Nonrenewal for Franchisee’s Refusal to Serve Pork Could Constitute Racial Discrimination

This posting was written by Pete Reap, editor of CCH Business Franchise Guide.

Dunkin Donuts, Inc. could have committed racial discrimination in violation of federal civil rights law by notifying a Palestinian-Arab franchisee that he was ineligible for relocation or renewal of his franchise agreements because of his refusal to carry breakfast sandwiches made with pork products, the U.S. Court of Appeals in Chicago has ruled.

A federal district court’s grant of summary judgment in favor of the franchisor (CCH Business Franchise Guide ¶12,938) was reversed, and the dispute was remanded for further proceedings.

In 1984, the donut shop franchisor began offering breakfast sandwiches containing bacon, ham, and sausage at its franchises. The franchisee refused to sell the sandwiches because, he claimed, his Arab race forbade him from handling pork. The franchisor did not object to the franchisee's refusal until May, 2002, when it informed the franchisee that he was no longer eligible for a proposed relocation of one of his stores, or for renewal of his three franchise agreements.

Racial Discrimination Law

A plaintiff could prove racial discrimination under the civil rights law either through direct evidence or through an indirect burden-shifting method, according to the court. The franchisee presented little direct evidence that the franchisor intentionally discriminated against him. The franchisee provided only a statement by his store manager that she overheard a franchisor representative make an anti-Arab statement.

However, the statement was so lacking in detail—including any indication as to what the statement was—that its potential relevance was purely speculative, according to the court. It did not provide direct evidence that the decision regarding the renewal and relocation of the franchises was based on the franchisee’s race.

Burden-Shifting Method

Under the burden-shifting method, the franchisee was required to produce evidence from which a jury could find that: (1) the franchisee belonged to a protected class; (2) he performed, or could perform, his obligations; (3) he suffered an adverse action; and (4) similarly-situated unprotected individuals were treated more favorably, the court noted.

If the franchisee met that burden, the franchisor would be required to provide a legitimate, non-discriminatory reason for its actions. The burden would then shift back to the franchisee to demonstrate that the franchisor’s reasons were merely pretextual.

It was undisputed that the franchisee belonged to a protective class and that he suffered an adverse action, the court observed. Instead, the franchisor unsuccessfully contested the second and fourth prongs of the franchisee’s prima facie case. The franchisor argued that (1) the franchisee failed to establish that he could perform his obligations under the parties’ agreement because he was unwilling to serve the full line of products and (2) the franchisee failed to establish that there were no similarly-situated unprotected franchisees treated more favorably.

In response, the franchisee admitted that that his failure to carry the full line of breakfast products was inconsistent with a provision in the parties’ agreement. However, he contended that the franchisor applied that provision in a discriminatory manner. Thus, the second and fourth prongs were merged in the inquiry, leading to the issue of whether or not there were similarly-situated individuals not in the protected class who were treated differently, the court reasoned.

The franchisee identified three non-Arab franchisees in the Chicago area who refused to carry the full line of breakfast sandwiches and who were granted franchise renewals by the franchisor. Furthermore, the provision in the parties’ agreement was absolute in its terms regarding the carrying of the franchisor’s full-line of products and it did not indicate that exceptions would be made for certain reasons and not for others.

Thus, the franchisor’s argument that the three other franchisees were not similarly situated (because their reasons for failing to carry the full-line were different than those of the complaining franchisee) was unavailing, and the franchisee demonstrated a prima facie case, the court decided.

Pretext

Dunkin Donuts pointed to the provision itself as its non-discriminatory reason for notifying the franchisee he was no longer eligible for relocation or renewal of his franchises. There was enough evidence, however, to demonstrate that the reason was pretextual, the court ruled. Significant evidence showed that the carrying of breakfast sandwiches was not an issue of importance to the franchisor.

Dunkin Donuts allowed other franchisees in the area to refuse to carry any breakfast sandwiches at all, when merely relocating the shops, or in one case merely rearranging store displays, would have allowed them to carry the full-line. The practice of not carrying the full-line was apparently so common that the franchisor provided signs for such franchises declaring “Meat Products Not Available,” the court observed. Moreover, despite his failure to carry pork products for nearly 20 years, the franchisee always received favorable store reviews and the failure to carry such products was not an issue.

The fact that the failure to carry the sandwiches was unimportant to the franchisor was strengthened by evidence that breakfast sandwiches accounted for only approximately four percent of sales at shops in the franchisor’s system. There was no evidence that there had been a change the franchisor’s corporate or regional policy on the matter. Thus, the evidence was sufficient to allow a jury to find pretext.

The decision is Elkhatib v. Dunkin Donuts, Inc., No. 04-4190, July 10, 2007. Text of the opinion will appear in the August report of the CCH Business Franchise Guide.

A feature story on the franchise dispute ("Pork at issue in doughnut franchise row") appeared in the August 1 edition of the Chicago Tribune.