Franchisors: Where do 'Franchisee Associations' get the Right to Sue and how to Challenge this "Right"?
From a franchisors perspective litigation is a critical "cost factor" that must be contained and mitigated. When consulting with franchisors (both start-up and established) one issue that provides good reason for concern is the ability of "franchisee associations" to sue you directly. Traditionally, the issue of "standing" - that is the right to sue another individual or company - requires that, in commercial transactions, the parties possess a direct relationship and "privity" with one another. When dealing with certain associations (including franchisee associations) the courts have expanded the concept of "privity" and have afforded certain associations the right to sue even where a direct relationship may not exist. That is, although you may have no dealings or contractual relationship with a "franchisee association", the "association may nevertheless possess the legal right to sue your company. Considering the significance of this issue and to better address the question of - why? - that franchisors rightfully ask, the following is a brief review and summary of some of the case law involving a franchisee association's right to sue (My comment follows at the end):
[Guest Post: Kenneth A. Goss, Esq.]
Franchisors that have experienced litigation from franchisee associations may wonder how a franchisee association has a right to bring a lawsuit against a franchisor. Here is the brief answer.
First, a little background and let's assume we are only talking about federal court, where many franchise cases are brought. Under Article III of the United States Constitution and applicable federal law, a franchisee association must have standing to bring a lawsuit against the franchisor. Standing simply means that the franchise association has the right to file a lawsuit under the particular facts of the case. In the franchise relationship, franchisees themselves may have standing to sue a franchisor because of privity of contract. Privity of contract simply means that a franchisee can enforce its franchise agreement by a lawsuit against the franchisor and vice versa. However, a franchisee association may be a separate entity, not a party to a franchise agreement with the franchisor and, therefore, not in privity of contract with the franchisor. How then can a franchisee association bring suit against a franchisor?
The simple answer is that courts have said they can. Courts have held that an association, which otherwise itself would lack standing to sue, nevertheless has standing to bring suit on behalf of its members when (1) its members would otherwise have standing to sue in their own right; (2) the interests it seeks to protect in the lawsuit are germane to the association's purpose; and (3) neither the claim asserted nor the relief requested requires the participation of the individuals in the lawsuit. See, for example, Clark v. McDonald's Corporation, 213 F.R.D. 198 (2003). If a franchisee association meets this test, then it can bring suit against a franchisor on behalf of its members.
[My take on this issue: When evaluating the factors as to a franchisee association's "standing to sue", one serious point of attack in challenging the association's "right to sue" or, at least, limiting the relief sought by the association exists in the third factor - point (3), above. That is, although franchisee association's possess a "right to sue" this right is limited to claims and relief "that do not require the individual participation of your individual franchisees". If the franchisee association's claims extend to "monetary damages" - a claim that "requires the participation of individual franchisees - then the association may have exceeded its legal standing. Claims that fall within the association's standing typically involve claims where the association seeks "declaratory judgment and injunctive relief. When faced with association litigation, franchisors must challenge standing at every reasonable opportunity.]
Below are five steps / factors / issues that you should be considering and evaluating before investing in a franchise. There are many more than five, but the following is a start.
