Franchising on Indian Reservations

Franchisors looking to penetrate new or emerging markets should explore the possibility of franchising in Indian Country.¹ In conjunction with America’s largest corporations, Indian tribes are now aggressively engaged in real estate development, banking and finance, telecommunications, wholesale and retail trade, and tourism – all of which gives rise to franchising opportunity. Over the past decade, the 567 federally-recognized tribes in the U.S. have become an economic, legal, and political force to be reckoned with. Consider these facts:

• Most of Fortune 500’s top 20 companies now do business in Indian Country, including Wal-Mart, Exxon, G.M. and Ford (#1-4), Verizon, AT&T, Home Depot, Target and Bank of America.

• Tribal businesses, although generally not subject to state and federal taxation, have annually generated over $246 million in tax revenue for states and counties, and $4.1 billion for the Federal Government.

• In 2001, gaming tribes contributed $32 billion in revenue, $12.4 billion in wages and 490,000 jobs to the U.S. economy.

• Indian tribes occupy more than 55 million acres of land in 30 states.

Both the cause and effect of the dramatic rise in Indian economic development is the increased interaction of tribes, and millions of people who now seek business, employment, or recreation on Indian reservations. It is that enormous influx of people onto tribal land – a "captive audience" of reservation consumers – that makes Indian Country ripe for franchising.

The body of tribal, state and federal law known as "Indian law" is the foundation for every transaction in Indian Country. Whether you represent a franchisor that is considering expanding onto the reservation for the first time, or you are an experienced international franchise lawyer, you must understand basic Indian law before consummating a tribal franchise. Better yet, given that the negotiation of an Indian franchise agreement may involve as much politic and culture, as business and law, franchise counsel would be well advised to associate Native lawyers with Indian law expertise to assist you in brokering the deal.

Tribal Sovereignty. Indian tribes are "distinct, independent political communities, retaining their original natural rights" in matters of local self-government.² While no longer "possessed of the full attributes of sovereignty," tribes remain a "separate people, with the power of regulating their internal and social relations."³ Essentially, Indians possess "the right . . . to make their own laws and be ruled by them."⁴ Much like the Federal and state governments, tribal governments are elaborate entities, consisting of executive, legislative, and judicial branches. The office of the tribal chairperson or president (like that of the President or a governor) and the tribal council (a legislature) operate the tribe under a tribal constitution and/or code of laws, and tribal courts adjudicate most matters arising under tribal law.

This analysis presumes the franchisee to be a federally recognized Indian tribe, as opposed to an individual tribal entrepreneur. In the context of franchising with a tribal member, the critical difference is that the tribal member franchisee does not enjoy the same privileges and immunities as an Indian tribe- franchisee. Most notably, the tribal member franchisee, i.e., acting on his or her own accord, is not immune from suit.⁵ The issue of tribal sovereign immunity is fully discussed below.

Tribal Corporations. Frequently, an Indian tribe is organized pursuant to the Indian Reorganization Act of 1934 (IRA).⁶ Under Section 16 of the IRA, a tribe will have adopted a constitution and bylaws that set forth the tribe’s governmental framework and the authority that each facet of its government possesses. A tribe may also be incorporated under Section 17 to the IRA,⁷, by which the Secretary of Interior issues the tribe a federal charter. Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities. The Section 17 corporation has articles of incorporation and bylaws that identify its purpose, much like a state-chartered corporation.

Alternatively, an Indian corporation may have been organized under tribal or state law. If the entity was formed under tribal law, the tribe will have done so pursuant to its corporate code. Under federal common law, the corporation likely enjoys immunity from suit, as discussed below. If the entity was created under state law, the tribal corporation exists as a state-entity and state law governs the corporation and its activity. Thus, the state-chartered tribal corporation is generally not immune from suit and may be sued in state court. When negotiating a franchise with a tribe, one should first review the tribe’s organic documents and code of laws, which taken together identify the entity with which one is dealing and the franchise’s legal rights and remedies. In addition, one doing business with an Indian tribe must be patient because as is the case when dealing with a local, state or federal governmental entity, doing business with an Indian tribe simply takes time.

