The Franchise Memorandum

The United States District Court for the Southern District of New York issued an opinion late last month in DiPilato v. 7-Eleven, Inc., 2009 WL 2633130 (S.D.N.Y. Aug. 25, 2009), that serves as an important reminder that franchisors should maintain independent contractor relationships with franchisees. The plaintiff was a 43-year-old unmarried female applicant who was denied a 7-Eleven franchise after allegedly being told by a franchise sales employee that a single female over the age of 40 would not be a suitable franchisee. DiPilato sued 7-Eleven and several of its employees for discrimination under federal and New York employment discrimination laws, the United States and New York Constitutions, 42 U.S.C. § 1985, and New York state business discrimination laws. The court granted summary judgment to the 7-Eleven defendants on most of the claims, but denied summary judgment under two New York laws prohibiting discrimination in business and in connection with commercial spaces.

In dismissing DiPilato’s federal and state employment discrimination claims, the district court ruled that these laws only prohibit discrimination by an “employer.” The court found, after applying various independent contractor tests, that 7-Eleven entered into independent contractor relationships with its franchisees, not employment relationships. In so ruling, the court noted, among other factors, the importance of the franchisees’ ability to control the day-to-day operations of the franchise. The court also dismissed DiPilato’s constitutional claims, finding, among other things, that there was no evidence of any “state action” by 7-Eleven. In addition, the court dismissed DiPilato’s claim that the 7-Eleven defendants had conspired to violate her rights under 42 U.S.C. § 1985, which prohibits conspiracies by two or more persons to deprive a person of the equal protection of the laws. The court found that DiPilato only alleged wrongdoing by 7-Eleven employees, and that a conspiracy cannot be committed by a single corporation or its employees. The court did, however, rule that DiPilato could pursue discrimination claims under a New York Civil Rights law prohibiting a business from discriminating against a New York individual based on age, marital status, or other protected classes. The court also found that DiPilato could proceed under a New York Executive Law prohibiting discrimination in the ownership, use, and occupancy of commercial space. In so ruling, the court found that a 7-Eleven franchise is a “commercial space,” and that 7-Eleven was covered by the New York Executive Law given its landlord-tenant relationship with its franchisees.