US Seventh Circuit: National Girl Scouts Organization Subject to State Franchise Laws

In an opinion authored by Circuit Judge Richard Posner, the U.S. Court of Appeals for the Seventh Circuit held that the national Girl Scouts organization violated the Wisconsin Fair Dealership Law by dissolving the Manitou, Wisconsin chapter of the organization “without good cause.” Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., No. 10-1986  (7th Cir. May 31, 2011). The Girl Scouts attempted to dissolve the Manitou chapter as part of a territorial reorganization whose purpose allegedly was to increase ethnic and racial diversity within the organization. The Manitou chapter sought an injunction against the dissolution. The district court granted summary judgment to the national organization and dismissed the lawsuit. On appeal, however, the Seventh Circuit reversed.

The Girl Scouts argued that its decision to dissolve the Manitou chapter was protected by the First Amendment and that, as a nonprofit organization, it was not subject to the dealership law. The Seventh Circuit disagreed.

The Wisconsin Fair Dealership Law applies to “dealership agreements,” which authorize a dealer to use another organization’s “trade name, trademark, service mark, logotype, advertising or other commercial symbol” and create “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.” The provision of the statute under which the chapter sued the national organization forbids a franchisor to “terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause.” Wis. Stat. § 135.03.

Citing Boy Scouts of America v. Dale, 530 U.S. 640, 653-56 (2000), the Seventh Circuit acknowledged that the Girl Scouts has rights of freedom of association under the First Amendment. However, the court wrote that “it does not follow that the First Amendment exempts the Girl Scouts from state laws of general applicability that have only a remote, hypothetical impact on the organization’s message.”  The Seventh Circuit opined that the organization’s alleged strategy to increase racial and ethnic diversity “cannot be taken seriously in the absence of any evidence of a connection between realignment of the councils and promotion of diversity—and none was presented.”

In holding that the Wisconsin Fair Dealership Law does not contain a nonprofit exception, the court observed that, “[f]rom a commercial standpoint the Girl Scouts are not readily distinguishable from Dunkin’ Donuts.” In a broadly-worded passage, the court minimized the differences between for-profit and nonprofit enterprises–

No gulf separates the profit from the nonprofit sectors of the American economy. There are nonprofit hospitals and for-profit hospitals, nonprofit colleges and for-profit colleges, and, as we have just noted, nonprofit sellers of food and for-profit sellers of food. When profit and nonprofit entities compete, they are driven by competition to become similar to each other. The commercial activity of nonprofits has grown substantially in recent decades, fueled by an increasing focus on revenue maximizing by the boards of these organizations, and this growth has stimulated increased competition both among nonprofit enterprises and with for-profit ones.

The court determined that the concerns about abusive termination of franchises which underlie the Wisconsin statute are equally applicable to both nonprofit and for-profit entities. Accordingly, the court found no basis for exempting the Girl Scouts from the prohibitions of the law.

The Seventh Circuit’s opinion has serious implications for nonproft chartering organizations. Typically, such an organization requires affiliates to sign charter agreements which set forth the rights and obligations of both parties. The charter agreement may provide that it can be terminated without cause. However, if a state franchise law that provides to the contrary applies to the parties’ relationship, that law may override such provisions in the charter agreement. For this reason, when drafting or terminating charter agreements, a chartering organization should review the franchise laws in states where it has affiliates to determine how those laws may impact the organization’s decisions.

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