Ken Starr is wrong on franchising

The ability of franchisors to use contracts with franchisees to shield behavior that would be deemed abusive or illegal in all other business relationships was a constant theme in the five years of hearings I conducted on franchising as chairman of the House Committee on Small Business.

News Release
June 1, 1998

Ken Starr is wrong on franchising
Rep. John J. Falce (D-29,NY)

Last month, Ken Starr learned that a federal judge had ruled against President Clinton's invocation of executive privilege in the Monica Lewinsky investigation, but Ken Starr was not personally present in that court. He appeared, instead, in a different Federal Court of Appeals, personally arguing a potentially precedent-setting case for a private client.

Under the independent counsel statute, Starr has a special status that permits him to continue his private legal practice while contracting his services to the government. This has reportedly allowed him to earn more than $1 million from private clients, such as the tobacco industry, in each of the three years he has conducted the Whitewater investigation.

In the May 5 case, Starr argued on behalf of the British conglomerate GKN, the parent of the Meineke Discount Muffler chain, in a case between Meineke and its local franchisees. He was seeking to overturn a March 1996 Federal District Court ruling against GKN and Meineke that had awarded the franchisees $397 million in damages, the largest award ever in a franchise case.

At issue in the case, Broussard v. Meineke, Inc., was Meineke's misuse of advertising trust funds. Between 1986 and 1996 Meineke misdirected nearly $32 million in trust funds either for its own use or for improper purchases. The franchisees argued that Meineke has a fiduciary obligation, in administering the trust, to honestly manage and account for these advertising funds. The franchisees were not cheated once, their attorney argued, but cheated every single week for over ten years.

The district court jury agreed, and cited Meineke for violating its fiduciary obligation to administer the funds on behalf of its franchisees and for failing to act in good faith to place advertisements in exchange for franchise fees. The franchisees were awarded $397 million in damages. It is the first federal court acknowledgment that franchisors have a fiduciary obligation in handling their franchisee's money and, if upheld by the appeals court, the highest federal court confirmation that franchise companies at least have an obligation to act in good faith, even if that is not explicitly in the contract.

The ability of franchisors to use contracts with franchisees to shield behavior that would be deemed abusive or illegal in all other business relationships was a constant theme in the five years of hearings I conducted on franchising as chairman of the House Committee on Small Business. The absence of any legal standards, including good faith conduct and fiduciary obligation, clearly disadvantages franchise business owners and makes it extremely difficult for them to protect their rights and investment in court.
This is why I have introduced legislation in every Congress since 1992 to require that generally accepted standards of conductstandards of good faith, due care, good cause and a limited fiduciary obligationmust govern the relations between franchise companies and individual business owners. Hence, Ken Starr's arguments were of special interest to me.

Starr argued in court against all the principles I have fought for. He contends that franchisors have, and should have, no duty to act in good faith, no duty to exercise due care, no duty to act in a trust relationship with their franchisees. I couldn't disagree with Ken Starr more. If Starr's view prevails, franchisees will continue to be second-class citizens, and franchisors who defraud and abuse their franchisees will continue to be immunized from common law principles that apply to almost all other persons and entities across the country.

The Meineke case may prove to be one of the most important franchising decisions in thirty years. In this case, Ken Starr is on the wrong side. His defeat in the Court of Appeals could mark an important first step in bringing basic fairness to business franchising.

CONTACT: Gary Luczak
FOR IMMEDIATE RELEASE:
(202) 225-3231


Brought to you by WikidFranchise.org

Risks: Bad faith and unfair dealings, Advertising fund put into general franchisor's coffers, Political champions, Big Tobacco, Tobacco industry-type defence, Politician's news release, United States, 19980601 Ken Starr

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License