Federal Court Dismisses Case When Franchisee Association Fails to Satisfy Requirements to Establish Associational Standing

21 September 2021 Legal News: Distribution & Franchise Publication
Authors: Peter Loh

A recent federal court decision explores the concept of associational standing, the right of an association of franchisees to sue a franchisor on behalf of its member franchises. In APFA Inc. v. UTAP Management, LLC, the district court for the Northern District of Texas granted a motion to dismiss under Rule 12(b)(1), on the grounds the franchise association plaintiff lacked standing. The defendant is a national franchisor of "Urban Air" indoor adventure parks, and the plaintiff is Adventure Park Franchisee Association Inc. (APFA), representing more than 50 Urban Air franchises across the U.S.

In April 2019, UTAP initiated various changes to its relationship with its franchisees, including a membership program for customers through which it collected revenue from franchisees’ sales of memberships and distributed a portion of those proceeds back to the franchisees. UTAP retained a portion of the revenues in the form of two kinds of fees. UTAP also implemented a new marketing program with a third party vendor, paid by a fee of 4% of gross sales directly to UTAP. Finally, UTAP required the use of other third-party vendors for insurance, socks that customers used while patronizing the stores, and construction.

UTAP proposed these changes through an amendment to the franchise agreement and a new accounts clearinghouse (ACH) authorization for the collection and distribution of the revenue from the membership program. Some franchisees signed the amendment, while others did not. APFA alleged these changes, taken together, constituted bad-faith conduct, were breaches of the franchise agreement and UTAP’s franchise document disclosure, and were violations of the FTC’s Amended Franchise Rule.

APFA filed suit in the district of New Jersey, seeking declaratory judgment that UTAP had breached the franchise agreements and covenants of good faith and fair dealing, had violated the Texas Deceptive Trade Practices Consumer Protection Act and the New Jersey Franchise Practices Act, and had committed fraud. The New Jersey court then granted a motion to transfer venue to the Northern District of Texas, where UTAP urged its motion to dismiss.

Generally, an association may sue on behalf of its members, but it must demonstrate that 1) its members would otherwise have standing to sue themselves, 2) the interests the association seeks to protect are relevant to the association’s purpose, and 3) the claims and the relief sought do not require the participation of individual members.

Only the first and third prongs were at issue in this case. The Court resolved the first requirement, of individual members’ standing, easily enough: It found the plaintiff had sufficiently pled that their members had standing to sue in their own right. Next, the Court turned to the more complicated issue of whether the case required the participation of individual APFA members. The Court recognized this question was prudential in nature and, thus, subject to its discretion and self-imposed restraint. Ultimately, the Court concluded that APFA, at the pleading stage, had failed to demonstrate it was the best litigant to present the subtleties of each member’s franchise agreements and their individual tort claims, characterized in the form of requests for declaratory relief. Thus, APFA failed to demonstrate that the participation of the individual members was not necessary, and the Court granted UTAP’s motion to dismiss for lack of standing.

The doctrine of associational standing remains a vehicle for groups representing franchisees to sue on behalf of their members. For the same reason, the burden of fashioning relief that can satisfy the standard for establishing standing — especially its third prong — is a difficult one.

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