Tribal Courts. While generally modeled after Anglo-American courts, the 150 Indian courts in the U.S. are significantly different. Tribal judges, who are often tribal members, may not necessarily have law degrees. Tribal courts operate under the tribes’ written and unwritten set of laws. Most tribal codes contain procedural rules specific to tribal court, as well as tribal statutes and regulations. Increasingly, tribes are adopting commercial laws modeled after the Uniform Commercial Code. Tribal procedural laws outline the tribal court’s adjudicatory authority and may set forth limitations on tribal jurisdiction. Tribal laws also include traditional practices, including commercial customs, which are based on oral history but may not be codified.

Tribal judges generally follow their own precedent and, although each and every tribal court and the tribal laws they follow are distinct from the next, tribal judges give significant deference to the decisions of other Indian courts. However, because there is no official tribal court reporter and not all tribal courts keep previous decisions on file, finding such case law can be difficult. While federal and state court opinions can serve as persuasive authority, particularly in business litigation, tribal judges are not bound by such precedent. Nevertheless, many state courts extend full faith and credit to tribal court orders, and federal courts generally grant comity to tribal judges’ rulings. When negotiating contractual choice-of-forum clauses, a franchisor must appreciate the character of tribal courts, understand pertinent tribal laws, and acknowledge both the differences and inter-relatedness of tribal, state and federal courts.

Federal and State Franchise Laws. Federal Trade Commission ("Commission") franchising regulations and the legislative history for those laws do not affirmatively contemplate the inclusion of Indian tribes, which is not unique to franchising. Most federal laws of general applicability (with the exception of the two employment statutes mentioned below) do not make any mention of Indian Country. As Ninth Circuit Court of Appeals Judge William Canby observes: "In most cases, Congress does not state whether it intends its legislation to tribes or Indians in Indian Country . . . [C]ourts are consequently called upon to decide that question."⁸ While it is highly doubtful that a federal court would hold that Commission franchising regulations apply to tribes and in turn a tribal franchisee,⁹ a non-Indian franchisor is likely subject to the jurisdiction of the Commission and thus should comply with its regulations.¹⁰ Notwithstanding, state franchise laws do not apply to either party to a reservation-based franchise deal.¹¹ However, the parties to a franchise agreement can include a covenant under which both must abide by federal and/or state franchise laws, and a provision that such authorities will govern any dispute arising from the franchise.

Labor & Employment Laws. Labor and employment issues affect the possibility and practicability of every tribal contract. Both Title VII¹², and the Americans with Disabilities Act¹³, expressly exclude Indian tribes. Likewise, state discrimination laws usually do not apply to tribal employers; e.g., Arizona Revised Statute § 41-1464 expressly exempts tribes from the state’s discrimination laws. Tribal officials are also immune from suit arising from alleged discriminatory behavior, so long as they acted within the scope of the tribe’s authority.

The circuits, however, are split regarding whether federal regulatory employment laws apply to reservation employers. The Tenth and Eight Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA), Employee Retirement Income Security Act (ERISA), Fair Labor Standards Act (FLSA), and National Labor Relations Act (NLRA), because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance. Conversely, the Ninth, Seventh and Second Circuits have applied OSHA, ERISA and NLRA to tribes, reasoning that such statutes of general applicability govern tribal employment activity because India n tribes are not explicitly exempted from the laws. Nevertheless, state labor laws and workers’ compensation statutes generally remain inapplicable to tribal businesses.

Given that U.S. tribes now employ nearly half a million Americans, it will not be long before the Supreme Court is asked to resolve the conflicting circuit court decisions. Before admonishing a reservation franchisee regarding labor and employment law compliance, franchisors must understand which, if any, of these laws apply to that particular tribe and tribal franchisee.

Secretarial Approval. The Secretary of Interior must approve any contract "that encumbers Indian land, for a period of 7 or more years¹⁴." Leaseholds for Indian lands, which typically run 25 years in duration, also require Secretarial approval. 25 U.S.C. § 415. If the franchise agreement and/or a collateral contract encumbers lands owned by a tribe (or tribal member), which is more likely than not, counsel should analyze whether the Secretary of Interior must approve the agreement(s). Failure to secure Secretarial approval could render the franchise agreement null and void.

