FORMATION AND OPERATION OF DEALER AND FRANCHISE ASSOCIATIONS
In the face of franchise or distribution market turbulence, franchisees and dealers often seek to form a dealer or franchise association. They understandably believe that such joint action will better protect them and their individual interests. Franchise and dealer associations vary significantly across franchise and distribution systems. In general, however, it is possible to categorize a group of franchisees or dealers into one of two types: a formed association, which is controlled and maintained by independent dealers or franchisees; or a fashioned association, which is controlled and sustained by the franchisor, manufacturer or supplier. The former are known as franchise or dealer associations, and the latter as franchise or dealer advisory councils.
Although franchisors, manufacturers and suppliers vigorously oppose the formation, operation and existence of independent franchise associations in most circumstances, they have learned over time to be more accepting of such associations. As it is often inevitable, franchisors and suppliers no longer react by attempting to torpedo the formation of these groups. In fact, franchisors and supplies sometimes actually formally recognize franchise associations. Unfortunately, however, many times this initial cooperation between franchisors and franchisee associations quickly disintegrates.
Franchise or dealer associations generally arise from a franchisee or dealer’s concerns about either a specific issue, or a general issue that relates to the overall operations of the franchise or supplier system. Usually groups that are formed as a result of more general franchise system issues have a better chance of acceptance and long-run survival. Regardless of the impetus for the association’s formation, most groups seek increased interaction with their franchisors so that they can have some direct and meaningful input on the promulgation of new requirements and standards that affect their day-to-day profits.
Sometimes, the issues that give rise to formation of an association afflict all franchisees because they are so fundamental and broad sweeping. For instance, independent franchise associations have been formed in response to a franchisor or supplier’s unreasonable remodeling demands, lackluster franchisor or supplier marketing efforts, ambitious upgrade requirements, free product give-a-way requirements, new product introduction demands, maximum pricing restrictions, increasing costs of required inputs, and increasing saturation levels of the franchisees’ individual markets with new franchisees or direct online sales.
Unlike labor unions, independent dealer or franchise associations are not protected through federal legislation; however, about nine states provide minimal statutory protection. In essence, these states protect franchisees and dealers by outlawing franchisors and suppliers from restricting or prohibiting franchisees and dealers’ to join or form associations. Sadly, no states directly of explicitly create a cause of action for retribution by a franchisor or supplier against a franchisee or dealer for joining a franchisee association. For instance, a New Jersey statute states that “it shall be a violation of this Act for any franchisor, directly or indirectly, through any officer, agent or employee … [t]o prohibit directly or indirectly the right of free association among franchisees for any lawful purpose.” Likewise, not only do no statutes exist that explicitly require franchisors to negotiate in good faith with franchise or dealer associations, no law requires franchisors to negotiate with them at all.
One of the most important issues regarding whether a franchise or dealer association should be formed is whether, as a matter of law, an independent franchise association has legal standing to assert claims in its own name against the franchisor or supplier for independent franchisee members’ grievances. To the extent the law permits an institutional plaintiff to lodge such claims, it serves to allow some franchisees and dealers to indirectly participate in franchise litigation in a stealth capacity, thereby not explicitly jeopardizing their place in the franchise community.
The concept of associational standing in a franchise context is evaluated under a three-part test: (1) its individual franchisee members would have standing to sue themselves; (2) the independent franchisee association seeks to protect interests that are germane to the organization’s purpose; and (3) neither the claim asserted nor the relief requested requires participation of individual franchisee members in the lawsuit. Normally, with suits against a franchisor, manufacturer or supplier, litigation arises regarding the third prong of the test. Essentially, constitutional principles in both federal and state courts require that the alleged injury have been suffered by the association itself, as opposed to the individual franchisees. Historically, this has meant that franchisee association’s claims for injunctive or future equitable relief are more likely to be permitted, whereas franchisee association’s requests for damages are more likely to be forbidden.
The discussion on this page regarding reasons prompting the formation of franchisee associations is not limited solely to those franchisees and dealers that operate physically in the United States. American franchisee associations are not unique, and have been mimicked by franchisee associations internationally.
The plight of franchisees and dealers in other countries is many times very similar to that of franchisees in this country. Frequently the same large franchisor companies that mistreat their franchisees in America also legally abuse their franchisees and dealers in non-American countries. This wrongful conduct of franchisors on the international stage has stimulated both the formation of international franchisee associations as well as native foreign franchise and dealership associations.
SUCCESS OF GOLDSTEIN LAW FIRM IN REPRESENTING FRANCHISEES AND DEALERS IN FORMING AND OPERATING DEALER AND FRANCHISE ASSOCIATIONS
Jeff Goldstein and the lawyers at the Goldstein Law Firm have utilized their great expertise and experience in franchise law to guide the formation and operation of franchise associations around the country for over thirty years. Jeff Goldstein serves as Franchise Legal Counsel to dealer and franchisee associations with thousands of franchisees. Goldstein Law attorneys have also formed smaller associations with initial start-up membership of 20-30 members.
With the assistance of Goldstein Law, its franchisee and dealer association clients have successfully achieved ambitious and significant relief from their relevant franchisors and suppliers. These successes span from obtaining rewrites of certain significant aspects of the system’s franchise agreements, to obtaining modification of remodeling requirements and deadlines, to forging agreements between franchisors and franchise associations to litigate together against suppliers of the franchise or distribution system.
WHAT TO DO IF YOU WOULD LIKE TO FIND OUT WHETHER IT WOULD BE BENEFICIAL TO FORM A FRANCHISE OR DEALER ASSOCIATION IN YOUR FRANCHISE OR DISTRIBUTION SYSTEM
The Goldstein Law Firm’s attorneys believe that franchisees and dealers are entitled to have a say in how their franchise or distribution systems are operated. In light of the historical shift of legal and economic power to clearly favor franchisors and suppliers, there are few effective limitations on franchisors and suppliers’ unilateral modifications of their system standards and requirements. Predictably, many of these unilaterally enacted operational changes result in increased profits to franchisors; unfortunately, many of these changes are funded on the backs of franchisees and dealers.
If you believe that your franchise or distribution system could benefit from increased protection for common franchisee and dealer rights, you should contact franchise lawyer Jeff Goldstein at the Goldstein Law Firm at 202-293-3947 to explore the idea of forming a dealer of franchise association. Don’t let your franchisor or manufacturer’s modifications to system standards and requirements strip you of your valuable personal and franchise investments.