California Legislates Fair Franchising

California’s bellwether fair franchising bill, the Level Playing Field for Small Businesses Act, is gaining momentum in the state Assembly. Now, Vermont and Massachusetts are also considering enacting …

California’s bellwether fair franchising bill, the Level Playing Field for Small Businesses Act, is gaining momentum in the state Assembly. Now, Vermont and Massachusetts are also considering enacting legislation that will better protect franchisees from the unfair business practices commonly perpetuated by franchisors. Advocates say it’s about time, and that franchisees who have invested their lives into a business should be subject to unfair terminations or non-renewal at the whim of franchisors. Major provisions of the legislation include requirements of both parties to deal in good faith, protections against a franchisor developing geographically competitive franchises and a 55-day extension over the current 5 days allotted to franchisees to settle overdue fees.  For more on this continue reading the following article from Blue MauMau.

Associations representing franchised small business entrepreneurs sang today in rare harmony in support of California’s new bill to protect franchisees from abusive franchising practices.

Last week California Assemblyman Jared Huffman (D-San Rafael) announced AB 2305, the Level Playing Field for Small Businesses Act. The law, co-sponsored by Assemblyman Tom Ammiano (D-13th), looks to be one of the most advanced fair franchising bills in the nation.

California is not alone.

There looks to be a wave of state franchise relationship laws pushing forward. Vermont and Massachusetts will also vote on similar pieces of fair franchising legislation this year. That’s in addition to the franchise relationship law that was enacted in Rhode Island three years ago. What is at the heart of these new laws are complaints by franchisees that franchise contracts in the last twenty years have become intolerably lopsided in favor of franchisors, and abusive.

"This legislation will respect the importance and rights of franchisors while providing essential protections for thousands of small businesses throughout California so they can avoid bankruptcy and continue creating jobs in our communities," said Assemblyman Huffman. "Unfortunately, abuses by some franchisors have resulted in small business franchisees losing everything trying to fight honest battles against intentionally unfair practices."

Franchisee lawyer Peter Lagarias couldn’t agree more. He adds, "Franchisees often invest their life savings and look to their franchise businesses for their livelihoods." The Bay-Area attorney is one of the top in the country and a certified specialist in Franchise and Distribution Law with the State Bar of California. "Franchisees should not be subject to unfair terminations and non-renewals following their investment and hard work," said Lagarias. "The result of unfair franchise practices is not only the loss of the business but often financial ruin. This legislation will level the playing field and provide for fair relationships with franchisors including protections from deceptive and unfair practices."

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The two California assembly members, attorneys and franchisee associations backing this bill say that these long, technical contracts have progressively become worse over the years in offering less protection to franchisees from unscrupulous and overreaching franchisors. They also point out that a typical franchisee is an individual or partnership that pools and invests life savings, mortgages a home or cashes out a retirement plan in order to buy into a franchise after an exciting and inspiring sales pitch.

Susan Kezios, chair of the Chicago-based American Franchisee Association, says that she helped provide templates to the legislation when the bill was crafted. Her organization and the California Small Business Association have backed the bill from the start. Kezios observed, "The reality of owning a franchise is very different from being the franchise corporation. The economic interests of both parties are different from the outset. AB 2305 merely removes from franchise corporations their unfair advantage by addressing significant ongoing concerns of franchisees."

AB 2305 (pdf) would significantly revise California’s existing Franchise Relations Act and its Franchise Investment Law. If passed, franchisee advocates say it would provide strong protection for franchisees that include the following:

  • It provides 60 days rather than the current 5 for franchisees in settling their overdue fees.
  • Franchisee agreements would automatically be renewed under the original terms unless the franchisee had substantially and materially breached the contract, or if the franchisee elects, under the franchise terms then being offered to new franchisees.
  • Franchisees would be given protection if the franchisor decided to set up a new store in the old franchise’s backyard
  • Franchisors would owe a duty of competence to franchisees.
  • The parties to a franchise agreement would be required to deal with each other in good faith.
  • Any provision in a franchise agreement requiring the application of the law of another state would be void
  • It would be unlawful for a franchisor to refuse to recognize an independent association of its franchisees.

Other franchise groups join in

In a rare act of unity among individual small business entrepreneurs, diverse franchisee groups from some of America’s largest brands have announced today that they are joining in.

The Asian American Hotel Owners Association, a group of 11,000 paid members that operate and lead almost half of hotel properties in America, announced today that the group "STRONGLY" supports California’s fair franchising bill. The organization has advocated and negotiated with franchisors for years on fair franchising practices. "We applaud the lawmakers in California and other states for introducing legislation that will stop franchisors from dealing unfairly with franchisees," declared AAHOA Chairman Hemant Patel. "This legislation will go a long ways towards creating a level playing field so that franchisees can grow their businesses and provide excellent services to their customers."

"Franchising is most successful when it mutually benefits both the franchisor and franchisee," said AAHOA President Fred Schwartz. "It is reported that franchising is responsible for 760,000 businesses, 18 million jobs, 14 percent of the private sector employment, and over $500 billion in payroll. With this strong legislation, we can ensure the continued success of franchising at every level."

Keith Miller, a Sacramento-based franchisee of Subway shops, chair of the Coalition of Franchisee Associations says the group has already endorsed another state’s fair franchising bill that comes to a full vote this summer, Massachusetts. His group, the CFA, represents franchisees of some of America’s largest brands like Subway, Burger King, 7-Eleven, Choice Hotels and pharmacy shop franchisees. Miller states that California’s bill looks very good: "The bill borrows on many items from our Universal Franchisee Bill of Rights." The chair of the franchisee advocacy group, with an office on K-Street in Washington, D.C., declares: "We are excited about the increase in interest in franchise protection legislation. It is franchise owners who largely invest in towns and local communities."

Although the Coalition of Franchisee Associations has not had time to have its board and committees fully vet all the details of California and Vermont fair franchise bills, Mr. Miller says it looks good. The franchisee group may want to add a few minor changes. "At first look, we’re pretty pleased with it. The California [fair franchising] bill is probably the strongest legislation we’ve seen."

Powerhouse AAHOA weighs in

AAHOA Franchise and Industry Relations (FAIR) committee co-chairman Jay S. Patel thinks it is time that it is high time that fair dealing become strengthened. "This past year we have emphasized the importance of franchisors developing good faith and fair dealing practices and including them in the franchise agreements," he said. "With this legislation, such practices will become the law of the land. When a franchisee can trust the franchisor to treat it fairly in business, and can rely on the franchisor to make decisions that will truly benefit the brands, all will prosper. This legislation is a large step forward for fair franchising." 

"This bill strengthens the rights and negotiating powers of AAHOA members and other small business owners in California," said AAHOA director at large Satish "Sunny" Gabhawala, who is also co-chair of AAHOA’s FAIR committee. "I encourage all AAHOA members operating in the state of California to voice their support for AB 2305."

Robert Purvin, chair of Southern California-based American Association of Franchisees and Dealers, cautions that bills of this nature have not fared well in the past. He should know. His last involvement with a federal fair franchise legislation, along with the American Franchisee Association, ended in a failed attempt in the nineties. Purvin thinks this is a different place and time. "The State of California legislature and executive branch is currently dominated by Democrats," he observes. He thinks passage of a bill favored by a clear majority party can more easily get through. "The time may be ripe for more dramatic reforms in California. There could be an opportunity for this bill to pass with significant support from franchisee associations across the country."

This article was republished with permission from Blue MauMau.


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