No Good Deed Goes Unpunished

Does Franchise Law Apply To Charities/ The Girls Scouts Case

Kent Seton - Thursday, March 26, 2015

The U.S. Court of Appeals for the Seventh Circuit handed down a pair of decisions in Girl Scouts of Manitou Council, Inc. (“GS Chapter”) v. Girl Scouts of the United States of America (“GS National”). In short, GS National determined that “realignment” was necessary and attempted to adopt a plan that would reduce the national wide number of its girl scout chapters by nearly two thirds – from 315 to 109 by merging together various chapters (all of which were their own nonprofit corporations under GS National’s 501(c)(3) status) into new, larger, high-capacity chapters. GS Chapter was one of the best operating chapters under GS National and the plan to merge would have split up GS Chapter’s assets among three newly created chapters. GS Chapter’s board of directors concluded that such realignment was not in its best interests and refused to execute documents that would effectuate the forced mergers. The GS Chapter filed a lawsuit seeking injunctions to prevent changes to its jurisdiction or charter.

Ultimately, it was determined that the Wisconsin Fair Dealership Law (WFDL) applied to nonprofit corporations, which covers a broad range of both dealerships and franchises. The statute defines dealerships where (1) there is an agreement between the parties; (2) the chapter has been granted the right to sell or distribute goods or services, or use a trademark, service mark, logo-type, advertising or other commercial symbol; and (3) there is a community of interest in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement or otherwise. California’s Fair Dealership law set forth in California Civil Code Section 81(b) and its definition of “franchise” set forth in California Corporation’s Code Section 31005(a) have almost the exact definition of “dealerships”. Additionally, the Illinois Franchise Disclosure Act of 1987 (815 ILCS 705/3(1)) also has a very similar definition of franchise on point here.

Accordingly, because the court found that nonprofits are included in the definition of “dealerships” under the WFDL, it concluded that the WFDL’s prohibition of cancellations, terminations, nonrenewals, or changes to the competitive circumstances of a “dealership” without “good cause” was fully applicable to GS National’s effort to eliminate GS Chapter as part of GS National’s nationwide restructuring of chapters. While the determination of whether GS National had “good cause” is a question based on the particular facts and circumstances of the matter, the Seventh Circuit’s holdings have broad implications for nonprofits operating in any state that has an applicable franchise or dealership statute, like California and Illinois, and it is therefore possible that an Illinois and/or California arbitrator or court would similarly find that the relationship between National, the Chapter and the other chapters is defined as a franchise thereby concluding that National is unable to terminate the chapters, including the Chapter, without good cause.

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