Chapter 4 - Constitutional Authority to Regulate Business

By Nicole Knight,2014-07-09 07:24
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Chapter 4 - Constitutional Authority to Regulate Business

BLTS-8e Case Problem with Sample Answer

    Chapter 25: Sole Proprietorships and Private Franchises

25.8 Case Problem with Sample Answer

    Walik Elkhatib, a Palestinian Arab, emigrated to the United States in 1971 and became a U.S. citizen. Eight years later, Elkhatib bought a Dunkin’ Donuts, Inc.,

    franchise in Bellwood, Illinois. Dunkin’ Donuts began offering breakfast sandwiches with bacon, ham, or sausage through its franchises in 1984, but Elkhatib refused to sell these items at his store on the ground that his religion forbade the handling of pork. In 1995, Elkhatib opened a second franchise in Berkeley, Illinois, at which he also refused to sell pork products. The next year, at both locations, Elkhatib began selling meatless sandwiches. In 1998, Elkhatib opened a third franchise in Westchester, Illinois. When he proposed to relocate this franchise, Dunkin’ Donuts refused to approve the new location and added that it would not renew any of his franchise agreements because he did not carry the full sandwich line. Elkhatib filed a suit in a federal district court against Dunkin’ Donuts and others. The defendants filed a motion for summary judgment. Did Dunkin’ Donuts act in good faith in its relationship with Elkhatib? Explain. [Elkhatib v. Dunkin’ Donuts, Inc., __ F.Supp.2d __ (N.D.Ill. 2004)]

Sample Answer:

    In determining whether a franchisor has acted in good faith when terminating a franchise agreement, the courts generally try to balance the rights of both parties. If the court perceives that the franchisor acted arbitrarily or unfairly, the court will grant the franchisee a remedy. In this situation, the court would consider the fact that the franchisee’s refusal to offer breakfast sandwiches containing pork was based on his religious beliefs. Nonetheless, the court would balance this against the fact that the Dunkin’ Doughnuts (the franchisor) has a right to require franchisees to offer a uniform menu to protect its name and reputation. Quality standards are particularly important in chain-style business operations, and the court would give great weight to the franchisor’s interests. Dunkin Doughnuts acted fairly and honestly when it notified Elkhatib that it would not allow relocation and would not renew his franchise agreement. Its reasons were not arbitrary. Thus, Dunkin’ Doughnuts acted in good faith. The court issued a summary judgment in the defendants’ favor. The court recognized that “[t]he dietary restrictions Elkhatib points to are associated with [his] religion . . . . Islamic and Jewish law both prohibit the handling and consumption of pork.” The court held, however, that it is within a franchisor’s rights to determine the location of a franchise and to insist that a franchisee sell certain products. In this case, Dunkin’ Donuts “clearly shows that Defendants were not relocating his

    Westchester store and would not renew his existing agreements solely based on

his refusal to sell the entire line of Dunkin’ Donuts food products. . . . Elkhatib

    has shown that he cannot perform his obligations under the current franchise agreement. The agreement, as entered into by Elkhatib and Defendants, requires all franchisees to carry the full food product line of Dunkin’ Donuts. Elkhatib had made it clear . . . that he will not carry any of the pork products as required by the agreement. . . . [B]ecause Elkhatib failed to carry the full line of food products, Defendants would not extend his current franchise agreement, or relocate his Westchester store.”

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