defense and Education Fund, Inc., that “the intentional refranchising of hopelessly unprofitable sites” should be proscribed)

(395) The Code of Ethics states: “A franchisor shall not discriminate in the operations of its franchised network on the basis of race, color, religion, national origin, gender, sexual preference, or disability.” International Franchise Association, supra note 360.

(396) For more on the limited scope and effect of the Code, see Self Regulation of Franchising: The IFA Code of Ethics, Hearings Before the House Comm. on Small Business, 103rd Cong., at 4-7, 21-35, 38-70 (1994) (oral statement, testimony in response to questions from the Committee, and written testimony of Professor Robert W. Emerson).

(397) Telephone Interview with Terriann Barnes, International Franchise Association, Vice President, Governmental Relations (May 28, 1997). There is also a wide pool of talent available to furnish franchising parties some advice and to speed the expansion of minorities into franchising. The group is IFA’s Alliance for Minority Opportunities in Franchising. That Alliance, formed in 1992, is a network of media, universities, and franchisors. Cassandra Hayes & Rhonda Reynolds, 25 Years of Blacks in Franchising, BLACK ENTERPRISE, Sept. 1, 1994, at 126.

The International Franchise Association (IFA) has long espoused, as a basic part of its mission statement, its need to assist franchisors “to establish minority franchise programs to increase the number of successful minority franchisees.” See Minorities and Franchising: Hearing Before the Comm. on Small Business, supra note 380, at 76 (written statement of Ronald E. Harrison, incoming Chairman of the International Franchise Association’s Minorities and Women in Franchising Committee). In April 1992, it formed the Alliance for Minority Opportunities in Franchising, with founding members including major civil rights organizations such as the National Urban League, the National Council of LaRaza, and the National Association for the Advancement of Colored People, and various minority economic development groups such as the National Minority Supplier Development Council, the U.S. Hispanic Chamber of Commerce, and the U.S. Department of Commerce’s Minority Business Development Agency. See Minority Franchising: Is Discrimination a Factor? Hearing Before the Comm. on Small Business, supra note 21, at 141-142 (written testimony of Ronald E. Harrison, Chairman of the International Franchise Association’s Minorities and Women in Franchising Committee). The Executive Summary of the IFA Long-Range Plan, 1996-2001, lists as one of only six key IFA Strategic Goals: “IFA must be the catalyst for cultural, gender, and racial diversity in franchising.”

(398) See Self Regulation of Franchising: The IFA Code of Ethics, Hearing before the Committee on Small Business, supra note 396 (testimony and statements of three franchise lawyers and Professor Robert W. Emerson).

(399) See Self Regulation of Franchising: The IFA Code of Ethics, Hearing Before the Comm. on Small Business, supra note 396

(400) An alternate dispute resolution process intended to resolve, without litigation, problems between franchisors and their franchisees, the National Franchise Mediation Program, began operations in 1995 and is run by the CPR Institute for Dispute Resolution, in New York City. It is endorsed by the International Franchise Association, the largest and most influential franchise lobbying and education organization in the United States.

(401) Most of the members are large franchisors, such as Burger King, Dollar Rent A Car Systems, Dunkin’ Donuts, Hardee’s Food Systems, Holiday Inn, I Can’t Believe It’s Yogurt Stores, Jiffy Lube International, Kentucky Fried Chicken, Little Caesar Enterprises, Mailboxes Etc., McDonald’s, Meineke Discount Muffler Shops, Midas International, Pizza Hut, Radisson Hotels International, 7-Eleven Convenience Stores, Shoney’s, Summer Fun Day Camps, Taco Bell, and Wendy’s. CPR Institute for Dispute Resolution, National Franchise Mediation Program, List of Participants (April 14, 1997).

(402) Sixty-four were filed by franchisees, 27 by franchisors, and seven by both franchisors and franchisees (joint filings). CPR Institute for Dispute Resolution, CPR Franchise Dispute Resolution Report (March 31, 1997).

(403) Id.

(404) See CENTER FOR PUBLIC RESOURCES, INC., PROCEDURE FOR FRANCHISE DISPUTES, Part D (“Selecting the Mediator”) (1995).

(405) For example, they could be promulgated outside the particular franchise system, in the franchising community as a whole, or among the franchisees and franchisors in an industry.

(406) See Dayan v. McDonald’s Corp., 466 N.E.2d 958 (Ill. App. Ct. 1984) (discussing the French court’s appointment of “huissiers” to establish findings of fact about a dispute involving the McDonald’s franchise in Paris, France, which was involved in a protracted dispute with McDonald’s

A “huissier” is best described as a court-appointed marshall. See generally Raymond Guillien & Jean Vincent, LEXIQUE DE TERMES JURIDIQUES 240 (1988). This marshall, whether in France, Quebec, or even various non-French speaking civil law jurisdictions (where the marshall is known by some name other than “huissier”), is both a server of process and a factfinder. He or she is, in effect, a court-appointed, private investigator for purposes of a particular case. See generally Robert F. Taylor, A Comparative Study of Expert Testimony in France and the United States: Philosophical Underpinnings, History, Practice, and Procedure, 31 TEX. INT’L L.J. 181, 197 n.148 (1996).