Tribal Sovereign Immunity. Like other sovereign governmental entities, federally recognized tribes enjoy federal common law sovereign immunity. A tribe is subject to suit only where Congress has "unequivocally" authorized the suit or the tribe has "clearly" waived its immunity.¹⁵ Tribal immunity generally extends to tribal casinos and businesses, and to Section 17 and tribally chartered corporations. Tribes and their officials, however, can be subject to suit under various exceptions recognized by courts. For example, courts have applied the Ex Parte Young doctrine to tribal officials, creating an exception to the general rule of immunity when an official acts outside of the government’s authority. While this analysis assumes the franchisee to be a tribe, a tribal member-franchisee does not enjoy immunity from suit. Tribes retain immunity from suit when conducting business both on- and off-reservation. Thus, even though the franchise may not lie within the exterior boundaries of a tribal franchisee’s reservation, the franchisee may remain immune from any litigation arising from the franchise agreement. As a general proposition, a tribe can only be sued in contract if the parties expressly negotiated a sovereign immunity waiver into the four corners of the contract. Nonetheless, the U.S. Supreme Court held in C&L Enterprises v. Citizen Band Potawatomi Tribe of Oklahoma¹⁶, that an agreement to arbitrate disputes constitutes a clear waiver of immunity. While the Court held that a tribe’s waiver must be "clear," it expressed for the first time that a waiver need not include the express terms "waiver of sovereign immunity" and that an arbitration clause was sufficient to evidence such intentional waiver. 

Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief. Tribes have also been held immune from subpoena enforcement to compel production of corporate witnesses or tribal documents. Recently, the Ninth Circuit Court of Appeals, in Bishop Paiute Tribe v. County of Inyo¹⁷, reaffirmed that tribes are immune from subpoena enforcement in barring the execution of a warrant to obtain confidential payroll records for casino employees. The Supreme Court granted certiorari in Bishop Paiute and, though many tribal advocates expected the High Court to reverse the Ninth Circuit and consistent with C&L and other recent Indian law opinions, further erode the tribal immunity defense, the Court remanded the case for reconsideration of separate but related issues arising under civil rights law. Therefore, for the time being, even in matters where, e.g., the franchisor has been sued and the tribal franchisee has been served with a subpoena as a non-party, the franchisee need not comply with the court order.

Sovereign Immunity Waiver. In this modern age of Indian commerce, many (perhaps most) tribes agree to clear and unequivocal limited waivers of immunity in agreements with non-Indian parties. To further encourage commercial dealing, some tribes have created state-chartered corporations or subordinate entities, with the express understanding that the assets of such institutions are not immune from suit, levy, or execution. Still other tribes have specifically waived immunity for tribal businesses incorporated under the IRA. To secure a valid waiver, the franchisor should receive written assurance that the franchisee adhered to tribal protocols to affect the waiver. Most often, the tribe’s entire governing council (as opposed to just the tribal chairman or a tribal corporation’s CEO) must formally resolve, in writing, to waive immunity. Otherwise, the waiver could be rendered invalid and unenforceable.¹⁸

Negotiation of limited waivers of immunity is a widely practiced prerequisite to contracting with tribal governments and their businesses. However, many attorneys fail to even spot the immunity issue when negotiating tribal contracts and thus risk finding their clients without a remedy in the event of a breach. When initiating a tribal franchise agreement, you, perhaps with the assistance of Indian legal counsel, should first consider practical remedies to any problems that may arise from the deal, such as insurance and/or lines of credit. If no practical solutions exist, a franchisor should ask the tribe for a limited waiver and stand prepared to negotiate explicit waiver, dispute resolution and choice-of-law clauses. To the extent a franchisor requires access to reservation lands, e.g., to satisfy its obligations under the franchise agreement or serve the franchisee with a view towards compelling the tribe to remedy any breach of the agreement, the waiver provision should be negotiated to confer access rights to the franchisor.

Tribal Court Jurisdiction. Tribal jurisdiction depends largely upon (1) whether the defendant is Indian or non-Indian; and (2) whether the events at issue occurred in Indian Country, particularly tribal or non-Indian lands within the boundaries of a tribal community. These two highly complex issues should be the first area of inquiry for any jurisdictional question involving a business dispute arising on a reservation. A third threshold determination is whether Public Law 280¹⁹, grants the state civil authority to adjudicate the deal. "P.L. 280" applies fully in California, Minnesota, Nebraska, Oregon, Wisconsin and Alaska.

