A RECENT DISTRIBUTOR CASE IN FEDERAL COURT IN MAINE, involved a manufacturer, DuPont, and its distributor, NES. The franchise agreement permitted DuPont to terminate the distribution agreement without cause with 60 days
notice. After DuPont and NES became embroiled in a dispute, DuPont terminated NES, even though NES had invested over the years hundreds of thousands of dollars into the business. One argument that the franchisee made was that the franchisor, DuPont, was required to act “reasonably” in terminating the distribution agreement. The court quickly and without hesitation rejected this argument stating:
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An independent franchise association is formed, operated and perpetuated by individual franchisees. While franchisors have formed many associations, only a few have been formed by franchisees. Organizations that have the moniker “advisory counsel” or “advisory board” are generally franchisor organizations whose members are appointed by franchisors.
Most franchise associations are borne from system-wide discontent centered on a major disputed issue. However, the value of these associations should transcend beyond resolving the dispute that originally spurred the association’s formation. Once a franchise association is formed, the group should promptly adopt an infrastructure with the tools and interest to provide benefits to its members in the long-run – regardless of whether its members face a crisis in the short-run.
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Courts in general have become so hostile to franchisees, that, even when a federal statute protects a limited class of franchisees (in this case, gas stations), they will go out of their way to find a valid ground of termination, no matter how small and insignificant. In a recent case in California (supposedly a franchisee-friendly state), a federal court ruled, in essence, that a termination of a franchisee’s gas station business was valid solely because the franchisee allegedly had failed to pay a mere $5000 associated with an old case between the gas station and the franchisee. Indeed, even a cursory review of the decision shows that the real reason for the termination (which was firmly supported by the court), was the franchisee’s having posted political signs in his service station.
In October 2005, Shahbazi posted two signs at the Marina station. The first sign read, “Consumers’ pain is big oil’s unearned profit! To oppose it see cash-ier.” “Big oils are price gouging and profiteering! To participate in roll back see cashier.” Shahbazi also stacked a newspaper rack at the Marina station with copies of a two-page letter, which included the following statement in its title: “‘Consumer Alert’ Outrageous goug-ing by all oil companies rip-off in action across the nation. Do not blame the operator of your neighborhood station.” The letter advised customers to “stop buying frrm ‘Company stores’ or from large distributor sites stations where [it] is pos-sible until prices go down to a fair market value.”
Refusing to pay royalties in response to a perceived breach by a franchisor is a sure ticket to purgatory. Although it seems counterintuitive, not to mention unfair, courts have refused to permit franchisees to withhold royalties as a weapon in a franchise dispute. Further, there is no comfort in numbers, in that, even if a group of franchisees decided to “all” withhold their royalties together, the group’s conduct would most probably be violative of the antitrust laws, which prevent independent business entities (franchisees) from agreeing to a concerted economic action (refusal to pay royalties) to achieve an economic goal (a more equitable distribution of the franchise “pie”).
Measured under the microscope of “fairness”, very few franchise agreements in the year 2007 make the cut. The most unfair aspect of today’s franchise agreements is that franchisors reserve to themselves the right to make arbitrary modifications, which in many cases, fundamentally change the economic and business relationship between franchisor and franchisee from the one that existed when the franchise agreement was originally signed.