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Are Franchisees Well-Informed? Revisiting the Debate over Franchise Relationship Laws

By Published On: April 26th, 2013

By Robert Emerson & Uri Benoliel.

The most vital debate in the field of franchise contract law over the last few decades has focused on the following issue: Whether the law should protect franchisees against franchisor opportunism. Franchisor advocates suggest that franchisee protection laws, commonly known as ―franchise relationship laws,‖ are undesirable. Their opposition to such laws is based primarily on an assumption that franchisees consider all relevant information before signing a franchise contract and make a well-informed choice among the range of franchise alternatives available. In particular, prior to signing the contract, franchisees are assumed to have read the franchise disclosure documents made available to them, compare the various contracts and disclosure documents offered by different franchisors, and consult with a specialized franchise attorney regarding the terms of the franchise contract. Since franchisees consider all of the relevant information and make a well-informed decision, they do not deserve, according to franchisor advocates, any special legislative protection that would interfere with the franchisor-franchisee free-market relationship.

Systematic empirical evidence, however, which has thus far been overlooked in the debate over franchise relationship laws, casts significant doubt on the theoretical assumption that, before signing a franchise contract, franchisees consider all relevant information which leads to a well-informed choice. Empirical studies show that new franchisees that join a franchise network normally lack prior business ownership experience. This lack of experience presents significant cognitive obstacles for novice franchisees when attempting to consider all of the relevant information before acquiring ownership of a franchise unit. Such cognitive obstacles—contrary to the franchisor advocates‘ view—often lead franchisees, as empirical studies show, to ignore franchise disclosure documents, avoid conducting a comparison between various franchise contracts and disclosure documents, and neglect to consult with a specialized franchise attorney prior to signing the franchise contract.

Given this reality, theoreticians and legislators interested in creating franchise laws that protect novice franchisees from possible opportunism by franchisors must cast doubt on the assumption that franchisees are well-informed business people and incorporate into their analyses a more representative conception of franchisee characteristics.

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Prof. Robert Emerson is Professor of Business Law & Legal Studies, at the Warrington College of Business Administration, University of Florida. He holds a B.A degree from the University of the South (Sewanee), and a J.D. degree from the Harvard Law School.

Dr. Uri Benoliel is the Head of the Commercial Law Department at the Academic Center of Law & Business. He holds a doctoral degree from the University of California, Berkeley.

This blog is based on an article recently published at the Albany Law Review (vol. 76, p. 193, 2013)

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Written by : AAFD

The AAFD seeks to improve the franchising climate by providing resources to franchise associations, franchisees, franchise owners and prospective Franchise Buyers.