USA Trends and Developments Contributed by: Carmen D. Caruso, Carmen D. Caruso Law Firm
• franchisees fall short of brand standards, whether wilfully or negligently. These factors tend to overlap. Most franchise agreements deliberately grant the fran - chisor broad discretion to steer the brand and police performance. This produces one-sided contracts that leave franchisees dependent on the franchisor’s continuing wisdom and fairness. When economic pressure mounts, the temptation grows to prioritise shareholder value over franchisee equity – for exam - ple, through: • coerced discounting programmes to spike top-line sales and the consequent royalties; • approving new units that build system volume but may encroach existing units; or • seeking enhanced revenues on franchisee pur - chases of mandated products or services. Franchisors may also impose sweeping system changes or new fees without projecting a reasonable return on investment (ROI) or impose costs the fran - chisee never expected. Beyond these examples of system-wide disputes, individual franchisees may contend that the franchisor has wrongfully denied renewal or growth opportunities for pretextual reasons – for example, by grading their locations dishonestly. Other franchisee grievances occur, without limitation, when franchisors: • claim ownership of local customer lists and good - will through data-sharing practices; • manipulate advisory councils or marginalise inde - pendent associations; and/or • retaliate against franchisees who dissent. In addition, minority franchisees may assert discrimi - nation claims under the Civil Rights Act of 1866 (42 USC Section 1981) when they believe, for example, that their cash flow lags majority-owned units or that the franchisor steered them to less attractive loca - tions. As amended in 1991, this act protects a minor - ity franchisee’s right to enjoy all the “privileges” and “benefits” of the franchise “relationship”, which are usually broader than the express terms of the fran -
chise agreement, meaning that franchisors can be challenged when making discretionary decisions such as site approvals, though Section 1981 claims require proof of “but for” causation. See Comcast Corp v Nat ’ l Ass ’ n of African American Media , 589 US 327, 341 (2020). This is often a difficult burden for civil rights plaintiffs. Seeking to minimise their exposure to franchisee liti - gation, most franchisors draft their franchise agree - ments to avoid jury trials, preclude class actions, limit the damages a franchisee might recover, and limit the application of the common-law implied covenant of good faith and fair dealing. Franchisors also include liquidated-damages clauses that provide substantial leverage over failing franchisees who are tempted to sue. Franchisee advocates decry these contractual provisions; however, in deterring the proverbial bad franchisee who brings frivolous litigation that con - sumes franchisor resources or causes brand-damag - ing publicity, these clauses protect the system, includ - ing its non-litigious franchisees. The Lingering Effect of Sylvania and the Narrowing of Antitrust Remedies Franchise agreements commonly contain vertical restraints governing how franchisees operate and dis - tribute the franchisor’s products and services. Before the Supreme Court’s decision in Continental TV , Inc v GTE Sylvania Inc , 433 US 36 (1977), franchisees could challenge certain vertical non-price restraints as per se violations of Section 1 of the Sherman Antitrust Act, such as: • exclusive territorial restrictions; • location clauses limiting franchisee retail sales to approved sites; • customer restrictions limiting the persons or class - es of customers to whom the franchisee could sell; and • other vertical restraints that confined the fran - chisee’s freedom to dispose of purchased products and reduced intra-brand competition. In Sylvania , the Supreme Court abandoned per se lia - bility for non-price vertical restraints in favour of the rule of reason. See 433 US at 47–59. A franchisee chal - lenging such a restraint must prove that the restraint
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