Generally speaking, tribal courts have jurisdiction over a suit by any party – Indian or non-Indian – against an Indian defendant for a claim arising on the reservation, which would include tribal (or tribal member) franchisee defendants. However, under Montana v. U.S.²⁰, a tribal court can only assert jurisdiction over a claim against non-Indians when "necessary to protect tribal self-government or to control internal relations." Essentially, an Indian court only has jurisdiction over non-Indian parties "who enter consensual relationships with the tribe . . . through commercial dealing, contract, leases, or other arrangements." The Supreme Court has made clear that a private contract (e.g., franchise agreement) qualifies as a consensual relationship under the so-called "Montana rule," thus affirming that tribal courts have jurisdiction over non-Indian parties to tribal contracts. However, a franchisor should not be required to litigate in tribal court so long as the franchise agreement includes an express waiver and specific dispute resolution provisions permitting adjudication in another forum.

State courts may exercise jurisdiction over non-contract claims against a non-Indian party that arises in Indian Country, or contract disputes involving a state-chartered tribal corporation or a tribal entity for which the tribe has waived immunity. Federal courts can assert jurisdiction over claims arising from reservation business activities if there a federal question under 28 U.S.C. §§ 1131, 1343, or diversity under § 1332. While tribes generally destroy diversity because they are not state citizens, a state-chartered tribal enterprise can be sued in diversity. While tribal courts would retain personal jurisdiction over a party to a tribal franchise agreement and subject matter jurisdiction over disputes concerning the agreement, a series of recent Supreme Court cases casts serious doubt as to whether tribal authority over non-Indian business reservation activity remains "necessary to protect tribal self-government or to control internal relations."

In Nevada v. Hicks²¹, the Court held that tribes lack adjudicatory jurisdiction to hear claims under 42. U.S.C. 1983 arising from the activities of state officials on reservation land but expressly left open "the question of tribal court jurisdiction over nonmember defendants in general." The Court explained, however, that "we have never held that a tribal court had jurisdiction over a nonmember defendant," observing that it had previously dodged the question of whether tribes may generally adjudicate claims against non-Indians arising from on-reservation transactions. As a result of Hicks, many tribal attorneys are now counseling their clients to consider settlement of business disputes with non-Indians, rather than litigation, for fear that the next appellate or high court decision will outright foreclose tribal adjudicatory jurisdiction over non-Indians.

Tribal Exhaustion Doctrine. If sued in tribal court, a franchisor could challenge tribal jurisdiction in federal court. The question of whether a tribe has jurisdiction over a non-Indian party must be answered by federal law and thus poses a federal question under Section 1331. ²² Ordinarily, however, "a federal court should stay its hand ‘until after the tribal court has had a full opportunity to determine its own jurisdiction.’"²³ If the tribal court determines it has jurisdiction, it will proceed to rule upon the merits of the case. The non-Indian party can then file suit in federal court, where the district court will review de novo the federal question of tribal jurisdiction. The district court is guided but not controlled by the tribal court’s jurisdictional determination. If the federal court decides tribal court had jurisdiction, it will not relitigate issues already determined on the merits.²⁴

There are several exceptions to the requirement that a federal court should stay its hand – where "an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction."²⁵ Moreover, "when . . . it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule," exhaustion "would serve no purpose other than delay."²⁶ While these exceptions to the exhaustion rule can assist non-Indian defendants in getting into federal court, they would offer little assistance to a franchisor, who, absent negotiated choice-of-forum or dispute resolution provisions, would remain subject to tribal jurisdiction under Montana. Because a tribal court could be the only trier of fact in a franchise dispute, the franchisor should thoroughly present the merits of its case to the tribal judge, being ever mindful of the unique aspects of tribal courts described above.

Conclusion. As evidenced by the Fortune 500 companies and high-powered franchisors who are already doing business with America’s 567 federally-recognized tribes, Indian Country is ripe for franchising opportunity. Notwithstanding, Indian law in the franchising arena defies boilerplate contract language, standard business negotiations, and common understandings of civil procedure and jurisdiction. Thus, it is vital that today’s franchise lawyer understand basic Indian law – or even better, associate him or herself with Native counsel who does – when franchising in Indian Country.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.