Legal Matters

by Simon Lord

last updated 13/06/2011

overseas franchisees call for GREATER PROTECTION

by Simon Lord

last updated 13/06/2011

May 2011 - A US body called the Coalition of Franchisee Associations has called for the introduction of a ‘Bill of Rights’ for franchisees, while a new Australian body is also concerned for franchisee rights.

The Coalition of Franchisee Associations was founded three years ago and brings together around ten US franchisee groups from individual franchise systems such as Subway, Burger King, Hardee's, Meineke Car Care, Supercuts, Dunkin' Donuts and others. The CFA is not to be confused with the IFA (which is the US equivalent of the Franchise Association of New Zealand) or the World Franchise Council (which represents national franchise associations from around the globe).

The CFA’s approach highlights the often adversarial ‘us and them’ feelings within franchising in the US which have often been commented upon by New Zealanders who have studied franchising there. Is this a function of the larger size of many US franchises, and of the resulting ‘corporatisation’ of the sector?

Dave Glodowski, the multi-unit Hardees franchisee who is head of the lobby group, told the Blue MauMau website that contracts between franchisors and franchisees were more balanced and fair 30 years ago. ‘As franchisors become more legal institutions, franchise agreements have been favouring franchisors to the point where it is now extremely unbalanced.’ He acknowledges that franchisor advocates will often say it is a free market and franchisees can simply choose to walk away from abusive franchise agreements but points out that this is often not a practical solution. ‘Franchisees who have been in the system for years and years have to agree to the latest document in order to maintain the franchise moving forward,’ he states.

An article by Blue MauMau founder Don Sniegowski paints a dismal picture of the state of franchising in the US and claims, ‘America's franchisees struggle for the freedom to associate with other owner-operators in independent franchisee associations. Members fear termination or retaliation by a franchisor for hanging out with the wrong crowd. Store owners want territorial protection against a competing company store or a franchise opening next door, causing lost business and turning [the original] store unprofitable. Franchisees also want audited disclosures on vendor kickbacks. Kickbacks from a vendor to a franchisor can significantly raise the price of goods to franchisees, and they are typically undisclosed. They act as a hidden royalty fee.’

The draft ‘Franchisee Bill of Rights’ aims to address these issues, with the CFA intending it to provide a framework for discussion, negotiation and alliances. The bill contains 13 clauses:

1.     Freedom of Association: A franchisee shall have the right to freely associate with other franchisees, including forming independent franchisee associations, without facing retaliatory or punitive measures by the franchisor.

2.     Good Faith and Fair Dealing: A franchisee may rely on its franchisor’s good faith and fair dealing, exercise of due care, and performance during the the term of the franchise agreement. The franchisor has a fiduciary duty to the franchisee in the administration of any advertising, rewards program[me], or marketing fund which the franchisee is required to contribute. 

3.     Uniform Application of Brand Standards: Franchisors shall maintain consistent standards operating under a specific brand name in the franchise system, and shall uniformly apply such standards in a manner that is fair and non-discriminatory.

4.     Full Disclosure Regarding Fees Collected From Franchisees: A franchisee shall have the right to obtain and review the books and records of the franchisor regarding the collection, allocation, disbursement and expenditure of the marketing, rewards program[me] and related fees paid by the franchisees, vendors, suppliers, and licensees.

5.     Right to Price: A franchisee shall have the right to determine the price of all goods and services sold in its franchise business. 

6.     Fair Sourcing of Goods and Services: A franchisee, or purchasing cooperative representing franchisees, shall have the right to purchase from any vendor, so long as the formally communicated standards and specifications established in good faith by the franchisor are met.

7.      Right to Renew the Franchise: A franchisee shall have the right to renew its franchise. Terms of the renewal must be free of unreasonable stipulations; economic or otherwise.

8.     Right to Transfer: For transfers involving family members, or existing partners and shareholders already named on the franchise agreement, the franchisor's consent is not required, no new franchise agreement may be imposed and only a nominal fee paid by the transferor. All other transfers are subject to the franchisor's reasonable and good faith approval, but no excessive transfer fees or any unreasonable stipulations or requirements that are not uniformly imposed may be required.

9.     Encroachment: A franchisee shall have specific market protection wherein the franchisor shall not materially impact the franchisee’s business, or allow another entity with the same or a similar brand to operate.

10.  Ample Notice of Significant Changes and Opportunity to Exit: A franchisee shall have the right to ample notice of any significant or costly changes to the franchise system, and shall be given the right to exit the system without penalty if proposed changes will substantially and negatively alter the operations or profitability of the franchise unit.

11.  Fairness In Dispute Resolution: If a dispute arises, [the] franchisee shall have the right to seek resolution of such dispute in a local venue, and shall be afforded all protections offered by the courts and laws of the franchisee’s jurisdiction, including mediation, filing court claims, requesting a jury trial, pursuing a class action, and/or seeking punitive damages for oppressive or fraudulent conduct. No franchisee shall be required to submit to mandatory binding arbitration.

12.  Franchise Termination Rights:  A franchise may not be terminated by the franchisor unless for good cause shown. Franchisee shall be given notice of the grounds for and a clear explanation of the default, and a reasonable time to cure.  If franchisee timely cures the default, franchisee shall retain all other rights and benefits during the term of the franchise agreement. Default or termination of one franchise unit shall not result in cross default or termination of other franchises owned by the same or an affiliated franchisee.

13.  Reciprocal Termination Rights: A franchisee shall have reciprocal rights to terminate its franchise agreement for significant financial distress or hardship, without being compelled to pay liquidated damages or other penalties for early termination. Any non-competition covenant in the franchise agreement shall be void.

Some of the draft clauses in this ‘Franchisee Bill of Rights’ would raise few eyebrows in New Zealand or, we suspect, within many US franchise systems. However, items such as Clause 8, which seeks to allow transfer of the franchise agreement to another family member without the franchisors’ consent (and apparently regardless of their suitability as a franchisee) are hardly practical. What do you think? We’d love to hear your comments on this proposal and on the differences between the approach to franchising, franchise relationships and the application of commercial law in New Zealand and the US. See below to add comments.

New Franchisee Body Formed In Australia

Meanwhile, a group of disgruntled franchisees in Australia has set up a new body called the National Franchisee Coalition. With the slogan 'Opportunity not opportunism',  the body aims to lobby for legislative reform to promote the benefits of a transparent relationship based on the principles of 'Good Faith' and 'Fair Conduct' in all franchise dealings. The Coalition’s main objective is to promote compliance with the existing franchising code of conduct legislation, along with associated penalties for breaches of good faith conduct being proposed by state bills. The NFC has also raised concerns about the Franchise Council of Australia, which represents both franchisees and franchisors. Its immediate objective, NSW representative Isaac Chalik told the website, is to collect contact details and information from franchisees regarding their experiences with franchisors. According to SmartCompany, the NFC website was set up by 'more than a dozen individuals.'

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