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As a franchisee attorney I’m unable to even begin to put a number on how many times I’ve received calls from distressed franchisees claiming that they are victims of “unfair discrimination” by their franchisors. And, these callers always have a strong view on the legality of such discrimination.“They aren’t allowed to discriminate; that is unfair competition; it is certainly illegal, isn’t it Mr. Goldstein?” As soon as I hear the word “discrimination” I begin to shake my head in preparation for what is almost always going to be an angry response from the caller after I tell him what I must: “In almost every case, discrimination by a franchisor against a franchisee is lawful.” In an attempt to dull the anticipated harsh reaction from the franchisee caller, I quickly follow my comment with the entreaty: “Don’t shoot me, I’m only the messenger.”
The rich history in this country of combating pernicious racial and gender discrimination through the passage and enforcement of broad-sweeping “anti-discrimination” laws does not have an analogue in the franchise world. Indeed, almost every court that has heard an alleged franchisor discrimination claim has quickly cut the claim off at its knees. And, although there are a few states that have passed franchise legislation that touches on franchisor discrimination, these statutes, in my opinion, arguably make the franchisee’s burden in a discrimination case almost worse than it otherwise would have been had the franchisee been left to fend for himself under the common law. Every one of these very few statutes places its legal imprimatur on flat-out discrimination between franchisees so long as the franchisor shows that the discrimination was based upon “reasonable business distinctions” and was not “arbitrary.”
Even the most uncreative and incompetent of franchisors can easily cobble together an acceptable excuse for treating franchisees differently. Whether it is because a discriminating franchisor views one franchisee as bigger than another; or as more business-like than another; or as more innovative than another; or as more sincere than another; or as more obedient than another; or as more capable than another; or as more enthusiastic than another; or as more efficient than another, courts have consistently recognized these distinctions as lawful. So, for instance, even in the case where a franchisor blatantly discriminated by suing one franchisee but not others for violating the noncompetition provision in the franchise agreement the court held that the franchisor had not acted unlawfully because the franchisor’s decision could have been a “rational business decision” based on the cost of bringing suit when balanced against the cost of possible recovery in such cases.
There have, however, been a few cases in which the franchisor’s alleged conduct has been held sufficient to state a claim under a state franchise statute. In one of these, a franchisee alleged that the franchisor rigged the bids for franchise stores so that the franchisor could exercise its right of first refusal to buy the stores and shut out the franchisee. In this case the franchisee successfully pled an actionable claim because the franchisee alleged discriminatory treatment by the franchisee's use of its right of first refusal. In another case, a court held that a franchisee’s claim of discrimination was viable because he alleged that the animosity between the manufacturer and the dealer’s son caused his nonrenewal of the franchise agreement.
Bottom line: if your case against your franchisor is going to live or die based solely on a franchisor discrimination claim you ought to make sure that you have picked out your casket before filing the case.
About the author: Jeffrey Goldstein, Esq. is a franchise attorney. Visit his website at www.goldlawgroup.com. Or email him at email@example.com