Federal Court Dismisses Case When Association Of Franchisees Fails To Establish Association Status | Foley & Lardner srl

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A recent Federal Court decision explores the concept of associative status, the right of a franchisee association to sue a franchisor on behalf of its member franchisees. In APFA Inc. v UTAP Management, LLC, the District Court for the North District of Texas allowed a motion to dismiss under Rule 12 (b) (1) on the basis that the franchise association’s plaintiff lacked standing. Defendant is a national franchisor of “Urban Air” indoor adventure parks and plaintiff is Adventure Park Franchisee Association Inc. (APFA), representing more than 50 Urban Air franchises across the United States.

In April 2019, UTAP initiated various changes in its relationship with its franchisees, including a customer membership program through which it collected revenue from franchisee membership sales and redistributed a portion of that revenue to franchisees. UTAP withheld part of the income in the form of two types of royalties. UTAP has also implemented a new marketing program with a third party vendor, paid by a commission of 4% of gross sales directly to UTAP. Finally, UTAP required the use of other third-party providers for insurance, the socks that customers used to frequent stores and construction.

UTAP proposed these changes through an addendum to the franchise agreement and a new account clearing house (ACH) authorization for the collection and distribution of membership program revenue. Some franchisees have signed the rider, others have not. The APFA alleged that these changes, taken together, constituted bad faith conduct, were violations of the UTAP franchise agreement and disclosure of franchise documents, and were violations of the Amended Franchise Rule of the FTC.

The APFA brought an action in the District of New Jersey, seeking a declaratory judgment that UTAP had violated franchise agreements and covenants of good faith and loyalty, violated consumer protection law against deceptive business practices of Texas and the New Jersey Franchise Practices Act, and had committed fraud. The New Jersey court then granted a motion to transfer the location to the North Texas District, where UTAP requested that its motion be dismissed.

As a general rule, an association can sue on behalf of its members, but it must demonstrate that 1) its members would otherwise have standing to sue themselves, 2) the interests that the association seeks to protect are relevant to the objective of the association, and 3) the claims and relief sought do not require the participation of individual members.

Only the first and third parts were at issue in this case. The first requirement, that of standing for each member, was fairly easily resolved by the Court: it concluded that the plaintiff had sufficiently pleaded that its members had standing to bring an action on their own. Next, the Court turned to the more complex question of whether the case required the participation of individual members of the APFA. The Court recognized that this question was prudential in nature and, therefore, subject to its discretion and the restraint it imposed on itself. Ultimately, the Court concluded that the APFA, at the argument stage, had failed to demonstrate that it was the best litigant to present the intricacies of each member’s franchise contracts and their individual tort claims, characterized in the form declaratory judgment requests. Thus, the APFA did not demonstrate that the participation of individual members was not necessary, and the Court allowed UTAP’s motion to dismiss for lack of standing.

The doctrine of associative status remains a vehicle for groups representing franchisees to sue on behalf of their members. For the same reason, the onus of fashioning relief that can meet the standing standard – particularly its third branch – is difficult.

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