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Can Franchisee Associations Serve as a Substitute for Franchisee Protection Laws?

Posted on Date: Dec 11, 2013

Can Franchisee Associations Serve as a Substitute for Franchisee Protection Laws?


Law Professors Robert W. Emerson and Uri Benoliel have recently published a compelling article in the Penn State Law Review, “Can Franchisee Associations Serve as a Substitute for Franchisee Protection Laws?.”  The article identifies the need to protect franchisees from franchisor ‘opportunism,’, which the AAFD describes as ‘franchisee abuse.’

While the premise of the article is to dispute claims from franchisor advocates that franchisee associations alone are sufficient to protect franchisees, and that franchise fairness legislation is necessary to address unfair practices, the article has generated some ‘unintended’ comments that the authors believe that franchisee associations lack value.

First and foremost, the lack of franchisee protective legislation stems from the lack of an effective organized voice of franchisees to lobby for such laws.  In other words, franchisee associations are not a substitute for legislation, rather they are essential if there is any hope for passing legislation into law.

After 25 years of trying to organize franchisees, while the authors identify the fear of franchisor retaliation is a significant factor inhibiting the establishment of franchisee associations, I think the authors missed the most important factors:

1.    Franchisors are in the franchising business, while franchisees are not engaged in franchising, but in selling goods and services.  We have found that franchisees are not engaged in the rights of franchisees for the long term (the way a franchisor executive might be), but have only a passing interest when rights are infringed.

2.    Franchisees tend to react to a crisis, and when the crisis dissipates the associations tend to dissolve.  The exceptions are those franchisee associations that  into the purchasing cooperative business, and/or are large enough to engage an executive director and staff that can deliver a stream of approved suppliers.  For this to happen, franchisees must first have a right to engage the supply chain.

3.    Franchisees have not shown an interest or inclination to network effectively with other franchisee groups.  There have been efforts, including the AAFD, the AFA, and now the CFA, but the willingness of franchisees to truly join in common cause has been limited at best.  Until franchisees understand the importance of strong alliances, and common cause, associations will continue to have limited success, and protective legislation will continue to be an elusive dream.

The authors of the article only scratch the surface of franchisor ‘opportunism.’  The word ‘opportunism’ is too kind, and any good competitor should be ‘opportunistic.’  The correct characterization is franchisor ‘abusive practices.’  Opportunistic behavior to the point of an abusive practice is what needs to be curbed.  Although not addressed in the article as an example of opportunistic behavior, in my opinion  the most egregious ‘abusive’ conduct has to do with a franchisor’s ‘control’ and profit of the supply chain.  Abusing the ability to force franchisees to be captive buyers to the franchisor’s profit is the greatest threat to franchisees – even greater than encroachment (which is usually only an issue in the largest chains).  Cannibalizing market penetration through multiple channels of distribution and control of cash flow are other huge threats that are not mentioned.

While I agree with the authors that too few franchisee organizations exist, I do believe that the successful organizations have been able to effectively negotiate protections against franchisor opportunism and abuse.  I don’t think that franchisee groups have yet effectively negotiated franchise agreements (perhaps that is a lack of maturity), but negotiating leverage is abundant for franchisee associations if properly cultivated.

I fear the Emerson/Benoliel article has the effect of dissuading franchisees from organizing—by suggesting that legislation is a better way to address abusive practices.  Effective franchisee associations are the most effective vehicle to negotiate fair and balanced franchise agreements that limit franchisor abuse in the franchise agreement.  Legislation is needed to protect the majority of franchisees who are not protected by brand specific associations, and to set minimum standards of good faith conduct.  But In truth, the only path to legislation is through an organized effort to promote sound legislation—and that won’t happen without strong effective franchisee associations lobbying for reforms.

Article Abstract

Here is an online link to the paper:

The most vital debate in franchise law over the last few decades has focused on whether state or federal law should protect franchisees from the potentially opportunistic behavior of franchisors. Several states, such as California, Massachusetts, and Vermont, are considering the adoption of laws protecting franchisees against franchisor opportunism. At the federal level, several franchisee protections laws have been introduced, but so far all have been rejected.

Franchisor advocates suggest that franchisee protection laws are superfluous. Deeply ingrained in franchisor advocates’ opposition to such legislation is the belief that independent franchisee associations, namely trade associations formed by franchisees within a single franchise chain, serve as a sufficient barrier against franchisor opportunism. More specifically, franchisor advocates assume that by collectivizing a large percentage of the franchisees in the franchise system, an independent franchisee association improves the bargaining position of franchisees vis-à-vis franchisors. As a result, the association is assumed to succeed in negotiating contract terms that protect franchisees from franchisor opportunism and thereby eliminate the need for franchisee protection laws.

This Article questions the idea that independent franchisee associations can prevent franchisor opportunism and otherwise serve as a substitute for franchisee protection laws. Focusing on the implicit assumption that such associations exist, or at least have the potential to exist, this Article argues that, in most cases, franchisees are unlikely to establish independent franchisee associations in the first place—mainly because under current law the expected costs borne by the franchisee in leading the establishment of an association exceed the expected benefits. That is, as federal and most state laws fail to adequately prohibit the franchisor’s retaliatory termination of the franchise or other reprisals against a franchisee association leader, the probability of such retribution is significant; conversely, the probability that the franchisee will form a successful and sustainable association is very low. First, franchisors often establish, fund, and control a competing franchisee committee, known as the franchisor advisory council, which is likely to reduce considerably the probability that an independent franchisee association will operate successfully. Second, franchisees normally have little incentive to join and actively participate in an already functioning independent franchisee association for several reasons, including franchisee free-riding, franchisee fear of retaliation by franchisors, and economic incentives provided by franchisors to franchisees for not joining such associations.

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