New franchise legislation will not impair franchising

For years, efforts to help franchisees have been quashed by franchisor resistance…Franchisors have been intransigent for too long.

Franchise Times
June – July 1999

New franchise legislation will not impair franchising
Jeffery S. Haff

In the April 1999 edition of Franchise Times, Erik Wulff opines that if the bipartisan Small Business Franchise Act of 1998 is enacted in its current form, “new franchising activity is likely to stop stone cold” and the Act will create “an environment that fosters constant litigation.” After his many years of walking on the franchisor’s side of the street, I am sure that Mr. Wulff believes what he says. However, I believe that there is good reason to conclude that if the proposed legislation is passed (1) constant litigation will not ensue, and (2) franchising will not end. Furthermore, I believe that franchisors, by their past conduct, have brought about the very legislation they now fear.

As a franchisee lawyer in Minnesota, I reside in a state with one of the nation’s best pieces of pro-franchisee legislation, the Minnesota Franchisee Act (the “MFA”). The MFA protects franchisees against numerous acts by a franchisor, including: (1) failure to register in the state, (2) failure to properly disclose information about the franchise, (3) false or misleading oral or written statements, (4) termination of a franchisee for other than good cause, and (5) termination of a franchisee without proper notice and opportunity to cure any perceived deficiency of performance. The Minnesota Commissioner of Commerce has also enacted specific rules defining other things a franchisor cannot do. For example, one rule says that a franchisor cannot impose upon the franchisee and “unreasonable” standard of conduct. Very broad language indeed.

Despite the MFA’s many protections (which Mr. Wulff no doubt believes “disrespect” the “sanctity of contract” and “ignore the legitimate interests of franchisors”), franchising continues to flourish in Minnesota. The Minnesota courts are not unduly burdened with franchise disputes; in fact, despite my firm’s Minnesota address, over 80 percent of our work involves disputes having no connection to Minnesota. I believe this is due, at least in part, to the fact that franchisors who know they are legally obligated to act reasonably actually try to act reasonably. By doing so, they give franchisees less to complain about. If a franchisee is treated reasonably, what reason does s/he have to sue?

Mr. Wulff’s parade of horribles is nothing more than a rephrasing of franchisor attorneys’ much repeated warning that anything helpful to franchisees will “kill the goose that laid (or ‘lays,” depending on which article you read) the golden egg.” According to franchisor advocates, the franchising “goose” is a very weak animal so susceptible to fatal injury that one has to wonder how it has survived as long as it has. These franchisor advocates have long claimed that any new state franchise legislation will kill the goose, as will any court decision that says a franchisor has to act reasonably or honestly, as will any effort by franchisees to “collectively bargain” the terms of a franchise agreement, as will granting a private right of action to franchisees under the FTC Rule, as will the Small Business Administration requiring that the franchise loans it guarantees be loans to franchisees whose franchise agreements cannot be terminated without cause. I suggest that there is no more reason to compare franchising to a fragile goose about to take a terminal turn than there is to believe that geese actually lay golden eggs.

Before debating the merits of the proposed legislation, we should ask ourselves why it ever came to be introduced. I suggest that the refusal of franchisors and their advocates to even try to be fair to franchisees is why franchisors are where they are today, scared to death of federal legislation. No elected representative likes to hear stories of franchisees given inflated earnings claims, encroached upon, terminated for no good reason, forced out of business and denied the right to negotiate even one term of the boilerplate agreement presented to them. The stories sound even worse when the franchisor ultimately goes to court and successfully argues that had the franchisor planned on acting reasonably, it would have said so in writing! To make public relations worse for franchisors, these same non-negotiable franchise contracts are re-drafted every year to take more and more rights away from franchisees. Many long-term, successful franchisees are now facing the wonderful choice of (1) “renewing” their expiring contracts on terms that are so one-sided they shock the conscience, or (2) going out of business. Is it any wonder that these folks turn somewhere for help?

Mr. Wulff now seeks “less draconian” measures to address franchisee concerns. The short answer to that request may be, “Sorry, too late.” For years, efforts to help franchisees have been quashed by franchisor resistance. Franchisor advocates have long opposed a private right of action under the FTC Rule or collective bargaining of franchise agreements (both of which Mr. Wulff’s article now seems to tepidly endorse). Franchisors have refused to negotiate individual contract terms, tried to circumvent state protective statutes by contract provisions, and consistently reserved the right to act “unreasonably” or “in the franchisor’s unfettered discretion.” Franchisors have been intransigent for too long. Now Congress appears ready to exercise its discretion to move the franchisor flock where they should have voluntarily traveled – to a place where franchisors and franchisees deal with each other honestly, fairly, and in a commercially reasonable manner. What’s so wrong with that?

Jeffery S. Haff
Dady & Garner, P.A.
4000 IDS Center
80 South Eighth Street
Minneapolis, MN
(612) 359-9000

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