In a decision dated May 31, 2011, the U.S. Court of Appeals for the Seventh Circuit applied state franchise law to the Girl Scouts of the United States of America and its affiliates. The Seventh Circuit held that the national Girl Scouts organization, a nonprofit incorporated by an Act of Congress, violated the Wisconsin Fair Dealership Law by dissolving a local Wisconsin chapter of the national organization "without good cause."
The national organization attempted to dissolve the chapter as part of a territorial reorganization intended to increase ethnic and racial diversity. However, the chapters are not subsidiaries of the national organization. Rather, the national organization issues a "charter" to the chapter, thereby authorizing the chapter to use the Girl Scout trademarks and sell the famed cookies.
The chapter filed suit to prevent the national organization from taking away its territory, which would not have put the chapter out of business, but would have precluded the chapter from representing itself as affiliated with the national organization or otherwise using the Girl Scout trademarks. The chapter claimed that the national organization's action violated the Wisconsin Fair Dealership Law. That law, originally targeted at for-profit franchises, states that the grantor of a dealership may not "terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause." Despite language in the chartering documents between the national organization and the chapter to the contrary, the lower court found that the Wisconsin Fair Dealership Law prevented the national organization from dissolving the chapter without showing "good cause." The national organization argued that the decision to dissolve the chapter was protected by the First Amendment. In addition, the national organization argued that it was not subject to the Wisconsin Fair Dealership Law, since it was a nonprofit organization.
The Court of Appeals rejected the argument that the national organization's nonprofit status insulated it from the Wisconsin Fair Dealership Law. The Court stated: "From a commercial standpoint the Girl Scouts are not readily distinguishable from Dunkin' Donuts." The Court found the Wisconsin Fair Dealership Law applicable to both nonprofit and for-profit entities, and the Court found no basis for exempting the national organization.
Nonprofit organizations with chapters and affiliates need to review their affiliate structure and the state franchise laws in the jurisdictions where they have affiliates. The structure used by the Girls Scouts is a common one for nonprofit organizations and many organizations' chartering documents state that the affiliate's charter can be terminated "without cause." State franchise law may provide to the contrary.