Efforts to legislate proper behavior split franchisers, franchisees

“Our sense is with the federal legislation that’s pending and the threat of leveling the playing field, a lot of franchisers are sucking up to their franchisees to get their eye off the ball,” she says.

Crain’s Chicago Business
June 12, 2000

Efforts to legislate proper behavior split franchisers, franchisees
Mary Ellen Podmolik

Since forming the Chicago-based American Franchisee Association in 1993, Susan P. Kezios has been on a mission to level the playing field between franchisers and franchisees.

In the next year, Ms. Kezios and the group’s 16,000 members are optimistic that they’ll move significantly closer to that goal with the help of federal legislation.

Last November, Reps. Howard Coble, R-N.C., and John Conyers, D-Mich., introduced HR3308 known as the ‘Small Business Franchise Act of 1999’.

The bill would regulate the relationship between franchiser and franchisee by setting standards of conduct and strengthen the rights of franchisees to take action against franchisers in federal court. Among the key areas covered by the bill are termination, succession, supply procurement and encroachment, all key problems franchisees say they encounter.

A similar bill – crafted a year earlier – prompted grass-roots letter-writing and lobbying campaigns by both franchisers and business groups, including opponents such as the International Franchise Association and the U.S. Chamber of Commerce and franchisee groups that champion it.

Twelve representatives co-sponsored the earlier Coble bill. The current version, which contains only minor revisions, has garnered the support of more than 40 co-sponsors, including 25 Republicans.

“There is no such thing as one magic bullet to cure the ills of franchising or any other industry. But it would lead to franchisers taking their duty of good faith more seriously,” says Carmen D. Caruso, a Chicago attorney who specializes in litigation.

Franchisers say the legislation is unnecessary, because the expense of litigation and strained relations with franchisees have led them to improve communications through development of advisory councils.

“With that working well internally within a system, there need not be a bill to level the playing field, “ says Howard B. Marks, director of franchise development at BAB Holdings, Inc., the Chicago based-franchiser of Big Apple Bagels. “What a franchisee and franchiser get out of the relationship largely depends on the level of communication. This is, if anything, an over regulated industry. It gets to the point where it becomes a disincentive to continue the relationship.”

Ms. Kezios isn’t convinced of franchiser’s good intentions.

“Our sense is with the federal legislation that’s pending and the threat of leveling the playing field, a lot of franchisers are sucking up to their franchisees to get their eye off the ball,” she says.

When Rep. Coble introduced the legislation, he said it seemed out of character for a conservative Republican who favors smaller government and less regulation to sponsor such a proposal. Nevertheless, he noted some of the inconsistencies in today’s franchiser-franchisee relationships- particularly that since franchisers receive royalties on unit sales, not profits, it behooves them to open as many outlets as possible, regardless of the impact on the franchisee.

HR3308 seeks to curb encroachment by generally prohibiting new outlets unreasonably close to an existing franchise.

The legislation also would prohibit contract agreements requiring franchisees to buy equipment, fixtures and services directly from the franchiser rather than through a competitive bidding process, unless the products must meet certain reasonable standards.

And if there were mandated sourcing requirements, franchisers would have to disclose rebates or commissions they received by requiring franchisees to buy those products and services.

Under another provision, franchisees would be allowed to operate a different business at the same location once a franchise agreement expired. And franchisers could not transfer a franchise interest without 30 days’ notice to the franchisee.

“There will always be little loopholes,” Ms. Kezios says. “We’re not trying to create any federal or state bureaucracy. It basically says this is the law and you can go to court. This cuts across brand names and the problems cut across brand names.”

Five years ago, formalwear company Gingiss International Inc. in Addison restructured its franchise agreement to lower royalties on a sliding scale and cap franchise fees because experienced, longtime franchisees complained that they were paying for services they no longer needed.

“There’s some validity to the value of some of the legislation that’s pending, but some of it is scary,” says Thomas Ryan, Gingiss vice-president of franchise development. “No one forced franchisees to sign these agreements. Franchisees have got to understand what they bought when they sign it. Franchising has been a very successful means of doing business in this country, but I’d hate to see the golden goose get slaughtered.

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Risks: Tied contracting, Encroachment (too many outlets in area), Susan Kezios, American Franchisee Association, AFA, Termination, single, Gouging on supplies, International Franchise Association, Bad faith and fair dealings, Must buy only through franchisor (tied buying), Secret kickbacks and rebates, U.S. Federal Relationship Legislation, United States, 20000612 Efforts to

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