By Carmen Caruso

The following article originally appeared in Franchise Times, June, 2001 issue. This is an edited version.

Are racial minorities more likely to succeed in their franchised businesses if they locate in minority neighborhoods and sell to minority customers?

In Home Repair, Inc. v. Paul W. Davis Systems, Inc., No. 98 C 4074, 2000 U.S. Dist. LEXIS 929 (N.D. Ill. January 31, 2000), the district court in denied a defense motion for summary judgment in a case in which Mr. Caruso represented an African American franchisee who challenged the notion that franchisors may restrict minority opportunities to “their” communities. Mr. Caruso’s client, who already held a franchise in this system and was in good standing, sought to expand his business by purchasing franchised territories in the predominantly white portions of metropolitan Chicago from a white franchisee that was interested in selling. However, the franchisor denied approval of this sale and instead “steered” the African American franchisee to predominantly minority inner city areas. The district court upheld the claim that the franchisee presented sufficient evidence of racial discrimination to warrant a jury trial, and the case was then settled shortly one day before the trial was to begin.

The Civil Rights Act

Racial minorities (but not women or other minorities) are protected from discrimination in franchising by a Reconstruction era law, 42 U.S.C. §1981, which provides that “all persons” shall have the same right as “white persons” to “make and enforce contracts.” The protected rights include the “making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship.” This civil rights law applies when African Americans, e.g., claim that they were denied the right to purchase a franchise, or were treated differently in the sales process, or after their purchase, in any way.

Civil rights claims turn on proof of discriminatory intent, i.e. that the color of the plaintiff’s skin caused the adverse action, and that the franchisor’s stated reasons for its actions were phony. Victorious civil rights plaintiffs may obtain equitable relief requiring the franchisor to change its way of doing business, and/or they may obtain actual and punitive damages in amounts that are generally within the jury’s discretion, plus reimbursement of their attorneys’ fees and costs of suit.

Plaintiffs may present “direct” or “indirect” proof of discrimination. As the United States Court of Appeals for the Seventh Circuit (based in Chicago) has held:

In seeking to prove defendant intentionally discriminated against him because of his race, plaintiff can proceed by either of two paths: (1) by presenting direct evidence that race was a determining factor in the adverse employment decision; or (2) by tendering circumstantial evidence sufficient to “provide a basis for drawing an inference of intentional discrimination.” Troupe v. May Dept. Stores Co., 20 F.3d 734, 736 (7th Cir. 1994).

Direct proof of discriminatory intent is rare. Plaintiffs usually present “indirect” or circumstantial proof that “but for” the race of the franchisee or applicant, a different decision would have been made. The classic method is to show “disparate treatment” or “comparative evidence”, i.e. that a “similarly situated” white person, who had the same qualifications and stood in the same position to the franchisor, received better treatment.

“Mosaic Evidence”

However, sometimes an opportunity is denied to a minority and the franchise is simply not sold to anyone, making the “disparate treatment” comparison impossible. In those cases, courts have recently allowed the plaintiff greater flexibility in proof. The United States Court of Appeals has held that plaintiffs may present “a mosaic of evidence which, taken together, would permit a jury to infer discriminatory intent.” See, Kennedy v. Schoenberg, Fisher & Newman, Ltd., 140 F.3d 716, 724-25 (7th Cir. 1998) (citing Troupe, 20 F.3d at 736). The “mosaic” of proof may include evidence of suspicious timing, inconsistent behavior, racist statements and/or evidence of “racial steering” of minority franchisees to minority communities. The district court in Home Repair followed this precedent in denying summary judgment and ordering a trial on the §1981 claim for racial discrimination. The evidence presented to defeat summary judgment in Home Repair included evidence that:

  • The franchisor had no other African American franchisees out of hundreds of franchises.
  • In the same time period as the events giving rise to the suit, the franchisor had been willing to franchise a predominantly African American portion of the city to the African American plaintiff, but was denying him the opportunity to franchise in predominantly white portions of the city and suburbs.
  • There was evidence that the franchisor had previously attempted to steer this franchisee to various “urban” areas with relatively large African American populations including Detroit and Little Rock.
  • There was evidence of racially derogatory statements being made about the plaintiff, which while not sufficient as direct evidence of discrimination, sufficed at the summary judgment stage to constitute part of the “mosaic” of evidence. The franchisor could not contest the absence of African Americans among the ranks of its franchisees. However, and not surprisingly, the franchisor and its officers vigorously denied the most inflammatory portions of the plaintiff’s case including the alleged racial comments and alleged steering. Thus, there were questions of fact requiring trial.

Pretext Evidence

Another way to prove discrimination is to present “pretext evidence where the plaintiff is qualified for and fails to receive the desired treatment and the employer’s stated reason for the difference is unworthy of belief.” Kennedy v. Schoenberg, Fisher & Newman, Ltd., 140 F.3d 716, 724-25 (7th Cir. 1998) (citing Troupe, 20 F.3d at 736). In Home Repair, the stated reason for denial of the sale to this franchisee was that the selling franchisee was seeking to be excused from his post-termination non-compete clause, which allegedly the franchisor found to be unacceptable. However, the franchisee presented pretext evidence that immediately after the franchisor communicated an initial denial of approval for the reason stated, it made a flip-flop and made a deal directly with the selling franchisee that included a release from the non-compete, under which the franchisor would re-franchise these territories as opposed to allowing the plaintiff to buy them from the seller. This deal collapsed, however, when the franchisor insisted that the selling franchisee provide indemnity to the franchisor against potential claims by the African American franchisee who was being denied this expansion opportunity! Again, there were questions of fact as to whether race was the motivating factor.

Conclusion

Similar racial steering claims have been maintained against KFC, Wendy’s International and BP Oil, and more are likely to be filed as minorities increase their presence in franchising.

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