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New Franchise Legislation – Are Franchisors Finally Reaping What They Sowed?

Posted on Date: Oct 11, 2013

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By Ronald Gardner, Dady & Gardner

Recently, many lawyers oriented toward representing franchisors have expressed surprise at the amount and breadth of legislation that has been introduced to protect franchisees.  With legislative activity in Maine, California, and more recently, Pennsylvania, these lawyers have expressed opinions ranging from, “There is no need for this—this is just an excuse for franchisee lawyers to sue our clients” to, “Whoever wrote this legislation are folks without much grounding in the reality of business transactions in general and or the franchise relationship specifically."

Allow me to posit another theory – legislators are finally hearing so much from their constituents about the over-reaching in what has become the typical franchise agreement that they have decided something needs to be done.  In short, legislation like this is not the disease, but instead is a symptom of the tremendous imbalance that franchisees face every day.  Do franchisors and their lawyers actually believe it’s a coincidence that legislation like that recently introduced in Pennsylvania is also "suddenly" being introduced all over the country?

Let's be blunt:  franchisors have continued to move further and further away from what has been the relative level playing field in more typical commercial relationships.

Initially, franchisors were emboldened by being freed from fiduciary responsibility (even though they typically hold monies of their franchisees in at least an implied trust when it comes to advertising).

That was followed by franchisors gaining freedom from most responsibility related to anti-trust considerations, allowing franchisors to set prices and costs in a way that enriches the franchisor (because of money being generated both on the supply side through control of the vendor system and on the retail side by controlling price points-- all at the expense of ANY profit).

Once that type of control was ceded, it was a quick leap to the aggressive drafting of contracts that virtually assure that the franchisor, beyond allowing the right to use a trademark not be required to actually DO anything.  In fact, this last concept has gone so far that franchisors are now regularly disclaiming the obligation that exists in virtually EVERY OTHER CONTRACT IN AMERICA – the obligation to act in good faith.  (The recent effort made to defeat a very commonsense solution to this over-reach in California is further evidence of my point.)

And now, despite the fact that many franchisors control EVERY facet of a franchisees' operation, we somehow think that this has not morphed into something curiously close to a straight up employment relationship (see, employers actually DO have obligations to their employees).

All the while, franchisors are funding this increasingly one-sided relationship, and their efforts to keep it that way, with money initially invested by, and subsequently generated by, the franchisees.

No, I don't think this is the work of "folks without much grounding in the reality of business transactions in general and or the franchise relationship specifically."  Instead, this appears to be the work of folks who know exactly what has happened, and simply can't take it anymore. What's the old adage?  You reap what you sow.

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Editor’s Note: The AAFD has always focused on marketplace solutions by advocating strong franchisee associations that are able to negotiate fair franchise agreements.  Over the past 20 years we have come to believe that franchisees need a legislative assistant.  The AAFD is the lead sponsor of fair franchising legislation in California ( Senate Bill 610), and we intend to support similar efforts at both the state and Federal level. We support efforts to level the franchising playing field, which is currently skewed heavily in favor of the franchisor interests mentioned in Ronald Gardner’s guest post.  Ron and his firm are long time advocates of franchisee rights, and longtime supporters of the AAFD.

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Ron is the Managing Partner of Dady and Gardner, P.A and a member of the AAFD’s Franchisee LegaLine.  Ron’s practice is limited to representing franchisees, associations, dealer/distributors in disputes with their franchisors and manufacturers.

Ron is a Past Chair of the ABA Forum on Franchising, and the only franchisee lawyer ever elected to lead the nation’s franchise lawyers.  He is also only one of four franchisee lawyers that serve on the Franchise Advisory Counsel of the North American Securities Administrators Association—an organization dedicated to formulating legislation and regulation to protect franchisees.

Ron is an author and a highly sought-after lecturer on topics related to franchise/distribution law.  He is listed as a Best Lawyer in America, has been named one of Minnesota’s Top 100 Super Lawyers for the last five years, and has been recognized by Chambers USA as “the premier franchisee lawyer” in America.

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