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CARMEN D. CARUSOSCHWARTZ COOPER CHARTEREDChicago, Illinois

FAIR FRANCHISING

PERSPECTIVE

LEGAL STRATEGY

Brief History of Fair Franchising

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Early legal challenges in the 1970’s

The American Franchisee Association (AFA) (lobbied for a federal statute)

The American Association of Franchisees & Dealers (AAFD) has worked to create FAIR FRANCHISING STANDARDS

AAHOA offers 12 points of FAIR FRANCHISING

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Franchisee Advocacy

antitrust

statutory regulation & public policy

unconscionability

fiduciary duties (general & agency theory)

good faith & fair dealing

independent associations & collective bargaining

fair franchising standards

FRANCHISORS FIGHT BACK

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From:Scheck v. Burger King: Implied Territorial Protection

To:Post-Scheck Franchise AgreementsNo Territorial Protection

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The Implied Legal Covenant OfGOOD FAITH & FAIR DEALING

“a party who is vested with contractual discretion to exercise that discretion reasonably with proper motive and in a manner consistent with the reasonable expectations of the parties”

Interim Health Care of Northern Illinois v. Interim Health Care (7th Cir. 2000)

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GOOD FAITH & FAIR DEALING

The federal district court denied summary judgment against a plaintiff-franchisee's claim for breach of the implied covenant where the franchisor allowed a competing franchisee within the plaintiff franchisee's trade area, despite the fact that the franchise agreement allowed the franchisor discretion to establish competing franchises "as appropriate."

Bloomington Chrysler Jeep Eagle, Inc. v. DaimlerChrysler Motor Co., L.L.C.

(Minnesota 2005)

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GOOD FAITH & FAIR DEALING

Hubbard Auto Center, Inc. v. General Motors Corp.

(Indiana 2006)

Upholding a franchisee’s claim that its franchisor had breached the implied covenant by, inter alia, “failing to distribute motor vehicles in a fair and equitable manner…[and] failing to permit the opportunity to receive a reasonable return on investment.”

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No Good Faith & Fair Dealing?

No duty to be reasonable or fair?

No duty to act with proper motives?

No duty to act consistent with the parties’ reasonable expectations when the contract was signed?

No standard of care to measure performance?

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No Good Faith & Fair Dealing?

Unless otherwise provided in this Agreement…, whenever this Agreement requires you to obtain our written consent, or permits us to take any action or refrain from taking any action, we are free to act in our own self-interest without any obligation to act reasonably, to consider the impact on you or to act subject to any other standard of care limiting our right, except as may be provided by statute or regulation.

International Franchise Association Legal Symposium (2005)

Unconscionability Doctrine

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“no man in his senses”senses”

““not under not under delusion”delusion”

“no honesthonest and fairfair man would accept”

“inequitablenequitable and unconscientious unconscientious bargains”

“licenses behavior sufficiently outrageousoutrageous to “shock the shock the conscienceconscience” of the court”

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Ticknor v. Choice Hotels9th Cir. 2001 (Montana Law)

Non-mutual out-of-state arbitration clause

agreement = adhesive

• standardized, form agreement

“take it or leave it”

arbitration clause = unconscionable

“one-sided”

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Mailbox Center Owners v. Sup. Ct.Cal. App. 2005

Knocked Out

ban on class arbitrations

limitations on damages and other remedies

arbitration fee-splitting

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Mailbox Center Owners v. Sup. Ct.

KEY CONSIDERATIONS FOR THE COURT:

franchise agreements have some adhesion characteristics

“clear disparity of bargaining power”

similarities to consumer and employment contracts

damage limitations cannot preclude statutory remedies

arbitration cost allocation

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FRANCHISEE STRATEGY Improve Bargaining Power!

Press the 12 Points

Form Independent Associations, Demand Collective Bargaining & document any lack of negotiation

Litigate Aggressively

Seek Mutual Respect

Change the Playing Field

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