Recently, the International Franchise Association (A Franchisor Trade Organization) posted the following on LinkedIn.  You’ll find my comments which supplement the post marked and made bold as “KGP” beneath each of the published IFA comments. 

IFA: The New York Times & WSJ each published stories today citing franchisees clamoring for government to get more involved in setting the terms of franchise agreements due to the perceived imbalance of the franchise relationship. But if the relationship is so imbalanced, why is franchisee satisfaction so high? And why are so many franchisees expanding and becoming multi-unit and multi-brand? Is franchising perfect? Far from it. There are bad franchisors and bad franchisees and both industry and government should do more to educate the public about the risks.

KGP: If you want to be honest and entirely transparent, there isn’t a person involved in franchising or franchisor-centric lawyers that “perceive” an imbalance in the franchise relationship.  We all know full well that agreements are “adhesion” agreements where the franchisor is in full and complete control providing the Franchisee Investor with a “license” to use trademarks, policies, procedures, and operating specifications for its brand(s).  This clear “imbalance” doesn’t stop franchising at all. Nonetheless, the imbalance is not “perceived” but is factual, recorded, and made part of every franchise agreement executed.  You can’t imply that franchising perfection is “Far from it” while in a subsequent sentence indicating that both “industry and government” should do more to educate the public about the risks.”  This is often referred to as speaking out of both sides of the mouth, thus the full-scale review and very possible updating of the franchise rule by the Federal Trade Commission. 

IFA: If you’re a franchisee, you need to start paying more attention to the loud voices clamoring for changes that will affect you and harm your hard-earned equity by regulating existing contracts. If you are a franchisor, you need to educate your franchisees about what government is asking for as they consider changes to the franchise relationship and your ability to execute your business model. A few additional points:

KGP: “Loud voices” don’t clamor.  They do exactly what those in the IFA do, except that they speak on and advocate for Cherished Franchisee Investors, both existing and new, rather than franchisors. One could easily say the IFA “clamors” on behalf of franchisors and that would be as true as saying “loud voices” clamor for Franchisees. A generic talking point about “changes” that will affect “you” and “harm” your “hard-earned equity” equates the very meaning of “gaslighting” and fear-mongering for those that understand, only superficially, what the IFA eschews as fact.

IFA:  1. Everyone in franchising agrees that good franchisees need to be protected from the occasional bad franchisor, and that can happen through enforcement of existing laws and improved disclosure and education. But good franchisees also need to be protected from the occasional franchisee who is not following brand standards or not paying fees it agreed to pay in the contracts they freely entered into. If government restricts franchisors ability to protect brand standards, they won’t be able to protect the brand, and that will harm franchisee’s existing equity.

KGP: Couldn’t agree more with enumerated statement number one except that there are more than occasional bad franchisors, and again, if you’re going to be honest (with integrity), you know that enforcement of existing laws and improved disclosure and education simply don’t cut it.  The new proposed legislation would create fairness and balance the relationship between Franchisee Investors, Franchisees, and franchisors. While true that there are those Franchisees who enter into agreements without the due diligence and counsel required, this is far from “freely” entering into agreements when in fact, the fine print and nuanced agreement particulars are missed by the uneducated or misinformed. There is no debate on brand standards except when a franchisor will use the most minor infractions to hammer a Franchisee into submission or, worst case, a termination as a form of reprisal.  To say this doesn’t happen is naive and incredibly uninformed.

IFA:  2. Franchisors need to be able to protect their franchisees from changes in the market for their products or services. If government prevents franchisors from making changes, they won’t be able to improve the brand.

KGP: It is firmly believed that franchisors need to protect their Franchisees. The issue is, or becomes, how they go about it, the methods utilized, and some covert ways via operations manuals or franchise agreement renewals that are often used to do everything “but” protect a brand’s Franchisees.

IFA: 3. Disputes within a franchise system are usually complex and nuanced, not black-and-white. They’re best resolved by dialogue between franchisors and franchisees, not by government.

