Currently, five states prevent franchisors from discriminating between franchisees. Four states do this by statute, while one uses a rule.
How do states identify franchise discrimination?
State statutes do not define discrimination. Under franchise law, the term simply means differences in treatment between similar franchisees concerning a material aspect of the business. Note that no statute applies to prospective franchisees or to the grant or sale of a franchise.
How have courts ruled in franchise discrimination cases?
Here are some key franchise discrimination court rulings:
Death as grounds for termination
According to the Washington Division of Securities, franchise agreements that include death as a grounds for termination discriminate unfairly against individual franchisees (as opposed to their corporate counterparts).
English language proficiency tests
One court found it reasonable for a franchisor to require franchisees to pass an English language proficiency test. In this case, the franchise agreement required franchisees to be able to write and speak English. The court rejected the franchisee’s contention that the test was arbitrary. The franchisor presented substantial evidence that it was reasonable to require franchisees to be proficient in English.
Lower royalty rates
In another case, a franchisor changed the royalty rates for new franchisees that joined its system. The rates were lower than those charged to existing franchisees. A court found that this did not violate the Washington Franchise Investment Protection Act’s prohibition on discrimination. According to the decision, the franchisor offered different rates in order to encourage franchisees to convert to the new system. The fact that franchises were granted at different times and under different circumstances was also important.
In a related case, a court found that it was legal for a parent company to charge different royalty rates between franchises operated under different trademarks.
Enforcing non-compete clauses
A franchisor raised counterclaims after a former franchisee brought suit against it. The counterclaims included an attempt to enforce a non-compete clause. A court found this to be a rational business decision that did not discriminate against the franchisee, even though the franchisor didn’t sue other former franchisees for violating non-compete clauses. In the end, the court wrote, the possible costs outweighed the potential recoveries of bringing suits against other franchisees.
Franchise agreement contractual rights
In yet another case, a group of distributors claimed they were treated differently, even though all distributors were subject to identical marketing plans. A court found that the franchise agreement allowed the franchisor to treat distributors differently. This did not, in fact, constitute a breach of the implied covenant of good faith.
Lending policies
Under the Washington Franchise Act, a franchisee claimed that the difference in a franchisor’s lending policies discriminated against franchisees. A court allowed the franchisee to pursue discovery.
Defaults
Finally, a court found that a franchisor did not discriminate against a developer by giving it less time than it gave others to cure defaults. It was not unlawful discrimination, the court wrote, for a franchisor to consider each dealer’s situation and decide to keep or terminate a dealer based on whether it met newly imposed goals.
Contact a franchise attorney
If you have any questions about antidiscrimination provisions that may affect your rights as a franchisee, be sure to contact a franchise attorney.