Franchise Termination Restrictions: A Guide for Practitioners and Policy Makers

• Author: Michael J. Lockerby
• DOI: 10.1177/0003603X8503000402
• Published date: 01 December 1985
• Date: 01 December 1985
• Subject Matter: Article

The Antitrust Bulletin/Winter 1985

Franchise termination restrictions:

a guide for practitioners and

policy makers

BY MICHAEL J. LOCKERBY*

I.

Introduction

791

Antitrust practitioners know how frequently a franchise termina-

tion results in antitrust litigation. Increasingly appended to such

antitrust claims are other claims as well. These claims typically

allege some form

of

breach of

contract-despite

the fact that

virtually every franchise agreement is terminable at will by the

franchisor. Terminated franchisees seeking relief have won the

sympathy

of

courts, legislatures, and commentators. As a result,

franchise termination provisions have been found to include an

implied "good cause" requirement, to impose a fiduciary duty on

the franchisor, to be unconscionable, and to be subject to a

"good faith" limitation.

Despite the fact that such restrictions on franchise termina-

tions do not arise under the antitrust laws, the discussion

of

these

various causes of action contained in this article should prove of

benefit to antitrust practitioners and policy makers alike. For the

antitrust practitioner confronted with such a claim appended to

more familiar antitrust claims, this article contains a handy

Antitrust and Trade Regulation section, Hunton &Williams,

Richmond, Virginia. Previously, Research Assistant to the Joint

Economic Committee of the U.S. Congress and Legislative Assistant to

U.S. Senator John Heinz (R.-Pa.).

AUTHOR'S NOTE: The author is grateful

for

and wishes to acknowledge

the guidance and assistance

of

Robert E. Scott, Professor

of

Law at the

University

of

Virginia.

©1986by Federal Legal Publications, Inc.

792 The antitrust bulletin

compendium of the relevant federal and state statutes and deci-

sionallaw.

For

the policy maker, this summary

of

what the law

of

franchise termination restrictions is is followed by a discussion

of

what the law in this area should be. Specifically, the article

concludes that many

of

the assumptions which have prompted

courts and legislatures to restrict franchise terminations are

flawed, and that doctrines borrowed from other areas

of

contract

law are ill-suited to the context

of

franchise terminations. The

article notes that franchisors who arbitrarily and unfairly termi-

nate franchisees face extralegal sanctions in addition to potential

liability under the antitrust laws. The article also identifies the

possible benefits

of

the franchisor's unrestricted power

of

ter-

mination-benefits

that accrue not only to franchisors and the

consuming public but also to franchisees as well.

The analysis concludes with a recommendation as to the

appropriate response

of

the legal system to franchise termination

provisions.

It

is hoped that compared to the various approaches

employed to date, this suggested legal rule will best reflect the

legitimate expectations of parties to franchise agreements, the

interests of franchisees and the consuming public, the needs

of

franchisors to police their trademarks and respond to changing

market conditions, and the desire to minimize litigation costs.

II.

For

the practinoner: asummary

of

the judicial

and

legislative response to date

A. Restrictions on franchise termination and nonrenewal

Increasingly in our complex national economy, franchising

and analogous forms

of

distributorship and lease agreements are

the preferred method

of

organizing economic activity.IDespite

the diversity of the industries in which franchising has become

See generally U.S. Dept. of

Commerce,

Franchising in the

Economy

1978-80

(1980).

Franchise termination 793

prevalent-from

automobile sales, to gasoline marketing, to

fast-food

merchandising-a

striking similarity appears on the

face

of

the legal agreements governing these relationships: vir-

tually

everyone

is terminable at will by the franchisor. However,

the right

of

franchisors, manufacturers, and lessors to terminate

or fail to renew such agreements has increasingly been the subject

of

regulation. Restrictions on termination

and

nonrenewal

of

franchise agreements have been imposed at

both

the state

and

federal level, and have taken the form

of

legislative enactments as

well as decisional law.

1. LEGISLATIVE REMEDIES FOR TERMINATION AND NONRE-

NEWAL a. Federal legislation i. Automobile Dealers' Day in

Court

Act The first

major

federal enactment in this area was

the Automobile Dealers' Franchise Act, commonly known as the

Automobile Dealers' Day in Court

Ace

Under the act, the term

"franchise" is broadly defined to include

"the

written agreement

or contract between any automobile manufacturer engaged in

commerce and any automobile dealer which purports to fix the

legal rights

and

liabilities

of

the parties to such agreement or

contract."?

(a) Manufacturer required to act in

"good

faith" The act

provides an automobile dealer with a federal cause

of

action

against amanufacturer for failure

"to

act in good faith in

performing or complying with any

of

the terms or provisions

of

the franchise, or in terminating, canceling, or

not

renewing the

franchise

....

"4

For

the purposes

of

the act, "good faith" is

defined to mean:

"the

duty

of

each party to any franchise. . . to

act in a fair and equitable manner toward each other so as to

guarantee the one party freedom from coercion, intimidation, or

threats

of

coercion or intimidation from the other party. . . ."5

215 U.S.C. §§ 1221-25.

15 U.S.C. §1221(b).

415 U.S.C. §1222 (emphasis supplied).

15 U.S.C. §1221(e).