Editorial

If It’s Unfair, Is It Unlawful?

Perhaps the most common, and the most interesting, question I face, over and over again, as a franchisee lawyer of over 25 years standing, is this one: Is conduct by a franchisor that most reasonable folks would call unfair conduct thereby also unlawful conduct?

I first faced this question in 1975 when my father, a Hamm’s Beer distributor, received a notice of termination. He complained to his supplier: “You can’t do this. It’s not fair.” The supplier responded: “Read your contract.” The terms of the written agreement he had signed permitted termination for any reason or no reason on 30 days’ notice. Nevertheless, given the absence of any “good cause” for termination, I began what has become a 25-year examination of legal principles that can and do stand for the proposition that, in general, obviously unfair conduct on the part of a franchisor or supplier is also very likely to be found to be unlawful conduct.

It has been our experience that franchisors and their attorneys too often wrongly assume that the respective rights and responsibilities of the parties are completely defined in the written agreement. While it is important to consult the written agreement in seeking to ascertain the rights and responsibilities of the parties, that is the starting point, not the end of the inquiry. Both franchisors and franchisees have rights and responsibilities that may be different from, or even contrary to, the specific language of the written agreements.

To be sure, there is some support in judicial decisions for the view of many franchisors that, if they have written it into the Franchise agreement which you have signed, they can do it, no matter how unfair. The often cited cases involving the Scheck vs. Burger King franchise encroachment dispute support this view. Ironically, in this case, the court appeared to be searching for a remedy for a franchisee who had apparently been victimized by unfair treatment by its franchisor. However, rather than simply citing applicable case law relating to the covenant of good faith and fair dealing for the proposition that unfair treatment may be unlawful treatment, the court instead stretched to find that, because the franchisor had not clearly spelled out its right to do what it had done, it could not do so.

In our judgment, the better view, supported by many (but not all) judicial decisions on this question, can be summarized as follows:

If the franchisor writes it into a written agreement signed by the franchisee, it can do it . . . if it’s fair.

Examples of judicial decisions to this effect include Sons of Thunder, Inc. v. Borden, Inc. (holding that a jury can look beyond the letter of the contract and consider a company’s long-term behavior in determining whether the company acted in good faith); and Vylene Enterprises, Inc. v. Naugles, Inc. (holding that, although the franchisee was not given an exclusive territory under the contract, the franchisor could not “act to destroy the fruits of the contract” by locating a competing Restaurant within a mile and a half of the franchisee and otherwise acting to breach the implied covenant of good faith and fair dealing).

With a compelling factual presentation of unfair treatment, legal tools potentially available to help the franchisee prevail, include (1) the common-law doctrine of “contract in fact” (which holds that it is appropriate to look at the parties’ course of dealing and customary practices to define the legally enforceable contract); (2) the covenant of good faith and fair dealing, which adds a “contract in law” duty, as does the Uniform Commercial Code principle of “commercial reasonableness,” if applicable (both of which, although differently defined in different jurisdictions, commonly provide that a franchisor may not act to destroy the reasonable expectations of the parties); (3) the tort (that is, “noncontractual”) duty of franchisors not to interfere with existing or potential contractual relationships; (4) common-law principles of recoupment and unjust enrichment (allowing franchisees, in certain circumstances, to recover unrecouped investments, or the fair value of what is being taken, from their franchisors); and (5) potentially applicable statutory protection against arbitrary, discriminatory, or “without good cause” conduct by a franchisor (and, to be sure, good statutory protection against unfair conduct by franchisors is the franchisees’ best protection against having the value of their Franchises destroyed or greatly diminished by unfair franchisor conduct).

In the final analysis, to answer the question “If it is unfair, is it unlawful?”, doesn’t it make good sense to return to the fundamental purpose for which our legal system was established in the first place -- that is, to do justice?! In our mind, and in the minds of the franchisees we typically serve, this fundamental purpose appropriately includes protecting franchisees without bargaining power against unfair conduct by franchisors -- franchisors who hold the power to get their franchisees to sign any written agreement presented to them.