FRANCHISEE 101: Franchisee Alleges Discrimination Lawsuit by Franchisor
A Party City franchisee in Minnesota (Newpaper, LLC) owning 26 franchised stores, successfully beat a motion to dismiss filed by its franchisor, Party City. The franchisee claimed that certain stores without franchise agreements received more favorable treatment than Newpaper's franchises, in violation of the Minnesota Franchise Act (MFA).
Newpaper argued that Party City terminated certain Party City franchisees and then entered into supply agreements with them with more beneficial terms than under their former franchise agreements. Consequently, these operators received the benefits of running Party City stores, without having to pay the advertising and royalty fees that other franchisees had to pay.
The court held that regardless of its label, an agreement may establish a franchise relationship under the MFA if the relationship satisfies the statutory elements. The court found that Newpaper plausibly alleged that the supply agreements allowed the non-franchised stores to continue a franchise relationship with Party City by another name. Taking those allegations as true, the court held Newpaper stated a viable claim for discrimination under the MFA.
Party City argued that even if the other stores were franchises, they belonged to a different system altogether: the "Party America" system. While the court found this argument may have merit, the court felt it was premature to dismiss Newpaper's claim.
The court held that the evidence may later demonstrate that these other stores do not have franchise relationships with Party City, or that they operate under a separate "Party America" franchise system. In either of those cases, Newpaper's MFA discrimination claim would fail. At this stage, however, the court found that since Newpaper plausibly alleged that, the franchisor deliberately advertised these other Stores using the "Party City" trademarks and offered precisely the same products, store designs, and other benefits as its franchised locations, these allegations supported a claim for discrimination.
Newpaper also argued that Party City engaged in unlawful competition by:
1. Selling products online;
2. Allowing the "supply" stores to continue operating in the their former territories;
3. Requiring Newpaper to install e-commerce kiosks in its stores, which facilitated online sales; and
4. Offering "web-only" items.
The court held that none of these alleged violations stated a claim upon which relief could be granted and dismissed the franchisee's claim, finding the alleged violations fell under exclusions within the franchise agreement or were allowable under the franchise agreement's Internet addendum.
For franchisors, the case sends a message of caution in setting up a competing program in competition with franchisees when the same trademarks are involved. For franchisees, the case reaffirms the message that investors in a franchise program deserve to be treated respectfully and without discrimination.