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.]
Obviously, the provisions concerning the right to sue of Franchise Associations favor the franchisors because the original "adhesive" contracts are all about preserving and cementing the "one-on-one" relationship of the franchisor and the franchisee.
This model of business, this hybrid, called franchising is all about PREVENTING any collective bargaining within franchise systems. The spector of anything that looks like a union is prevented by the carefully designed terms of the routine franchise agreement.
Unfortunately, thousands of innocents sign these "adhesive" and binding long-term contracts believing that the franchisor can't make profits unless their franchisees also make profits. They are tricked by the appearance of viability that is provided by the visibility of the system -- not realizing that the visibility has been produced often through the churning and turning of "founding" first-investor franchisees, which is not disclosed to new buyers in the pre-sale process.
The FTC Rule itself, upon which the State Franchise Disclosure Documents are founded, prohibits a private right of action for any violation of the FTC Franchise Rule that governs the sale of franchises to the public. Obviously public policy would not grant Franchisee Associations to the standing to sue for fraudulent inducement to contract or breach of contract on behalf of franchisees and the right to sue is merely "cosmetic" in reality for franchisees who would like to believe that their Associations have real power to bring change.
It is important the franchisee association only be seeking a type of declaratory relief on behalf of the group.
An interpretation of the contract, an interpretation of a vendor agreement, etc.
Otherwise, I believe the association will lose standing.