By Jessica Bennett, Robert Purvin and Keith Miller
The recently reported scandal involving the BurgerIM® franchise system apparent implosion (See “The BurgerIM Disaster” from Restaurant Business Online), has refocused a bright spotlight on the question, “How is a franchisor able to perpetrate a fraud within the fabric of franchising regulations in America?”
Have you ever heard the expression caveat emptor? It means “buyer beware.” For much of U.S. history, caveat emptor was the name of the game in consumer protection. Businesses, hucksters, and snake oil salesmen of all stripes could sell whatever they wanted and make any claims they wanted about their products. It was up to the buyer to make sure they got a fair deal.
All of that changed in 1962 when the Kennedy administration created the Consumer Bill of Rights. Those early laws ensured that consumers had:
- The right to safety from the products they bought
- The right to accurate information about the products they purchased
- The right to choose products and services
- The right to voice complaints and concerns
Over the intervening decades, the Consumer Bill of Rights has grown, and we’ve seen a rash of new laws meant to protect consumers from bad corporate actors. (Here’s a great link on the history of consumer protection laws.) These days, a consumer who is harmed by a product can sue the manufacturer on any number of grounds.
This is great news for consumers, but there is one group that’s been missing out on these important corporate protections. Franchisees!
Why Franchisees Don’t Get the Same Protections as Regular Consumers
In the late 1960’s and into the early 70’s business format franchising boomed—largely spurred by the massive success of McDonald’s. During this time there were a spate of fraud claims raised by franchisees who were injured by false promises and outright instances of misrepresentation. In the late 60’s the state of California began looking hard at franchise abuses, and soon thereafter the franchising ‘industry‘ came under the scrutiny of the US Federal Trade Commission (FTC).
Unfortunately, by this time franchisors had already organized and funded the International Franchise Association to protect industry interests and there was no organized voice for franchisees speaking out for franchisee ‘consumers.’ Yes, the FTC does consider the franchise buyer to be a consumer, not a business to business transaction as the franchisor community likes to imply. The result was a system of franchise regulatory efforts focused on presale disclosure only and ignoring remedies to address injured franchisees. Starting with the California Franchise Investment Act in 1970, followed by similar laws in other states, and ultimately the FTC Rule on Franchising in 1979, franchisors were required to be truthful in soliciting franchise investment, but there were virtually no prohibitions on franchisor conduct (as long as it had been properly disclosed), and very limited private remedies for injured franchisees. And even then, the conduct often needs to be “willful” for the franchisor to have action taken against them.
Unlike all other areas of consumer protection laws, there are no prohibited activities, no punishments for unlawful or abusive behavior, and not even a private right of action for fraudulent practices under the FTC Franchise Rule.
Consumers have many different paths of recourse when they’ve been treated unfairly by a manufacturer, a securities issuer, or a broker-dealer in most industries. But for most franchisees, their only option is forced arbitration, stipulated in the franchise agreement they signed. Usually the arbitration takes place in the franchisor’s home state, often using arbitrators friendly to the franchisor, forcing the franchisee to spend precious dollars to travel across the country and spend days in arbitration instead of running their business.
And major franchisor abuses such as those recently exposed in the BurerIM ‘scandal’ continue to go unabated. We’ve seen franchisors use their marketing funds to support selling new franchises or business-owned locations, run promotions that grow the top line sales and royalty fees while damaging the bottom line for franchisees, force their franchisees to use a specific vendor so that the franchisor (not the franchisee) receives rebates and other incentives at the added expense for franchisee consumers, allows new franchisees to encroach the markets of existing franchisees, not to mention piling on excessive fees and expenses that diminish franchisee earnings.
When will franchisees get the same protections as regular consumers? The answer is when they demand and lobby them! You might have seen recently that we’ve been calling on our members to support S. 2383, The Small Business Administration Franchise Loan Transparency Act. This type of legislation is certainly a start and allows franchisees the opportunity to meet with their representatives and tell their franchise story, but we need a legislated franchisee bill of rights.
Guess what? We already have one!
The AAFD’s Franchisee Bill of Rights
Here is the AAFD’s longstanding Franchisee Bill of Rights. It calls for things, such as the right to an equity in the franchise business, the right to franchisor loyalty, the right to full disclosure, and the right to associate with other franchisees, and more. We encourage you to publicly endorse this document and to reach out to your Senators to support S. 2383. You can also join us in Mesa, Arizona October 14 through the 17, 2020 for the AAFD’s Franchisee Leadership Summit and Annual Conference, where we will be discussing our legislative agenda, among many other exciting and important topics. We hope to see you there!