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In a pair of concurrently filed opinions,¹ the United States Court of Appeals for the Eleventh Circuit struck down a local ordinance designed to prevent expansion of chain and franchised businesses.

In both cases, the court held that an ordinance in the town of Islamorada, Florida prohibiting “formula restaurants” and restricting the size of “formula retail” establishments violated the Commerce Clause of the United States Constitution. The Commerce Clause prohibits regulatory measures that favor or benefit in-state economic interests to the disadvantage of out-of-state competitors.

The outcome of these cases shows that local community formula provisions that are misguided barriers to franchise development (such as Islamorada’s) may be successfully challenged on constitutional grounds. That is, you can fight City Hall, and win.

Local communities are increasingly putting in place formula restaurant and retail restrictions that often apply not just to “big box” retailers but to franchised businesses seeking to enter these markets. Successful challenges, such as this one in Florida, should temper these community legal efforts and bolster franchise expansion.

In January 2002, the City of Islamorada, Florida enacted an ordinance prohibiting “formula restaurant[s]” and limiting the size of “formula retail” establishments within the district (the Ordinance). The Ordinance defines a formula restaurant as:

[a]n eating place that is one of a chain or group of three (3) or more existing establishments and which satisfies at least two of the following three descriptions: (1) has the same or similar name, trade name, or trademark as others in the chain or group; (2) offers any of the following characteristics in a style which is distinctive to and standardized among the chain or group: i. exterior design or architecture; ii. Uniforms; . . . or iii. has a standardized menu; or (3) is a fast food restaurant.

The Ordinance defines formula retail as:

[a] type of . . . of retail sales establishment…that is required . . . to maintain any of the following: standardized array of services or merchandise, trademark, logo, service mark, symbol, décor, architecture, layout, uniform, or similar standardized feature.

The broadly-worded Ordinance is clearly aimed at chains, whether franchised or company-owned.

In Cachia v. Islamorada, an independent retail store owner entered into a letter of intent to sell his property to a corporation planning to convert the property into a Starbucks® coffee shop. After the Starbucks Coffee Company was informed that the Ordinance prohibited using the property to operate a Starbucks® coffee shop, the corporation notified the owner that it no longer intended to purchase the property. The owner sued Islamorada, alleging that the formula restaurant provision was unconstitutional.

Similarly, in Island Silver & Spice v. Islamorada, Island Silver contracted to sell its property to a developer seeking to open a Walgreens drug store. The developer withdrew from the purchase after unsuccessfully protesting the Ordinance. Island Silver sued Islamorada, also alleging that the formula retail provision was unconstitutional.

The federal district courts that heard these cases each came to a different conclusion. The federal district court in Cachia granted Islamorada’s motion to dismiss, finding, among other things, that the owner failed to state a claim because the Ordinance’s formula restaurant provision does not violate the Commerce Clause. But the district court in Island Silver decided otherwise, granting injunctive and monetary relief in favor of Island Silver and invalidating the Ordinance’s formula retail provision. It held that the provision had a discriminatory impact on interstate commerce unsupported by a legitimate state purpose and that the putative local benefits were outweighed by the burden imposed on interstate commerce.

The appellate court reversed the district court’s decision in Cachia, emphasizing that the district court did not fully consider whether the Ordinance’s stated interests constitute a legitimate local purpose, whether the prohibition of formula restaurants adequately serves such purpose, or whether Islamorada could demonstrate the unavailability of nondiscriminatory alternatives, such as zoning ordinances or building codes, to fulfill the same needs. The appellate court in Island Silver affirmed the district court’s decision in favor of the property owner.

A regulation violates the Commerce Clause if it directly regulates or discriminates against interstate commerce and if the state is unable to identify a legitimate local purpose for such regulation that cannot be served by reasonable nondiscriminatory alternatives. If the regulation only has an indirect effect on interstate commerce, the state must only have a legitimate interest that exceeds any local benefits of the regulation.

The Cachia appellate court held that the Ordinance’s formula restaurant prohibition had the practical effect of discriminating against interstate commerce; therefore, it was subject to elevated review. The Court noted that “while the [O]rdinance does not facially discriminate between in-state and out-of-state interests, its prohibition of restaurants operating under the same name, trademark, menu or style is not evenhanded in effect, and disproportionately targets restaurants operating in interstate commerce.”

The appellate court in Island Silver invalidated the formula retail provision, holding that it did not serve legitimate local purposes. First, the court noted that the Ordinance’s effective elimination of all new interstate chain retailers had the practical effect of discriminating against interstate commerce. Second, the court noted that the Ordinance was not supported by a legitimate local purpose that could not be adequately served by reasonable nondiscriminatory alternatives. Islamorada alleged that the local purposes of the Ordinance included preserving unique and natural small-town community characteristics, encouraging small-scale uses, water-oriented uses and a nationally significant natural environment, and avoiding increased traffic congestion, litter and garbage. While the Ordinance restricted large-formula retail establishments, it permitted small retail establishments; the Court reasoned that allowing growth in the number of small retail establishments would similarly affect Islamorada’s small-town character. The court concluded that, while the local purposes stated might be legitimate, the Ordinance did not serve those purposes.

In sum, formula provisions that are misguided barriers to franchise development (such as Islamorada’s) may well be subject to successful constitutional challenge; indeed, such provisions may be unconstitutional. Mounting a challenge to such laws that block franchises from entering local markets may be worthwhile when such laws seek to block franchises from entering into certain markets. Yes, you can fight City Hall – and win.