Franchise Reform Ideas

The American Bar Association’s Forum on Franchising began this year with panelists suggesting different ideas on how to improve franchising in the U.S., and one panelist recommended federal …

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The American Bar Association’s Forum on Franchising began this year with panelists suggesting different ideas on how to improve franchising in the U.S., and one panelist recommended federal franchise laws under a framework of reform. Attorney Rochelle Spandorf argued that franchises should be guided by a unified federal law instead of a disparate collection of state laws. Under that law, she said, franchisees would have a codified guarantee of action in good faith, disclosure would be part of a national registry and disagreement would be settled through mediation or arbitration in the franchisor’s home state. For more on this continue reading the following article from Blue MauMau

Not all wizards are known for their magical powers. Some are identified by their skill and knowledge about a particular topic, said Joseph J Fittante, Jr., moderator of this year’s American Bar Association’s 36th Forum on Franchising plenary session, in introducing this year’s annual meeting of franchise lawyers.

Aptly named "If I Had a Wizard’s Wand," the conference began with a selection of four legal wizards. ABA Forum on Franchising chair Fittante then asked each to provide the attendees of the opening session with what they would change in franchising if they could wave their magic wand.

There were two elements that were noteworthy about the session. "All our four wizards did not collaborate or share their ideas with one another before presenting their individual proposals to me: they worked in complete isolation," said Fittante. "Second, other than each being a past chair of the Forum, our wizards’ experiences in franchising are quite diverse."

Blue MauMau will be addressing each of the wizards’ proposals in a series of articles.

Spandorf flashes wand to redo current broken system

Rochelle "Shelley" Spandorf of Davis Wright Tremaine was the first to wave her imaginary magical wand (pdf, 14 pgs). Historically, her experience has been evenly balanced between representing franchisors and franchisees. Spandorf emphasized her prudent nature. ". . . I am not the kind of wizard who goes off half-cocked flashing my wand just to show off my extraordinary powers."

Then Spandorf explained franchising’s problem: "The current system is redundant, bureaucratic, and inefficient and its effectiveness for ridding fraud from the franchise sales process and leveling the playing field for franchisees has never been demonstrated, let alone fully tested."  She said no one defends the status quo. "Franchisors and franchisees universally agree on one thing: franchising would benefit from regulatory reform even if they don’t agree on its substance." 

The California attorney bravely asserted, "Let’s dispense with the question, should we continue to regulate franchising? Regulatory opponents cry that regulation is bad for business; franchises are private consensual contracts and government should not meddle in people’s private affairs." Spandorf’s response? That is nonsense. 

"Franchising’s remarkable success as a business model despite the problems with our broken regulatory system belies that public regulation is bad for franchising, she exclaims. "Furthermore, rescinding all franchise laws would shake the investment community’s confidence in the stability of franchise relationships, making it harder for franchisors and franchisees alike to obtain capital." Spandorf said the question is not whether to regulate, but how to regulate, and offers a five point plan to replace the current regulatory system.

Make a "2-2-1" rule to ensure franchisor competency

  • No company should sell franchises in the U.S. for a business concept without having owned and operated directly or through affiliates at least 2 outlets for at least the last 2 years.
  • Start-up franchisors must make a financial performance representation (FPR) in their FDD based on at least 12 months of "company-owned" performance data until they have sufficient franchisee data allowing them to base their FPR on franchisee performance.

Eliminate a myriad of State laws that franchisors have to navigate by having one federal franchise law

  • A federal franchise law should preempt all state franchise sales and relationship laws and provide for a private right of action.
  • The federal franchise law should authorize civil enforcement by states to protect franchisees that purchase franchises for a location or territory in the state.

Reform franchise disclosure and create national franchise registry

  • Pre-sale disclosure should be retained, but the FDD should be overhauled.
  • The federal franchise law will preempt the state registration system and establish a national franchise registry paid for by user fees.

Establish statutory duty of good faith in franchising

  • The federal franchise law will preempt state relationship laws and proscribe uniform unfair trade practices.
  • The federal franchise law will include a statutory duty of good faith.

Enforce through mandatory mediation then by dispute resolution in the franchisor’s home state

  • The federal franchise law would provide for exclusive federal jurisdiction and award attorney’s fees to the prevailing party.
  • Franchise parties would be required to submit to early neutral evaluation/mediation of franchise law and breach of contract disputes.
  • Franchisors may adopt their home state’s law as the franchise agreement governing law and require venue for disputes in their home state.
  • Franchisees may not maintain a claim for franchise sales violations if they have not read the FDD or retained legal counsel before buying a franchise.

This article was republished with permission from Blue MauMau.

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