(407) Because the other franchisees’ “testimony” would be anonymous, both the franchisor and franchisee may argue that their rights, such as due process or to confront the witnesses against them, are violated by this confidential, fact-gathering method.

(408) Moreover, the franchise parties could agree to such proceedings as part of arbitration, or otherwise could waive their right to object to such testimony.

(409) A survey of 100 franchise agreements found that 98% authorized franchisor-issued operating manuals, 59% gave the franchisor the right to revise the franchise agreement or operating manual, and 92% provided the franchisor with authority to issue quality control standards for goods sold at the franchise outlet. Emerson, supra note 24, at 967.

(410) In arbitrating or mediating a franchise dispute, one cannot have franchisees from the same system, or a competitor’s system, sit in judgment. These franchisees would not be disinterested observers. They would have much knowledge, but also prejudice from two sources: their own biases, and actual or potential pressure from their franchisor.

For the above suggested factfinding inquiries involving confidential surveys of franchisees, the franchisees’ anonymity can eliminate the risk of effective, outside pressure, albeit not the franchisees’ own prejudices.

(411) See supra note 91 and accompanying text.

(412) See Minorities and Franchising: Hearing Before the Committee on Small Business, 102d Cong., at 9 (1991) (testimony of Susan P. Kezios, President and Founder, Women in Franchising, Inc., stating that “the minority community comes to franchise business ownership with the intention of finding a mentor from whom they can learn entrepreneurship”).

(413) Id. at 43 (testimony of John A. Cuellar, Vice President, General Counsel and Secretary, Southwest Cafes, Inc.).

(414) Id.

(415) Id.

(416) Id. at 45.

(417) An example would include a good cause as a prerequisite to terminating a franchise.

(418) See Holsendolph, Courts Reshape Corporate Thinking on Discrimination, supra note 389 (quoting franchisee attorney Gary Kessler: “I think people see affirmative action and discrimination differently. Affirmative action may be controversial, but I have found juries very offended at proven discrimination, even white juries judging the complaint from a black person”). In a discrimination case brought by attorney Kessler on behalf of a black BP dealer, an all-white jury found in the dealer’s favor and awarded him over one million dollars. See Bill Rankin, Cobb Race Bias Case Costs BP $1 Million, ATLANTA J. & CONST., Dec. 15, 1994, at D2. (The trial judge also ordered BP to give the dealer his choice among several BP dealerships in a prime metropolitan area, northern Atlanta, Bill Rankin, BP Oil Ordered to Give Black Man Choice of Dealerships, ATLANTA J. & CONST., July 22, 1995, at A1

(419) A number of commentators have noted that, except for perhaps more precarious financing than is the average case, the main problems minority franchisees face are the same as all franchisees. Other than perhaps poor finance, the minority franchisee is generally no more vulnerable than are other franchisees. See, e.g., Rhonda Reynolds, Black Franchise Hopefuls Beware, BLACK ENTERPRISE, Sept. 1, 1995, at 81 (listing franchisees’ main concerns as franchisor-inflated sales estimates, franchisor-dominated unfair contracts, franchisor-sponsored encroachment on the franchisee’s market, and some franchisors’ failure to obey federal disclosure rules).

(420) See Brown v. American Honda Motor Co., 939 F.2d 946, 952 (11th Cir. 1991). See generally Andrew M. Dansicker, A Sheep in Wolfs Clothing: Affirmative Action, Disparate Impact, Quotas and the Civil Rights Act, 25 COLUM. J.L. & SOC. PROBS. 1, 24-25 (1991) (noting that many disparate impact cases fail because plaintiffs are unable to produce concrete statistical evidence of discrimination). The Civil Rights Act of 1991 (42 U.S.C. [sections] 2000e-2(k)(1)(A)(1) (1994)), however, does not reach non-employment cases such as franchising. For purposes of a non-employment case under section 1981 (42 U.S.C. [sections] 1981 (1994)), a mere statistical pattern, without evidence of intent, does not prove discrimination.

(421) For insight into this history of injustice, see generally, Taylor Branch, PARTING WATERS (1988)

(422) See supra notes 90-146 and accompanying text.

(423) Another avenue for plaintiffs is to pursue remedies specifically created for a particular industry, such as automobile dealerships. For example, in Pearson v. Ford Motor Co., 68 F.3d 1301 (11th Cir. 1995), an owner of a dealership tried to sue under the federal Automobile Dealers’ Day in Court Act. 15 U.S.C. [subsections] 1221-1225 (1988). The plaintiff, Gary Pearson, acquired his interest through a Ford “Dealer Development Program” geared toward financing insufficiently capitalized persons, especially African-Americans. Pearson is black, but his claims focused on overall unfair treatment, not alleged discrimination. While Pearson’s claim was denied because he was not a dealer, but merely a shareholder and officer of the dealer corporation (and not a party to the dealership agreement with Ford), his state claim under Florida’s automobile dealership law remains alive. See Anti-Bias Act Applies to GM Plant Tax Case, AUTOMOTIVE NEWS, Feb. 13, 1995, at 102.

ROBERT W. EMERSON, Associate Professor of Business Law and Legal Studies, Graduate School of Business, Warrington College of Business Administration, University of Florida. B.A., University of the South (Sewanee), 1978