The Franchise Memorandum

This is the first of our year-long series of articles reviewing the progeny of what we identified in our ten-year anniversary edition in December 2007 as the most significant franchise case decisions summarized in Issues 1 through 100 of The GPMemorandum, covering the period from late 1997 through 2007. The first of those cases was the groundbreaking decision on appeal in Broussard v. Meineke Discount Muffler Shops, 155 F.3d 331 (4th Cir. 1998). The decision issued by the Fourth Circuit in that case reversed a large judgment that had been entered against the franchisor, primarily based on its administration of the franchise system’s advertising fund. That case was significant for two reasons. First, the court held that class action lawsuits are generally inappropriate in the franchise context because of the unique contracts and facts presented by individual franchisees’ relationships with their franchisor. Second, the court determined that no fiduciary duty exists between franchisors and franchisees in the advertising fund situation in particular, or the franchise context in general.

The cases reported by The GPMemorandum over the past four years have followed the lead of the Broussard court. Since 2007, courts have repeatedly rejected franchisees’ attempts to present their claims on a class basis. As reported in Issue 104, the court in Good v. Ameriprise Financial, Inc., 2008 WL 185714 (D. Minn. 2008), found that franchisees’ claims against their franchisor were limited by the terms of their individual agreements, which varied among members of the class. That variation prevented class certification because the proposed claims would require interpretation of those individual agreements. Many of the class action lawsuits in the franchise context over the past four years have been brought by third parties, such as patrons of franchised businesses. Other class action cases have been brought by janitorial franchisees, which some courts have held are more properly characterized as employees than franchisees. See, e.g., De Giovanni v. Jani-King Int’l., Inc., 2009 WL 2993798 (D. Mass. 2009). In general, however, there has been a notable lack of successful class action claims brought by franchisees during the past four years.

The Broussard court’s analysis of the advertising fund and fiduciary duty issues also has remained largely unchallenged. We have not reported on a single case involving a challenge to the manner in which a franchisor has administered its advertising fund during the past four years. While franchisees continue to plead claims for breach of fiduciary duty, we also have not reported a single case in which a court agreed with that theory.

The past fifty issues of The GPMemorandum have not seen any courts taking a significantly different approach than the Broussard court. Franchisee class action lawsuits have faced the same hurdles identified by the Broussard court, to the point where most reported decisions involving class action issues now arise in the third-party context. The lack of cases involving challenges to an advertising fund suggests that the Broussard court’s analysis of that issue remains widely followed.