Coming Attractions

The world of franchise litigation and regulation continued to be a tug-of-war last year with the reversal of the landmark Meineke suit and the formation of the National Franchise Council (NFC). However, the Small Business Franchise Act of 1998, introduced in Congress last September, may shine a new light on the struggle.

The Bursar v. Meineke case, which originally garnered $600 million in damages for a class of Meineke Discount Muffler Shops dealers when Meineke misappropriated advertising funds, was reversed by the Fourth Circuit Court of Appeals last August. The appellate court found the plaintiffs didn't constitute a proper class, and a franchisor can't be held responsible as a fiduciary institute for franchisees. The plaintiffs plan to take the case to the Supreme Court.

While this decision might appear to favor the franchisor--the plaintiffs claim it sets a precedent against franchisees suing as a class--some see it as only a reiteration of standard franchise law practice. "The appellate court has reaffirmed a long-standing theme in franchise cases," says franchise attorney Andrew Selden of the Minneapolis firm Briggs and Morgan P.A. "A class action is an inappropriate device in most cases for claims seeking recovery for monetary damages." But this isn't necessarily bad news for the plaintiffs: Selden says they can go back to trial court, reprove the case as individual litigants, and set up an offensive collateral stophole, where dealers not involved in the initial case can use its decision and only have to prove individual damages.

Another 1998 franchising issue was the formation of the NFC. Funded by about 25 large franchisors, the NFC has preliminary approval from the Federal Trade Commission (FTC) to create a franchise mediation program for franchisors with minor FTC Franchise Rule violations. The idea that, as Selden puts it, "the foxes [are] appointing themselves the guardian of the henhouse," will be proved or disproved when the first mediation occurs. "If a franchisee suffers significant losses and the NFC's response [to the franchisor] is a symbolic slap on the wrist, then it would be fair to conclude the foxes are in charge," says Selden. "If the NFC [tells] the franchisor, `You sinned,' then you can have some confidence the group is serious."

So are franchisors leading the game? Last year, Rep. Howard Coble (R-NC), along with nine co-sponsors, introduced the Small Business Franchise Act of 1998 (H.R. 4841) with the purpose of "[promoting] fair and equitable franchise agreements, [establishing] uniform standards of conduct in franchise relationships and [creating] uniform private federal remedies for violations of franchise law." Rep. Coble plans to reintroduce the bill this month, but Selden says only time will tell whether the bill may be seen as a victory for franchisees pushing for equality in regulation. "The real test of the legislation will come next session when it's reintroduced and we'll see whether it gets buried in committee or whether it's something that goes to a hearing," says Selden. "Then you'll have a sense that Congress is willing to explore the question."

Contact Sources

Autopsy/Post Services Franchise Inc., http://www.1800autopsy.com

Francorp Franchise Consultants, (800) FRANCHISE

Andrew Seldon, (612) 334-8485, seland@briggs.com

Jerry Wilkerson, c/o Franchise Recruiters Ltd., 3500 Innsbruck, Linconshire CC, Crete, IL 60417, (708) 757-5595

U.S. Hispanic Chamber of Commerce, 1019 19th St. N.W., #200, Washington, DC 20036, (202) 842-1212

This article was originally published in the January 1999 print edition of Entrepreneur with the headline: Coming Attractions.