Monday, September 22, 2008

Franchisor Could Reject Franchise Transferees for Lack of English Proficiency

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

A restaurant franchisor did not breach a franchise agreement by withholding its consent to a franchise transfer to two prospective transferees who failed to pass the franchisor’s English Language Proficiency Test, according to the federal district court in Los Angeles.

The franchisor required the franchisee and the prospective transferees, who were of Middle Eastern origin, to execute a rider on the contract for the sale of the franchise expressly requiring the transferees to pass the language proficiency exam, which tested “whether, in [the franchisor’s view], an individual has a sufficient command of the English language to serve customers and conduct business with [the franchisor], with suppliers and with other parties.”

After both of the prospective transferees failed the exam, the franchisor informed them and the franchisee that it could not approve the sale. The franchisee subsequently closed his franchise and brought suit against the franchisor.

Arbitrary and Unreasonable Requirement

The franchisee argued that the requirement that the prospective transferees pass the language proficiency exam in order to receive the franchisor’s consent to the sale was arbitrary and unreasonable. However, the argument failed for several independent reasons, the court determined.

There was substantial evidence that franchisees must be proficient in both written and spoken English to complete required training, understand and comply with corporate operating instructions, communicate with suppliers, and interact with customers.

The franchisee contended that the proficiency exam misjudged the prospective transferees’ English proficiency, since the transferees’ proficiency had been sufficient in prior commercial contexts. However, that contention was undercut by one of the transferee’s repeated need to use an interpreter during her deposition, the court observed.

Contract Provision

The franchisee had agreed in the franchise agreement that it would follow all of the franchisor’s system requirements, one of which, set out in the franchisor’s company manual, was the English language proficiency requirement. The franchisee and the prospective transferees expressly agreed to the proficiency requirement in the rider to the contract for sale.

The decision is De Walshe v. Togo’s Eateries, Inc., CCH Business Franchise Guide ¶13,956.

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