The slippery slope of government intruding on contracts in franchising…and beyond

By: Matt Haller, IFA

This week, Maine is set to hold a hearing on so-called “Fair Franchising” legislation (LD 1458). This legislation, like many others, opens up a Pandora’s Box of ambiguity in contract terms that threaten the basic and proven tenets of the franchise business model, which is all about maintaining the brand, and would leave both the franchisee and the franchisor liable for potential litigation down the road.

The result?  More franchisors and franchisees will be fighting lawsuits versus working together to grow their businesses, add jobs and make the U.S. economy stronger.  Meanwhile, consumers would have a less consistent experience at franchise locations.

The International Franchise Association is working to educate lawmakers in Maine (and elsewhere) about why LD 1458 has damaging provisions that would harm the franchising industry and the 74,100 jobs it supports at 3,674 franchised locations in Maine, which pump $7.4 billion annually into the Maine economy.  Now is a good time to remind folks why IFA is fundamentally opposed to further government regulation of franchising.  The word “further” is a key point here, as the franchising industry is already highly regulated by government at both the state and federal levels, by commercial contract law, state investment law and nationally by the Federal Trade Commission.  Additional regulation is not only bad for business, but it’s bad for the free enterprise, market-driven system that our great nation was founded upon.

To be sure, going into business is inherently risky.  However, without risk, there would be no opportunity for success.  When a person starts a business of any kind, there is a risk of failure, and there is perhaps a greater risk that things won’t work out exactly as planned or envisioned.  Is that fair?  One could argue that it depends on your perspective.

With franchising, due to the contractual nature of the model, there are adequate opportunities for both parties to assess through due diligence the risk before a contract is executed.  The franchisor can evaluate the prospective franchisee and ask questions about if he or she is financially qualified, will be a good operator, and will follow the franchisor’s operating system.  The franchisee gets a detailed disclosure document with information about the franchisor, its business history, and its financials.  The franchise contract spells out the obligation of both parties to each other for the term of the agreement.  At the end of the day, both the franchisor and franchisee can make the decision to sign the agreement or not.

So what are some of the consequences of these so-called Fair Franchise bills?  With regard to Maine, there are several provisions that are very problematic and damaging to the franchise industry.  For instance, franchisors could not terminate, cancel, or fail to renew franchisees for refusing to take part in promotional campaigns for the products or services of the franchise that promote profitability.  That means non-compliant franchisees could benefit from advertising funds contributed by other franchisees who are following the system.  Franchisees also would be exempt from selling approved products from approved suppliers, which could jeopardize consistency and quality affecting the integrity of the brand.  We hear from franchisees that they want the brand protected as much if not more than the franchisors as it has a direct impact on their success.  These negative consequences hurt both the franchisor and franchisees.

In most cases, the root cause of tensions in franchise relationships is due to communication and transparency breakdowns.  Franchisees who feel they are being treated unfairly are encouraged to leverage the many mechanisms in place within the overwhelming majority of franchise systems to work together with the franchisor to resolve issues.  Franchisors ought to be transparent and consult with their franchisees when implementing a new relationship with a vendor, or implementing a new policy across a system and show franchisees why it will ultimately help them.

Franchising works when franchisees are profitable.  If franchisees don’t make money, franchisors don’t grow their system, don’t expand their royalties, and they certainly don’t create the jobs this country desperately needs.  In most systems, communication is very good between franchisees and franchisors.  IFA encourages all of its members to abide by its Code of Ethics, and while not a self-governing body, we believe the best course of action when tensions or disputes arise is through a private dispute resolution, before any legal action is taken.

An IFA-commissioned task force of leading franchisees and franchisors formed last fall is working toward the completion of a core set of principles that it believes franchise businesses should abide by to stave off conflict.  Fundamentally, their intention is to avoid conflict from the get-go by promoting transparency in franchise agreements and trust in franchise relationships.  If things do go wrong, mechanisms should be in place that are understood at the beginning of the contract phase by both parties to address the concerns.

IFA will continue to work to identify best practices to better the industry.  Litigation should always be a last course of action.  Government intrusion in a private right to contract is unnecessary, and will only result in unintended consequences for both franchisors and franchisees.

For more information about the consequences this legislation could have on the economy in Maine, click here