Massachusetts franchisees were given an opportunity to appeal to lawmakers June 29 as the state contemplates passing legislation that will reinforce fair dealing in franchisee-franchisor business contracts. Franchisees complain that power has shifted into the hands of franchisors over the past three decades, giving them power to terminate contracts at will, limiting court remedies and grouping franchises too closely to make profit. Powerful franchisors and the International Franchise Association oppose the new bill, arguing that more regulation will result in harm to the state economy. For more on this continue reading the following article from Blue MauMau.
Franchisees and a few franchisor advocates gathered on June 29 to be heard at the Massachusetts’ Committee on Community and Small Businesses. In a filled room, franchisees plead with state senators and representatives to provide fundamental protection from wayward franchisors.Their beef? Franchise owner-operators say that franchisors currently terminate their local businesses at will, set up competing stores too close, and prohibit them from taking their franchisor to court. Massachusetts has introduced two bills that aim to change the relationship between franchisors and the state’s franchised businesses.
An attorney who represents both franchisees and franchisors, Seth Stadfeld, thinks that the conflict is essentially one over power. Franchisees argue that the relationship, with the protection of the law, has moved almost completely to the franchisors over the past three decades. Franchised business owners want protection, while franchising firms want lawmakers to not mess with a good thing — for them. "Control is the name of the game, and control stems from rights," declares Boston-based attorney Stadfeld. "Rights right now are really on the side of who has the power in the contract. Franchisors don’t want to lose a stitch of that power through any regulation. That’s what this fight is about.”
Frankly, the general population and probably a lawmaker or two are hard pressed to understand the difference between a franchisor and a franchisee. Reporters sometimes erroneously refer to franchisors as a “parent company” as if they were a holding company or financially affiliated with the independent small business operators, which are in fact franchised establishments that have been granted a license by a franchisor to use trademarks and follow business protocols. The general public can sometimes be confused over the seeming civil war between what they perceive as a head office and its retail units. This hearing helped clarify those differences to lawmakers and the issues.
If anyone in the state knows franchising, it should be state senator Brian A. Joyce [D]. His office is located in Canton, Massachusetts, where franchisor Dunkin’ Brands Inc. is headquartered. If there are war stories, Senator Joyce is at ground zero. There seem to be Dunkin’ franchised stores on just about every other block. Senator Joyce declared to the panel at the outset of the hearing why his fair franchising law is needed in the Commonwealth. “These men and women who work so hard and bring revenue to our state are not sufficiently protected from having their franchise agreements terminated for no obvious or explainable reason: in other words, without good cause.”
Franchisor attorneys argued that what agreement two businesses — the franchising company and the local franchised business — have signed, let no state law come between.
In turn, franchisors asked for support of their own bill, which would overturn existing Massachusetts labor laws. Massachusetts courts have ruled that Coverall franchisees are not really franchised business owners, but rather employees in disguise. These “franchisees” are actually entitled to minimum wage and employee insurance, said the courts. Unlike most local franchise establishments that bill and service their own customers, franchisor Coverall North America Inc. develops customers, collects payment, deducts its expenses and then gives franchisees the remainder, similar to a paycheck. The new bill, HR 3513, would define franchising as special, exempting franchisors from labor laws that other industries must abide by.
Franchisees share horror stories on Beacon Hill
The result of these two separate squalls coming together in the same hearing was a major storm for franchisors. Whereas one bill would have garnered a few franchisee horror stories of predatory practices, the two combined formed a plethora of them for lawmakers to hear.
The room was filled with a number of franchisees from such chains as Dunkin’ Donuts and Coverall, who shared their experiences of being ground up in the franchise machine. According to some, these are but the tip of the iceberg. Jim Coen, president of the Dunkin’ Donuts Independent Franchise Owners, declared, “The reason there aren’t more franchisees here today testifying is that they fear retaliation, retribution and the potential loss of their livelihood and equity.”