KGP: Here is a perfect example of speaking out of both sides of one’s mouth. Although you want to have it both ways when it suits you, it isn’t fair or equitable. The government provided the franchise space with the original Federal Trade Commission rule in 1978. Without it, there would be no FDDs or regulations concerning nearly every aspect of franchising.  Lets categorically state that the IFA and other trade organizations rely heavily on the rule.  Several examples, such as membership in the IFA, require the submission of an FDD. Many of the courses provided for “Certified Franchise Executive” status with the IFA speak to and attempt to understand the FTC rule.  FranGuard, an IFA offering, is all about protecting your franchisor company against Franchisees and the “nuances” associated with the FTC rule.  To make further the point about having it both ways, let’s look at a statement published by the IFA on their own web pages:

IFA Web Page: “These goals are greatly enhanced by the Federal Trade Commission’s (FTC) Franchise Rule. Established in 1978, the Rule’s disclosure regimen ensures that prospective franchise buyers are given the information they need to understand the risks and potential rewards of joining a franchise brand. Part of this required disclosure includes the Franchise Disclosure Document (FDD), which contains information about franchise operations such as required fees, initial investment, company history including bankruptcy and litigation, financial statements of the franchisor, and earnings claims – all so an interested party can determine if this is the right business for them”.

IFA: Please share your thoughts on these articles below, and more than anything, no matter what side of this debate you might fall on, it’s important to engage in the process. Here’s a link to the FTC’s request for information, and a form you can complete to provide your thoughts directly to the agency →

https://www.ftc.gov/policy/studies/submit-comment-franchise-request-information 

KGP: A review of the comments submitted thus far are OVERWHELMINGLY in favor of change and a complete review of the FTC rule, non-competes, and other FTC objectives. 

KGP: Articles cited below require a subscription to read fully:

Heather Haddon https://www.wsj.com/articles/mcdonalds-and-franchisees-escalate-battle-over-chain-rules-9f7b92e4

Here is a link to the NYT story by Lydia DePillis https://www.nytimes.com/2023/04/20/business/economy/franchise-regulation.html

KGP: For the purpose of clarity, let’s review the “Franchisee Bill of Rights” that are typically opposed by Franchisor Centric Trade Organizations:

American Association of Franchisees and Dealers

Franchisee Bill of Rights

The Franchisees of America, representing the best of the American entrepreneurial spirit, hereby recognize and demand a basic minimum of commercial dignity, equity and fairness. In recognition there of, the franchisees of America do proclaim this Franchisee Bill of Rights as the minimum requirements of a fair and equitable franchise system:

• The right to an equity in the franchised business, including the right to meaningful market protection.

• The right to engage in a trade or business, including a post-termination right to compete.

• The right to the franchisors loyalty, good faith and fair dealing, and due care in the performance of the franchisors duties, and a fiduciary relationship where one has been promised or created by conduct.

• The right to trademark protection.

• The right to full disclosure from the franchisor, including the right to earnings data available to the franchisor which is relevant to the franchisees decision to enter or remain in the franchise relationship.

• The right to initial and ongoing training and support.

• The right to competitive sourcing of inventory, product, service and supplies.

• The right to reasonable restraints upon the franchisors ability to require changes within the franchise system.

• The right to marketing assistance.

• The right to associate with other franchisees.

• The right to representation and access to the franchisor.

• The right to local dispute resolution and protection under the laws and the courts of the franchisee’s jurisdiction.

• A reasonable right to renew the franchise.

• The reciprocal right to terminate the franchise agreement for reasonable and just cause, and the right not to face termination, unless for cause.

The American Association of Franchisees and Dealers House of Delegates adopted and promulgated the Franchisee Bill of Rights on June 6, 1996, and works to promote awareness and acceptance of these rights among the franchising community and the general public.

Available for Download:

Let’s review the summary of the Honorable Senator Cortez Masto concerning franchise issues:

https://www.cortezmasto.senate.gov/imo/media/doc/Franchise%20Report%20from%20the%20Office%20of%20Senator%20Cortez%20Masto.pdf

Let’s review the summary of the Honorable Congresswoman Jan Schakowsky that would empower Franchisees:

https://schakowsky.house.gov/sites/evo-subsites/schakowsky-evo.house.gov/files/SCHAKO_080_xml.pdf

A summary of Arizona HB2404 Proposed:

Arizona-2023-HB2404-HOUSE_SUMMARY_02-17-2023_Caucus_COW.pdf

A summary of  the Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition and would apply to franchising:

https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete_nprm_fact_sheet.pdf

Let’s review the AAHOA “12 Points of Fair Franchising” (Asian American Hotel Owners Association): 

https://www.aahoa.com/advocacy/franchise-relations/points-of-fair-franchising

KGP: While there are indeed others as states begin to review and propose legislation replicating that of other states, it is YOUR time as prospective Franchisee Investors and Cherished Franchisees to express your opinions and make your feelings known, either way.  Your voice in these matters will make all the difference in upcoming and future considerations.

Thank you for reading.