Hi. My name’s Jeff Goldstein of the Goldstein Law Group. I wanted to speak to you today about the important issue of franchise discrimination. Franchise discrimination that we’ll be discussing today asks whether a franchisor is permitted to selectively enforce certain obligations against certain franchisees and not others. This type of discrimination is to be distinguished from sexual discrimination and racial discrimination in a franchise context, and those I’ll be discussing in a future video. The discrimination we’re talking about today, the selective enforcement, is also to be distinguished from price discrimination which is another issue we’ll discuss in another video. And the Robinson-Patman Act is somewhat related to the antitrust laws, which will also be another video.
The source of the obligations that might be selectively enforced are twofold. The first comes out of a franchise agreement and, as you can imagine, there are many, multiple obligations, many hundreds of obligations that’ll be contained in a franchise agreement. The other source is a system standards manual. This is a manual that all franchise systems have. Some of them have more obligations in them than others. Some of them have thousands and multi-thousands of obligations in that type of manual. The franchisor, then, is accused of enforcing a certain of those thousands of obligations against one franchisee, but not another. The issue of discrimination that we’re discussing today usually arises in litigation, where a franchisor has terminated a franchisee. The franchisee defends, against that claim and against determination, by arguing that the franchisor discriminated against it, and the discrimination arose out of an obligation or a standard that the franchisor did not, or has not, ever enforced against other franchisees.
There are three general sources of discrimination law. The first is federal statutes, the second are state statutes, and the third is common law, which is non-statutory law, that is judge-made law over time. The federal statutes are not those that are applicable to all franchisees in all systems in all states. Instead, those are industry-specific statutes. One of them deals with petroleum, and the other deals with car dealers or auto dealers. These laws are very pro-franchisee. They allow for discrimination cases to be made rather readily in comparison with other state laws. There are also analogues to the petroleum and the auto dealer federal legislation in states, and those particular provisions actually prohibit discrimination. But as I said, the federal laws are not a good source for franchisees around the country who aren’t in those two industries, the petroleum and auto dealers, to be able to use to support a defense of discrimination.
The state statutes are a different issue. In general, state statutes are of two categories. The first is disclosure laws that require a franchisor to disclose many types of information to a franchisee before he is permitted to sell a franchise. The second are what I call relationship laws. These are laws enacted by states that govern a franchisee during its operation, and also particularly focus on terminations and defaults. These statutes are 18, 19, I don’t remember the exact number, and of those only a small handful actually used the word discrimination. And I wanted to give you a few states that actually use the word discrimination and give you an idea what these types of provisions will state. The first state I wanted to point out is Arkansaw. And Arkansaw statute permits termination if the franchisee fails to comply with the franchisor’s non-discriminatory standards. And obviously, that uses the word discrimination and bands it specifically. The Hawaii statute is rather broad and helpful to a franchisee, and states that it’s illegal for a franchisor to discriminate between franchisees in charges offered or made for royalties, equipment, rentals, advertising and other business dealings. It’s very broad in terms of what types of protection are given to a franchisee in a discrimination context.
And the next state I’d like to focus on is Illinois. That state’s language is very similar to the language in Hawaii. But there’s also one major gap in it, which I’ll read in the second, that allows franchisors to readily escape from a discrimination charge. In Illinois, it says that franchisors may not unreasonably and materially discriminate between franchisees with regard to royalties, equipment, advertising services and many of the issues that Hawaii prohibited. The difference between the two is that the Illinois statute says that the franchisor may not unreasonably and materially. That’s a big area that franchisors can exploit, as it allows the franchisor to argue that, although there might have been discrimination, it was reasonable and it was not material.
The Indiana statute, states that it is unlawful for any franchisors to discriminate unfairly against its franchisees. Now, that’s nice and broad, and covers more than royalties and advertising, but what it gives it could take away by stating that the prohibition covers only unfair discrimination. That obviously allows the franchisor to argue again, although there’s discrimination, it is fair.
The last source of law for discrimination in a franchise context is the common law. The common law is probably the worst source and actually, not probably, is the worst source for a franchisee to grab hold of to assert a discrimination defense. The common law, the best hook for a franchisee would prohibit violations of what’s called the covenant of good faith and fair dealing. And this, in essence, required the franchisor not to take away from the franchisee the fruits of his bargain, the fruits that were provided by the franchise agreement. There are many formulations that conceptually won. Over time, the covenant of good faith and fair dealing has lost most of its teeth, and in that regard it’s very, very unlikely that you’d be able to stretch the covenant of good faith and fair dealing to cover discrimination by a franchisor.
That’s the end of video one on discrimination. Please tune in for the video two that will complete the discrimination discussion. Thank you.