Former Dunkin’ franchisee Irwin Barkan agreed. “I could not testify here today if I were a franchisee. It is as simple as that. No matter how much I supported the bill, speaking publicly against the wishes of your franchisor is tantamount to economic suicide.”
Jane Keegan, past multi-store owner of D’Angelo deli shops, a New England chain that has 50 franchises, magnanimously would only mention that she had been with a sandwich chain. She spoke about unscrupulous practices of franchisors. At the urging of their franchisor and with the guidance of experts, Keegan and her husband spent all of their savings and retirement funds on a franchise. While the first franchise was in the red, the franchisor sold them another one as the answer to their problems. Both businesses soon came crashing down around them. The stress put her husband in the hospital. With the help of experts, she valiantly tried to turn the business around and legally protect herself but there was no saving a business that couldn’t make profits from day one. The couple soon filed for corporate and personal bankruptcy.
“Current franchise law makes investing in any business today more perilous than any gambling game in Las Vegas or Wall Street junk bond,” Keegan declared. And to make sure that lawmakers understood the lopsidedness of the contracts and predatory practices of franchising firms, she exclaimed, “Like quicksand, a franchise is easy to get into and hard to escape from.”
Pius Awuah, a former franchisee of Coverall, along with others, testified of a company that had promised him a job that he could never be fired from as an owner-operator. But what he received in return was a bad job that didn’t even earn him minimum wage. Worse, for all Awuah’s efforts, the franchisor took his better accounts for themselves. Attorney Shannon Liss-Riordan spoke about how this franchisor targeted immigrant workers who barely speak English and don’t understand what they are getting into for their franchise churning scam. Although composed for most of his testimony, Mr. Awuah, a burly man with a deep voice and a Ghana accent, sobbed, “I invested all the money that I have.” He spoke about how his family depended on him and he had let them down. “Financially, I’m in crisis. Emotionally, there’s a lot to say . . . ” he said as his voice trailed off and his head hung low.
“That’s all right, take your time,” said the chairperson of the panel to Mr. Awuah.
Coverall’s attorneys brought two franchisees to speak on the franchisor’s behalf. But one did not give testimony because he only spoke Portuguese, although the other unit operator said he would translate. The scene couldn’t have been scripted better by critics of the cleaning franchisor.
Coverall’s surprising allies
The almost unanimous cry from franchising firms Dunkin’ Brands, Friendly’s, Coverall and the International Franchise Association (IFA)— the major franchisor trade group — was don’t mess with our contracts or your state’s economy will suffer. The IFA, through lobbyist Steve Goldblatt of Boston’s The Suffolk Group, stated, “Our statistics demonstrate that in 1992 the state of Iowa enacted legislation that put it [franchises] in peril. In the years that followed, the growth of the franchise business model ground to a halt.” Concluded Goldblatt, “We are concerned that the Massachusetts economy will be hit in a very similar way.”
But there was little evidence that lawmakers were buying it.
Jim Coen, himself a past ice cream shop franchisee and also now the vice-chair of the Coalition of Franchisee Associations, had previously pointed out that isn’t the case. He cited how local franchisor Dunkin’ has been unfettered by fair franchising laws and is currently advertising that it is not only seeking franchise candidates for Iowa, but also Wisconsin, which has one of the most comprehensive fair franchise laws in the nation. He argued that if anything, those fair franchise laws have attracted and reassured buyers. "Recently, Dunkin’ Donuts announced, as well it should, that a group of existing franchisees will build over 75 shops in the great state of Wisconsin. I don’t think it is coincidental that those franchisees chose Wisconsin," said Coen.
Stadfeld thinks that there may be some skepticism about such sweeping generalizations. “There might be a little skepticism in light of the fact that we [Massachusetts] have chapter 93B, which provides similar protection for automobile dealers,” declares the Boston attorney. “And franchisors didn’t leave the state. We have similar protection for service station franchisees in Chapter 93E, and they haven’t left the state.”
