Video Transcription

Hi, my name’s Jeff Goldstein from the Goldstein Law Group. Today we’re gonna be discussing discrimination in the franchise context. This is video two of a two-part series on franchise discrimination. The franchise discrimination that we’re speaking of is selective enforcement, where a franchisor takes certain obligations and standards of its system through the franchise agreement or through the operations manual, and forces them against one group or one franchisee, but not another. As we discussed in the first video, the discrimination issue usually arises where a franchisee, in a termination proceeding, asserts that the franchisor unfairly discriminated against it in having a basis for the termination.

As we discussed, the form of discrimination that we’re talking about usually arises when a franchisee asserts discrimination against the franchisor who has terminated it. Basically the franchisee says, “Well you may have terminated me, and there may be some basis for it in either the operations manual or the franchise agreement, but you don’t enforce it, Mr. Franchisor, against the other franchisees, or against a certain group of franchisees.” At that point, the defense of the franchisee then kicks over to the franchisor. In some sense, the franchisor has to offer a defense to the franchisee’s defense of discrimination, or able to defend against this, is to argue that the franchisee who’s being terminated and against whom a standard’s being unreasonably enforced is not similarly situated to another franchisee against whom the same obligation is.

This is a very fertile source of defense for a franchisor. And any time a franchisor is going to be able to convince somebody that one franchisee is in some way different from another, the only question is whether that difference would support, or be significant enough, or material enough to support the selective enforcement. And in overwhelming majority of cases, courts will accept these differences as making out a good basis, an acceptable basis for the selective enforcement of these standards which would knock down a discrimination defense.

What I wanted to show you today is just take a look at three cases, without going into detail, and discuss the discrimination in that case and how the courts handled it. In one case involving Burger King, the franchisor terminated a Burger King franchisee because that franchisee also operated Hardee’s restaurants. The concept there is that, in the franchise agreement, it stated that the franchisee could not, during the term of the franchise agreement, operate or have an interest in competing businesses or similar businesses. At that point, the defendant here, the franchisee, as I pointed out, did have an interest in both the Burger King and Hardee’s. Now when they were terminated for that, the franchisee argued discrimination, and it pointed to Marriot, I believe, another big…and another big company, Horn & Hardart, I think, and said that these companies were permitted to have both Hardee’s and Burger King, and they weren’t terminated or disciplined. Franchisor also, as I pointed out earlier, argued that these two franchisees were not similarly situated to the franchisee who had been terminated. The franchisor’s defense revolved around the Horn & Hardart and the Marriott being publicly owned companies, and being so large that there was no expectation that these mammoth companies would be restricted only to a Hardee’s or Burger King. The court believed that the differences pointed out by Burger King were sufficient to support the discrimination. Now note there, the discrimination was pretty blatant, and the franchisor didn’t argue that the discrimination didn’t occur. He merely argued that the discrimination was supported based on the differences between those two franchisees.

Another case involved pantry food marts. And in this case, there was an obligation, I believe, in the franchise agreement that said the franchisee must maintain a certain level of net worth, otherwise the franchisee woulda breached the agreement. The franchisee then was doing poorly, dropped below a certain net worth, and the franchisor terminated it. The franchisee argued during that litigation that the franchisor had discriminated against it, saying that the franchisor had not terminated certain franchisees who had less of a net worth than this franchisee. The court argued that certain of the franchisees who were terminated at that time were in better financial shape than this franchisee who is asserting discrimination. And the court, in examining it in that way, looked at degrees of non-compliance with a certain regulation. And the court at that point found that because the franchisees who were doing better were terminated, and this franchisee was doing worse, that the discrimination that was shown was not of the type that would be significant enough to support a discrimination case.

The third instance is the application of the Minnesota State Statute to a case where a franchisee attempted to sell a store. As in almost every franchise system, a franchisee is required to get approval from the franchisor before he can sell or transfer his franchise. Franchisors all have certain criteria, some public, some not, that they use to approve or disapprove a franchisee. When this dispute made its way to court because the franchisor wouldn’t permit any of the transferees proposed by this franchisee, the franchisee argued that it was discriminated against, that the franchisor had selectively enforced its criteria for permitting or not permitting a transfer. The franchisee asserted discrimination. And in order to support it, he brought in as an expert to court, a CPA, and the CPA then examined all the transferees or people who purchase franchises, over a certain period a time, whether it was a year or two years, and determine that the franchisees who bought into the system were far less financially capable than those that this franchisee had proposed for the transfer. In this case, the court accepted the discrimination argument.

In essence, as you’ve seen in these…in this video and the first video on discrimination, it’s exceedingly difficult for a franchisee to make out a discrimination case, almost impossible under the common law. So in order to make this kinda case out, you’ve gotta have a state statute in almost all cases. And then even with a state statute, there is the defense by the franchisor that that franchisee who’s asserting discrimination was not similarly situated to the other franchisees who he’s asserted were more favorably treated. Many times, courts have focused on these differences between franchisees and found no discrimination to exist. So when franchisees come to me and tell me they’ve been discriminated against, the first thing I’m gonna do is look for the state that the franchisee operates and determine whether that particular statute has been used to prohibit discrimination. Outside that, except where there’s an egregious case, it’s gonna be exceedingly difficult to make out a discrimination case.

Thanks for watching this video, and I look forward to speaking to you in the future.

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