New law to protect franchisees continues legislative intervention in US
by Simon Lord
last updated 11/07/2013
June 2013 - As regulation of various kinds continues to be discussed in NZ, a new bill passed in the Californian Senate 'gives a bullet to franchisees,' says advocate.
A new bill passed by the Senate in California could influence the way in which franchising is regulated around the world. The California Franchise Relations Act has some similarities to the recommendations made in the latest review of the Franchising Code of Conduct in Australia. It would require franchisors and franchisees to deal with each other ‘in good faith’ and protect franchisees’ right to band together in associations. It also specifically allows franchisees to sue a franchisor who ‘offers to sell, sells, fails to renew or transfer, or terminates a franchise’ without acting in good faith.
The Australian review also included the express obligation to act in good faith, which extends to the resolution of any disputes between the franchisor and franchisee irrespective of whether there is a valid franchise agreement at the time of the dispute. However, the term ‘good faith’ will not be statutorily defined, which it is feared will encourage unfounded or imprecise allegations and increase legal costs while precedent is established.
By contrast, the Californian Bill defines good faith for the purposes of the Bill as meaning ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.’
In US franchising, there often seems to be a more confrontational relationship between franchisors and franchisees than exists in New Zealand, with the existence of several organisations promoting ‘franchisee’s rights’. The chairman of one of these groups, Robert Purvin of the American Association of Franchisees & Dealers, told Bloomberg BusinessWeek, ‘The change would help even a playing field that has tilted in favour of franchisors over the past half century. The propaganda we get is that [franchising is] the safe and secure path to owning a business, but what we’re being sold is the rental of a business… The proposed law gives a huge bullet to the franchisee to say, “If you treat me unfairly, I can hit you for damages and my attorney’s fees.” Protecting franchise associations will also give buyers more power to negotiate fair contracts with franchisors.’
Meanwhile, Business Week reports that the International Franchise Association (the US equivalent of FANZ), says it opposes the California bill on principle. ‘We simply do not believe that government intervention at any level is good for franchising,' spokeswoman Alisa Harrison said in an e-mailed statement. Existing regulations from the Federal Trade Commission and California statute 'provide for comprehensive disclosure to prospective franchisees about all the terms in a franchise contract before any agreement is signed,’ she wrote. This response seems to ignore the intention of the bill to govern the ongoing relationship rather than pre-contractual disclosure.
Comments
Some of the varying attitudes in the US can be understood through sampling Linked In comments on the bill.
‘If you want a level playing field, don't buy a franchise. You are playing a game where someone else wrote the rules. Advantage house. The key is to pick a franchisor you trust. Without trust there is no contract or legislation that will protect you.’
‘Judging from the type of legislation that comes out of California, I think the bill will help lawyers more than any party to a franchise agreement.’
‘If you're not careful you'll end up with the tail wagging the dog. Remember, if it wasn't for the franchisor getting established in the first place and putting the trading 'rules' in place, there wouldn't be any franchisees! Franchisees should sometimes start to emphasise the positives in their agreements and work for the common good having read and understood what they are investing into in the first place.’
‘What if there are no positives in franchisor's actions? Royalties are their cash cow for doing nothing! (Surprisingly, this comment came from a franchisor – Ed.)
‘Royalties are not a cash cow for doing nothing. The franchisor owns the trademarks. Trademarks are like any other property. When you use someone's property, you have to pay for it (just like leasing office space, or renting an apartment). Since the franchisor owns the trademarks, the franchisor owns all of the goodwill in the business too, as trademarks can only be licensed "en gross". Trademark law does not separate the trademark from the goodwill. Therefore not only is the franchisee paying royalties for the continued use of the trademarks, but also the goodwill inherent in the franchisor's brand. Without these payments, if the business were independent, the business owner would have all kinds of marketing and advertising expenses to establish their own brand. (It’s interesting to note that this comment makes no mention of the value of ongoing services provided by the franchisor to the franchisees – Ed.)
Both the US and Australian franchise sectors are heavily regulated. Although franchising may be affected by law changes currently under consideration, there is currently no franchise-specific legislation in New Zealand. We welcome comments from a New Zealand perspective – see below.
We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.


Featured Listings
Generate KiwiSaver
Proudly New Zealand owned and operated, Generate KiwiSaver Scheme is a leading provider of KiwiSaver and Managed funds. We are seeking individuals who...

Jani-King
Jani-King is known as the world's number one commercial cleaning franchise company providing full operational sales administration support for...

Black & White Coffee Cartel
Join the third wave of coffee today. Exciting opportunities to join NZ’s rapidly growing first micro-roasting coffee company franchise. Offering turnkey...

Speed Queen Laundry Systems
Enjoy true passive income with a Speed Queen self-serve laundromat. With our help, you’ll be up and running in your own profitable business in no time,...

V.I.P. Home Services
Professional home services franchise providing flexible, multi-serviced businesses for 43+ years. Either Lawns and Gardening, or Cleaning. Exclusive...
