The American Heritage Dictionary defines retaliate as, “To return like for like, especially evil for evil.” In life we are taught that one good turn deserves another. In franchising, many believe there is evil lurking when a franchisor decides it does not agree with the words or actions of one of its franchisees. This is especially so when the actions of the franchisor are based on that franchisee’s membership in or leadership of a franchisee association.
Attorney Eric H. Karp of Witmer, Karp, Warner & Ryan, LLP, a Boston-based law firm where he specializes in the representation of franchisee associations, says retaliation has been declining within most franchise systems for two main reasons.
The first is the growth in existence of franchisee associations. Unlike DDIFO, which was formed in 1989, many franchise associations have begun forming just in the past decade as franchising has become more common. More Franchisors have grown accustomed to the existence of independent franchisee associations this their systems, and the more enlightened ones will take advantage of the opportunity to collaborate with them,
The second reason Karp believes retaliation appears to be waning is traceable to the 2007 Federal Trade Commission (FTC) mandate that the existence of a franchise association be included in Franchise Disclosure Documents. The FTC said franchisors must, “Disclose, to the extent known, the name, address, telephone number, email address, and Web address (to the extent known) of each trademark-specific franchisee organization associated with the franchise system” for all prospective franchisees.
“One of reasons disclosure is so important is that they are a legitimate source of information about a system for a potential franchise owner. They teach you about the culture of a system,” said Karp. “The FTC’s regulation was fought by the franchisor community because it provides a stamp of approval on the existence of franchisee associations.”
Yet, many franchisees who organize new associations feel they are targeted by their franchisors—even if they can’t prove it. As Karp points out, there is still a minority of systems which believe in what he calls “power franchising”—another name for strong-arm tactics. On the other hand, in 2004 Karp presented to the American Bar Association Forum on Franchising a study of the six known court decisions in which franchisees claimed to have been terminated, harassed, intimidated and/or retaliated against by reason of their affiliation with a franchisee association. The score was six wins for the franchisees; three substantial verdicts in their favor and three franchisor motions for summary judgment denied.
Karp is quick to point out that in the Dunkin’ system, fear of retaliation seemed to diminish after former Chief Legal Officer Steve Horn resigned.
“Horn represented unenlightened leadership. System governance through litigation is not a recipe that motivates franchisees to reinvest in the system,” said Karp.
Today 13 states, not including Massachusetts where Dunkin’ Brands is incorporated, have laws that formally protect the rights of franchise owners to freely associate. In addition, several state courts have reaffirmed that right. The oldest relevant case dates to 1979 where owners of AAMCO Transmission franchises in Michigan were found, “like all other persons in the United States [to] enjoy the right pursuant to the First Amendment of the United States Constitution to assemble, subject only to those exceptions specifically provided by the statute.”
According to Karp, franchise owners who choose to belong to an association—whether it is formally recognized by the franchisor or not—are part of a protected class, based on the actions of state and federal court judges and juries.
Karp says instances when organizers of new franchise associations have been sued, harassed or discriminated against are rare and don’t fit the maturing business culture surrounding franchising, which rewards long-term growth.
And, because there is often greater change among system owners and mangers than among franchise owners, companies that purchase franchise systems are increasingly recognizing the need to tap the institutional knowledge of the franchisees.
“There’s a growing realization that the only way to deal with competition in the marketplace is to establish a cooperative, collaborative and mutually respectful relationship with the independent franchisee association.”