Can Franchisees Be Treated Differently?

If a politician were to answer the question posed in this issue of Franchisor Alert, he or she might give the retort, “it depends.” This answer would certainly be politically correct, as there are many facets of law which must be considered before a definitive answer to the question can be given. But the politically correct answer certainly does not help the franchise company make a decision on whether to discriminate among its franchisees. Hopefully, this issue will help franchisors by providing the process that a company must undergo before reaching the answer to a most difficult question about franchise discrimination.

The process of reaching a decision on whether a franchising company can treat franchisees differently starts with a franchisor’s own review of whether there exists a rational basis for different treatment. Can a franchisor pass the test that its conduct is not arbitrary? Justification might be premised upon such necessities as market conditions. Franchisors are often required to make competitive decisions responding to changing circumstances in the marketplace. For instance, a franchisor might provide a franchisee price concessions on products purchased where the franchisee is attempting to respond to a price war in a specific territory or the franchisor may allow certain franchisees to add additional menu items to a specific area to meet ethnic taste. If a franchisor has no quantifiable basis for discriminating among its franchisees, it should slam on the brakes and go no further. If however, the first step in our process receives a positive response from the franchisor, then we are ready for stage two.

Stage two consists of a legal analysis. Starting with the company’s franchise agreement and other relevant legal documents, legal counsel should review contractual language to determine if the franchising company has the contractual ability to treat franchisees differently. Is the language overbroad or are specific circumstances carved out when franchisees may be treated differently? Contractual language must also be reviewed in light of state statutory and common law.

There are at least 36 states with statutory provisions relating to franchise discrimination. 

Many state laws are industry specific and require the review of a knowledgeable franchise attorney. Most franchise contracts contain a choice of  law provision and if the franchisor has chosen a state with a strong anti-discrimination statute, the consequences could be disastrous to the company.  As part of the legal analysis, counsel should review how anti-trust law might affect different treatment of franchisees. The principal area of concern being price discrimination. In addition, counsel should consider a franchisor’s downside and what the potential damages might be. Obviously, the franchisee receiving special treatment has no cause to complain, but to the extent another franchisee is harmed by special treatment, a franchisor’s risk escalates.

Perhaps the Indiana Act sums up our analysis in Stage One and Stage Two most succinctly. The Act makes it unlawful to discriminate “unfairly” among franchisees. Some franchisee discrimination is by definition “fair” as long as franchisees are not similarly situated.

At the very beginning of this post, we chastised politicians answer to the question – “Can Franchisees Be Treated Differently?”, but after a thorough legal examination we find that the answer “it depends” to be very accurate.  Feel free to call or email me with your questions.  I’ll be glad to help guide you through the uncertainty and maze.