Fair Franchising Bills Gain Steam Across U.S.; New York Could Be Next

July 14, 2012

Fair Franchising Bills Gain Steam Across U.S.; New York Could Be Next

The franchisor-franchisee relationship is meant to be a mutually beneficial partnership. Franchisees get to put a tested business model into action under a well-known name, while franchisors reap the financial rewards of licensing fees and an expended national presence.

Yet, even in such a symbiotic relationship, conflicts can arise. In recent years, some small business owners, franchise attorneys and commerce groups have voiced concern over franchise agreements that seem to be increasingly lopsided in nature, favoring powerful franchisors at the expense of local business owners. In a growing number of states, lawmakers have introduced new legislation aimed at leveling the playing field for franchisees.

Franchise Law Reforms Look to Tip the Balance Of Power in Franchisees' Favor

The franchisor-franchisee partnership is typically governed by a comprehensive agreement. Franchise agreements lay out the essential framework of the business relationship, including the fee arrangement, the franchisee's duty of compliance to applicable franchisor mandates and the bounds of the franchisor's responsibility to provide operational support.

Yet, as powerhouse franchisors continued to gain market leverage (franchising is reportedly responsible for some 14 percent of private sector employment), many commentators began to point out the eroding bargaining power of the entrepreneurial franchisee. Inequity in franchisor-franchisee contractual negotiations started to play out in the real world, with more small business owners complaining that unfair obligations to franchisors were pushing their bottom lines into the red.

Rhode Island was the first state to take a renewed look at the legal protections afforded to franchisees. Back in 2008, the state legislature amended the Rhode Island Fair Dealership Act, a law that aims to help make buying a franchise a safer investment. Among other things, in Rhode Island, franchisors must give 60 days written notice before terminating any franchise arrangement (the originally proposed 90 days was whittled down in light of intense franchisor lobbying efforts) as well as 30 days advance notice for franchisees to cure any nonconformance issues.

California has now stepped up to the plate with the Level Playing Field for Small Businesses Act, which is rapidly gaining ground in the 2012 State Assembly. Highlights of the bill include:
-Increasing the minimum time franchisees are allowed to settle their overdue fees from the current five days to 60 days
-Preventing franchisors from terminating a franchise except for "good cause" -- under the Act, explained as a substantial and material breach of franchise agreements -- and only after giving written notice and 60 days to cure the defect
-In the absence of a substantial and material breach by the franchisee, requiring franchisors to renew a franchise under the same terms as the existing agreement (unless the franchisee chooses to renew under the terms being at that time offered to new franchisees)
-Codifying franchisors' "duty of competence" to franchisees
-Providing remedies for franchisees if the franchisor grants a new franchise in essentially the same market in "unreasonable proximity" to the existing franchise
-Voiding any franchise agreement clauses that require the application of another state's laws
-Forcing franchisors to recognize and deal fairly with an independent franchisee association
-Requiring all parties to a franchise agreement to deal with each other in good faith

Even the sponsor of the Level Playing Field for Small Businesses Act recognizes that the bill has a formidable road to overcome on its way into law. Yet, with a number of diverse and influential franchise groups weighing in favor of the legislation, its future looks promising.

With More States Following Suit, Preparation Could Behoove New York Franchisors

Following in California's footsteps, Vermont and Massachusetts have introduced similar bills to protect franchisees from unfair franchisor business practices. New York may be next.

Currently, there is no counterpart legislation on a comparable trajectory towards law in either the New York Assembly or Senate. However, franchisee-orientated revisions to the New York Franchise Act have come up in the past -- a significant overhaul of the Act was proposed as recently as 2009.

With lawmakers around the country increasingly concerned about small business viability and the rights of franchisees, it would come as little surprise if New York jumps on the franchisee protection bandwagon in the near future. For anyone currently or prospectively involved in a franchise relationship -- whether franchisor or franchisee -- this makes the present a critical time for action.

Franchisees may wish to ponder their agreements, and determine whether the time is right to harness legislative momentum and throw their weight behind reform efforts. Franchisors, on the other hand, may be able to get ahead of new laws to quell the situation -- and by modifying their own franchise practices, either forestalling new government franchisee protections or lessening the eventual pinch when and if it comes time to implement new legal developments.

Article provided by Einbinder & Dunn LLP
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