Publications

14 Jun 2011

Even the Girl Scout cookie may crumble - the broad reach of franchise and dealer laws

FranCast

Barry M. Heller
Jennifer Kappel

In a recent decision by Circuit Judge Richard Posner, the Seventh Circuit in Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America ruled that the Wisconsin Fair Dealership Law applies to nonprofit organizations.  This decision sounds an alarm for nonprofit organizations throughout the United States that they need to consider dealership laws when making decisions that affect their members.

The decision

The case of Girl Scouts of Manitou Council involved a dispute between the Girl Scouts of Manitou Council, Inc. (Manitou), a Girl Scout council in Wisconsin, and the Girl Scouts of the United States of America, Inc. (the Girl Scouts).  When the Girl Scouts decided to realign the boundaries of its local councils, Manitou would have been dissolved.  Manitou sought to enjoin the Girl Scouts from eliminating its territory, arguing that the Council is a “dealer” and that the elimination of the territory would violate Wisconsin’s Fair Dealership Law.

Reversing the District Court’s decision, the Seventh Circuit held that the First Amendment could not exempt the Girl Scouts from the Wisconsin Fair Dealership Law.  The court further refused to make an exception to the dealership laws for nonprofit entities who meet the definition of a “dealer” and enter into “dealership agreements” under the Wisconsin Fair Dealership Law.  The Court also stated that the proposed altered boundaries would serve to terminate the franchise altogether (a “constructive termination”), and found no evidence of “good cause” required by the Wisconsin Fair Dealership Law for a lawful termination of Manitou.

The court’s reasoning

When the dispute began, in 2004, the Girl Scouts had over 300 local councils, each with an exclusive territory designated in its charter.  The councils of the national organization are organized as nonprofit organizations, not as subsidiaries of the Girl Scouts.  The Girl Scouts “charter” the local councils, authorizing them to sell merchandise, including cookies, under the “Girl Scout” trademark, which the Girl Scouts owns.  Local councils also remit membership fees to the Girl Scouts.   As the court described it, the Girl Scouts relates to its councils as franchisor to franchisee.

In this appeal, the Girl Scouts argued that by realigning the boundaries of the councils, the Girl Scouts would attain its goal of increasing its racial and ethnic diversity (the larger the area served by a council, the likelier it is to include a more racially and ethically diverse population of girls).  The Girl Scouts, it was argued, are an “expressive association,” and have a congressionally-granted charter setting forth certain goals, such as “to promote the qualities of truth, loyalty, helpfulness, friendliness, courtesy, purity.”  The District Court judge had reasoned that although the fair dealership laws are applicable to the Girl Scouts, to apply the Wisconsin Fair Dealership Law (thereby preventing the realignment of boundaries) would violate the Girl Scouts’ First Amendment right to freedom of expression. 

The Seventh Circuit, however, held that the First Amendment could not override the Wisconsin Fair Dealership Law (especially in the absence of evidence of a connection between the realignment and the promotion of diversity).  The court stressed that diversity could be achieved through other means, such as ordering local councils to do so, and if requirements are not met, the Girl Scouts could revoke or refuse to renew a charter.  According to the court, the fair dealership law is one of “general application,” but the possibility that the law could “indirectly and unintentionally impede an organization’s efforts to communicate its message effectively” is not enough to “condemn” the law.

The Girl Scouts’ second argument – that dissolving Manitou would not violate the Wisconsin Fair Dealership Law because the statute is inapplicable to nonprofit entities – was rejected.   The court looked to the law’s definition of a “dealer,” which is defined as a grantee of a “dealership agreement.” A dealership agreement, according to the law, is one that authorizes the grantee to use the grantor’s “trade name, trademark, service mark… or other commercial symbol” and creates a “community of interest” between the parties “in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement or otherwise.”  §§135.02(2), (3) (a).  Although the Girl Scouts argued that the law’s references to “commercial symbol” and “business” of offering goods and services did not apply to nonprofit enterprises, the court found that the Girl Scouts met the description of a dealer and that the charter to Manitou constituted a dealership agreement.  The court stated that the commercial activity of nonprofit enterprises has grown substantially in recent years, and that nonprofit enterprises, particularly the Girl Scouts, engage in “commercial” and “business” activities (sale of cookies, for example, as well as other merchandise).  In fact, the court stated that “[f]rom a commercial standpoint, the Girl Scouts are not readily distinguishable from Dunkin’ Donuts.”

Finally, the Girl Scouts argued that there would be no change in competitive circumstances of the dealership agreement due to the alteration of Manitou’s territory.   However, the court found that when the alteration of a boundary or territory causes the termination of the franchise altogether (through “constructive termination”), the Girl Scouts must satisfy the Wisconsin Fair Dealership Law’s “good cause” provision, which requires “good cause” (defined as a dealer’s failure to “comply substantially with essential and reasonable requirements imposed” by the grantor of the dealership, Wisc. Stat. §135.03) to terminate, fail to renew or substantially change the competitive circumstances of a dealership agreement.  The court cited to a Wisconsin case addressing good cause, which stated that “the need for change sought by grantor must be objectively ascertainable.”  On appeal, the Girl Scouts had asserted that the realignment was necessary for the furtherance of its “expressive activity.”  Finding no evidence that the alteration of boundaries was “essential” or “helpful” to the attainment of the Girl Scouts’ goal, the Seventh Circuit rejected the Girl Scouts’ arguments and held that there was no good cause to effectively terminate Manitou.

The significance of this case

This case is important for several reasons. 

First, nonprofit organizations should not assume that they are immune from statutes like fair dealership laws.  If a nonprofit organization is organized in a way that fits a definition of a “dealership” or a “franchise,” the fact that it is not a commercial enterprise will not save it from coverage. 

In addition, this case highlights the concept of challenging state statutes with constitutional arguments.  While a constitutional claim may have validity in some circumstances, the courts will reject such claims if the challenged statute has a highly attenuated impact on a constitutionally protected right.

In light of the Girl Scouts of Manitou Council decision, nonprofit organizations with charters that may have the qualities of a dealership or franchise agreement may wish to evaluate their agreements to determine whether the agreement might be governed by a fair dealership or other franchise law. And certainly, no assumptions should be made that such statutes apply only  to for-profit businesses.

For more information about this decision, please contact:

Barry M. Heller

Jennifer M. Kappel