LD 1458, A Solution in Search of a Problem that does not Exist

 

Capture

Dear Assemblymembers,

On behalf of franchisees, franchisors and Maine-based business organizations including the Maine Restaurant Association, Retail Association of Maine, Maine Innkeepers Association, Maine Association of REALTORS and the Maine Energy Marketers Association, we respectfully urge the legislature to support the bipartisan, bicameral majority report of LD 1458 and to reject the minority report of LD 1458.

Our coalition remains opposed to the intent of legislation such as LD 1458 which would insert the legislature directly into the private contracts between two separate business entities who have freely entered into agreement. However, given the bipartisan and bicameral support expressed in the Jan. 30 majority report instructing the legislature to create a resolve to determine if legislation is necessary to regulate franchise relationships in Maine, we support this process as a means to educate the legislature about the extent to which business format franchises are already regulated at the federal level by the Federal Trade Commission; to demonstrate that additional legislation is unnecessary; and that language included in the LD 1458 minority report would ultimately harm the Maine economy and ongoing private contracts freely agreed to by franchisees and franchisors.

LD 1458 vs. State Franchise Relationship Laws Elsewhere:

  • If the minority report of LD 1458 were enacted, it would be the most far-reaching franchise relationship statute in the United States. While 17 states have some form of franchise relationship statute, 33 states have no franchise relationship law at all. Among the 17 states with relationship laws, most of these statutes simply have a registration or a disclosure requirement. Among the other states, even the most onerous do not go nearly as far as LD 1458 does, even as amended. Furthermore, no state has passed meaningful franchise relationship legislation since 1994. That law, passed in Iowa, was significantly scaled back several years later following a 42 percent decline in franchise development compared to adjacent states. Below are our specific concerns with the provisions remaining in Sen. Patrick’s minority report:

 

Termination

  • The language in LD 1458 addressing termination and transfer of a franchisee would effectively create a perpetual contract by which a franchisor will be unable protect its trademark and the brand integrity will suffer, harming the equity franchisees have built in their business. The Legislature cannot and should not create the ability for franchisees to allow contracts to continue in perpetuity, or be passed on to others without franchisor approval. LD 1458 only gives the ability to terminate a franchise relationship to a franchisee. With no remedy for franchisor to cure a franchisee that is driving their brand into the ground, or worse yet, conducting illegal activities, franchising will cease to exist in Maine as it would be too risky to operate a franchise brand you cannot control.

 

Transfers

  • The issue of transfers is found in Item 17 in all Franchise Disclosure Documents (FDD) which is required to by the Federal Trade Commission. Franchise agreements contain specific language that franchisor approval of transfers will not be unreasonably withheld, and many brands encourage and facilitate transfer to family members. In the case of death or disability, there are usually even more favorable provisions that the family has an extended period of time to find a qualified buyer. The notion that there is some conspiracy by which franchisors who don’t want to allow franchisees to transfer units to family members is simply not true. Furthermore, under common law, the courts have held that franchisors cannot unreasonably withhold approval of a transfer. This is without any reference to any franchise law.

 

“Good Faith”

  • In the context of detailed franchise contracts, which govern complex and ongoing business relationships, the concept of “good faith” provides no benefit, but instead creates uncertainty as to the enforceability of the contracts and standards. An amorphous “good faith” clause would allow franchisees to unilaterally change franchise agreements and creates uncertainty as to the rights and obligations of the parties. While a franchisor and franchisee would normally work out any differences privately, LD 1458 creates incentives to move disputes into the courts. While three other states have good faith provisions in franchise relationship law, only LD 1458 is one-sided, giving only the franchisee a right to damages and attorneys’ fees, thereby denying a remedy to a franchisor. This could allow franchisees to act in bad faith without any recourse. Franchisors must be able to protect their brand against franchisees who violate the terms of the contract.

 

Renewals

  • It is patently unfair to create a situation where franchise agreements are perpetually renewed. One of the basic tenets of contract law is the “rule against perpetuities.” There are many good reasons for this including: technological advances; nutritional discoveries; and health improvements to name just a few. LD 1458 would inhibit the ability for a franchisee to upgrade or update the franchise, damaging their equity and the overall brand.

 

Auto Dealer/Equipment Law

  • Auto dealer/equipment laws are inapplicable to business format franchising. There are more than one hundred different types of business format franchises. Laws that apply to a single product, such as auto dealers or farm equipment will not work for such a diverse group of businesses. The notion that Maine should pass legislation regulating business format franchises because it has laws regarding product distribution franchises (such as auto dealers and farm equipment) is like comparing apples to oranges. All franchisees are required by the Federal Trade Commission to receive a Franchise Disclosure Document (FDD) and review it for a 14-day period. The FDD explains in great detail all the information about a franchise; something that auto and equipment dealers are not given. Additionally, in business format franchising, a franchisor provides a trademark, start-up assistance, initial and ongoing training, product research and development, marketing support, joint advertising, site selection assistance and occasionally financial help. This type of support is non-existent in an auto dealer or other product distribution franchise.

 

A Solution in Search of a Problem that does not Exist

Over the past several months, the LCRED Committee heard from Maine franchisees and Maine franchisors, who are united in their opposition to LD 1458. Last month, Franchise Business Review, one of the most respected sources of independent franchise information, published a survey showing 94 percent of franchisees in Maine “enjoy operating their franchise business.” We have repeatedly wondered what we are debating these issues in our various meetings with legislators. Now, we have the evidence showing this legislation is a solution in search of a problem that simply does not exist in Maine, or anywhere else. We look forward to working with the legislature to ensure franchising continues to thrive in the current regulatory environment in Maine.

Sincerely,
International Franchise Association
Maine Restaurant Association
Retail Association of Maine
Maine Innkeepers Association
Maine Association of REALTORS
​Maine Energy Marketers Association