Laws in various states prohibit franchisors from engaging in unfair franchise practices and entitle franchisees to seek remedies when their franchisors violate the law. This raises two critical questions: What constitutes an “unfair franchise practice,” and what can (and should) you do if you are a victim? National franchisee attorney Jeffrey M. Goldstein explains:
Understanding What Constitutes an Unfair Franchise Practice
Broadly speaking, an unfair franchise practice is any act or omission that benefits a franchisor to the detriment of one or more of its franchisees. As a general rule, franchisors have a legal duty to manage their franchise systems in good faith; and, if they violate this legal duty by profiting at their franchisees’ expense, they can (and should) be held accountable.
More specifically, some of the more common examples of unfair franchise practices include:
Unfair Supplier Restrictions
Unfair supplier restrictions can take many different forms. While the specific details of each individual situation matter, unfair supplier restrictions commonly include violations such as:
- Requiring franchisees to purchase inventory at artificially inflated prices
- Requiring franchisees to purchase supplies or branded goods at artificially inflated prices
- Requiring franchisees to purchase items from a supplier that pays rebates to the franchisor
Here, a key factor is choice: Do franchisees have the ability to ensure that they are paying market prices? Or, are they being forced to pay more than they would in an arm’s length transaction? While franchisors can enforce supplier restrictions in order to ensure brand uniformity and maintain quality standards, they generally cannot enforce supplier restrictions in order to force their franchisees to pay more than necessary.
Unfair Customer Restrictions
Customer-related restrictions can cross the line from legitimate business practices to unfair franchise practices in various circumstances as well. Territorial restrictions are ubiquitous in franchising, and, as a fundamental concept, there is nothing wrong with dividing up territories amongst a franchisor’s franchisees. Franchisors do it all the time—and, in many cases, franchisees will benefit from having an exclusive territory within which to grow their businesses.
But, customer restrictions can (and occasionally do) cross the line. Here, too, the legal analysis focuses heavily on the franchisor’s intent. When restricting franchisees from targeting certain customers, is the franchisor’s goal to help each franchisee succeed? Or, is the goal to restrict customers’ choice—and to artificially inflate prices in the process?
Unfair Pricing Practices
Sticking with pricing-related considerations, unfair franchise practice allegations can relate specifically to a franchisor’s pricing strategy as well. For example, if a franchisor sets the minimum prices that its franchisees are allowed to charge, this may constitute a clear violation of the law. Likewise, if a franchisor requires its designated suppliers to charge certain minimum prices to its franchisees (so that it can reap certain minimum rebates), this can also provide franchisees with grounds to take legal action.
Unfair Disparate Treatment
While standardization is one of the hallmarks of the franchise model, franchisors generally have the ability to treat different franchisees differently. For example, just because a franchisor forgives one franchisee’s transgression, this does not mean that the franchisor must forgive the same transgression for other franchisees in the future.
However, franchisors cannot engage in disparate treatment unfairly. Unfair disparate treatment most often takes the form of discrimination. Discrimination in franchising is generally prohibited, and here, too, franchisees who fall victim to their franchisors’ unfair practices can (and should) talk to a franchisee attorney about taking legal action.
Unfair Refusals to Deal
One specific form of unfair disparate treatment is an unfair refusal to deal. If a franchisor refuses to deal with one of its franchisees for unlawful (i.e., discriminatory) reasons, this can provide clear grounds to pursue appropriate remedies under applicable law.
Unfair refusals to deal can also include things like tying arrangements (where the franchisor refuses to sell one product to its franchisees unless they buy another) and indirect pricing controls (where a franchisor refuses to sell to franchisees who won’t pay an artificially inflated price). The law here is complex, and, as a franchisee, making informed decisions about your legal rights requires experienced legal representation.
What Are Your Legal Rights if You Are a Victim of an Unfair Franchise Practice?
With these examples of unfair franchise practices in mind, what are your legal rights if you are a victim?
The short answer is, “It depends.” Different laws provide for different remedies, and, as a franchisee, the terms of your franchise agreement will play a critical role in determining what options you have available. In particular, if your franchise agreement includes a mandatory alternative dispute resolution (ADR) clause—which many franchise agreements do—you may be required to attend mediation, arbitration, or both rather than immediately seeking remedies in court.
However, one thing is clear: As a franchisee, experiencing an unfair franchise practice does not justify non-compliance with your franchise agreement. This is a situation where two wrongs do not make a right. If you violate your franchise agreement, this could provide your franchisor with the right to pursue legal action against you—or perhaps even terminate your franchise agreement for cause.
Given the varied circumstances that can present themselves, you will need to consult with an experienced franchisee attorney to make an informed decision. An experienced franchisee attorney will be able to assess your situation and help you make an informed decision with your long-term best interests in mind. To mitigate your risk and to ensure that you preserve your ability to pursue legal action, you will want to make an informed decision as soon as possible.
Discuss Your Situation with National Franchisee Attorney Jeffrey M. Goldstein in Confidence
Do you believe that you are (or may be) a victim of an unfair franchise practice? If so, we invite you to contact us for a free consultation about your legal rights. To discuss your situation with national franchisee attorney Jeffrey M. Goldstein in confidence, call us at 202-293-3947 or tell us how we can get in touch online today.
