In a very interesting opinion, Judge Posner of the Seventh Circuit last week ruled that the Girl Scouts could violate Wisconsin’s Fair Dealership Law, and that they were not immune to that law’s reach by virtue of the First Amendment.  See Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., No. 10-1986 (7th Cir. May 31, 2011).

The national Girl Scouts organization granted exclusive territories to some 300 local “councils.”  Each council was authorized to sell Girl Scouts cookies and other merchandise under the Girl Scout trademark.  The councils earned income from the sales of cookies and merchandise, as well as from charitable donations, and paid membership fees to the national organization.  The national organization concluded that there were too many councils, and so decided to dissolve the Manitou Council and reallocate its entire territory to other councils.  This plan would not have put the Manitou Council out of business per se, but it would have precluded it from using the Girl Scout trademark or representing itself as a Girl Scout organization.

The Manitou Council sought a preliminary injunction to prevent its exclusive territory from being dissolved.  It lost in the district court, but that decision was reversed in the Seventh Circuit in 2007.  Later, the district court granted the national organization summary judgment, reasoning that to apply the Fair Dealership Law to the national organization would violate the organization’s freedom of expression guaranteed by the First Amendment to the United States Constitution.

The Seventh Circuit disagreed.  The Wisconsin Fair Dealership Law is a state law of general applicability with only a remote, hypothetical impact on the organization’s message.  Originally, the national organization justified its reorganization plan on the basis that it would improve marketing of cookies, exploit economies of scale, and promote effective fundraising.  These justifications did not directly implicate First Amendment concerns.  On appeal, the national organization emphasized a goal of increasing the racial and ethnic diversity of the Girl Scouts (picking up on the district court’s First Amendment reasoning).  However, the Seventh Circuit found no evidence of a connection between realignment of the councils and the promotion of diversity.  “How changing the territorial boundaries would increase the recruitment of girls from minority groups is nowhere shown.”  The possibility that a law of general application might indirectly and unintentionally impede an organization’s efforts to communicate its message effectively cannot be enough to condemn the law.

The Seventh Circuit also addressed several arguments relating to the Fair Dealership Law itself.  First, the court rejected the argument that the statute is inapplicable to nonprofit entities.  “No gulf separates the profit from the nonprofit sectors of the American economy.”  The principal objective of dealer protection laws is to prevent franchisors from appropriating good will created by their dealers.  That concern is applicable to nonprofit enterprises that enter dealership agreements.

Second, the Seventh Circuit rejected the national organization’s argument that its alteration of the Manitou Council’s territory did not change the competitive circumstances of the dealership agreement.  “Altering a franchisee’s territorial boundaries can have the same effect as opening new stores in his territory; the narrower those boundaries, the less protection the franchisee has against competition from other franchisees.  But when as in this case the franchisor, though authorized to alter boundaries, attempts to use that authority to terminate the franchise altogether, he runs up against the provision of the Wisconsin act that requires ‘good cause’ to cancel a dealership.  Wis. Stat. § 135.03.”  Although the franchisor’s goal of increasing sales constitutes “good cause” under various franchise laws, the national organization rested its good-cause argument on the proposition that realignment was necessary to its expressive activity – an argument that the Court had already rejected.  “The purpose of the realignment remains an enigma; like many corporate and governmental reorganizations, it may reflect internal bureaucratic pressures unrelated to the organization’s professed legitimate concerns.”

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So what is the take-away from the Seventh Circuit’s decision? I think there are four fundamental points.

First, state franchise statutes and fair dealership laws can have wide application – sometimes much wider than you might think.  They can even apply, for example, to the distribution of Girl Scout cookies.

Second, courts are not very receptive to the argument that nonprofits are exempt from the reach of these statutes.

Third, creative arguments – such as application of one of these statutes would interfere with First Amendment rights – must be backed up by actual (and probably compelling) evidence, otherwise they will be easily dismissed.

And fourth, franchisors’ significant decisions that may effectively amount to a de facto termination should be supported by solid, and adequately documented, business reasons.

Franchise relationships can be subject to various special statutes. One such statute is the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. §§ 2801, et seq.  Unsurprisingly, the PMPA applies to gasoline stations.  Among other things, it prohibits gasoline refiners and distributors from terminating, or failing to renew, franchises absent the fulfillment of certain conditions, and unless one or more enumerated grounds for termination or non-renewal is met.

Of course, if a franchisee is offered and signs a renewed franchise agreement, the franchisee probably cannot maintain a claim for unlawful renewal under the PMPA.  See Poquez v. Suncor Holdings-CPOII, LLC, N.D. Cal., No. 3:11-cv-328-SC (5/26/11) (no public link available yet).

Bottom line, make certain you understand what statutes apply to your business relationship, and whether actions you have taken allow you to establish, or preclude you from establishing, elements of statutory claims.

Make sure you haven’t seriously underperformed your peers and your prior distributors, according to the express terms of your dealership agreement.