Attorney Art Sawyer, the general counsel for Massachusetts-based franchsor Friendly’s and previously of Dunkin’, spoke to protect Coverall and Jani-King and to support House Bill 3513. “A strict interpretation of the law [the one that applied to the recent court decision against Coverall] could effectively erase franchising from the state,” warned Sawyer. “This isn’t about a specific industry: this is about franchising across all industries.”
Representative Linda Dorcena Forry [D] and other lawmakers seemed baffled by the attempt of one size fits all.
Franchisor and franchisee attorney Seth Stadfeld explains to Blue MauMau readers the difference that many in the hearing probably had in mind. “You don’t have franchisors like McDonald’s or Dunkin’ Donuts going out and finding customers, charging them, and then giving back franchisees 94 percent as opposed to the franchisee giving the franchisor six percent in royalty. The money flows uphill, while in Coverall and cleaning service franchises, the money flows downhill. The customer relationships flow downhill. It is the franchisors that determine whether you can service the customer or not. For purposes of independent contract status, that really is different.”
Representing franchisor Coverall, Michael Vhey of law firm DLA Piper objected to Massachusetts’ recent and final court ruling that Coverall’s relationship with its franchisees was actually that of employer and employee. He included the entire franchise industry in his remarks about the practices of Coverall. “Franchising is different. Franchising gives people, for a fee — franchisors aren’t doing this for nothing — franchising allows them to build up experience with the franchisor, with the franchisor’s sales force, and the franchisor’s methods, and then grow their own business.”
Although the chairman of the small business panel and others tried on several occasions to keep Dunkin’, Friendly’s and the vast majority of franchises from being lumped together with the court ruling against Coverall and its relationship with its "franchisees”, franchisors would have none of it. Dunkin’ Brands declined to give an oral testimony, but the company provided a written statement in support of H3513, exempting franchisees from being considered employees. “Dunkin’ Brands as the franchisor enters into a contractual relationship with our franchisees. Thus, employees of Dunkin’ Donuts and Baskin-Robbins are employees of the individual franchisee, not Dunkin’ Brands.”
It was a sight to behold: four star restaurant franchisors rallying for troubled, one-star cleaners.
Franchisees come out ahead
The hearing was good for franchisees. The fair franchising bill, S1843, looks strong, while the franchisees-can’t-be-employees bill, H3513, looks unlikely to gain traction. The panel seemed unconvinced by the threats and arguments of the franchisor lobbyists.
After the meeting Representative Forry told members of the public who were discussing Coverall’s business model, “Let’s be frank, they are employees.”
One representative of the Committee discreetly told a franchisee advocate following the hearing that the meeting was an eye opener. He said he had had no idea of the predatory problems that franchising attracted, nor of some of the schisms between franchisor and franchisee until he attended the hearing.
Even the attorney for Coverall realized after so many horror stories that he was in rough seas. He began his remarks by saying, “I completely sympathize with Mr. Awuah’s predicament.” But quickly added, “It’s terrible when you start a business and it doesn’t work out.”
Shannon Liss-Riordan, a Boston-based attorney who specializes in wage and employee law and successfully represented Coverall franchisees in their minimum wage claims, came to the meeting to oppose the people-cannot-be-employees-if-they-sign-a-franchise-contract bill. She said of the other bill, on fair franchising, “It seemed to me there was general support for it.”
The fair franchising bill’s sponsor, Senator Brian A. Joyce, agrees. He declares to Blue MauMau readers, “I think the bill has legs. There is a strong likelihood of passage this session.”
That is good news for franchise owner-operators. With little money to lobby, but a lot of heart, a loud voice and a lot of organization, franchisees at the state level have managed to do the seemingly impossible. After they, through Dunkin’ Donuts Independent Franchise Owner’s Association and the Coalition of Franchisee Associations, helped introduce and support Rhode Island’s enacted fair franchising law a couple of years ago, franchisees seem to be poised for a double win, taking another nick out of lopsided contracts and predatory franchising in the state of Massachusetts.
Most likely the International Franchise Association, whose paying members are largely franchisors, will throw money at and redouble their efforts in Massachusetts. But those efforts look unlikely to accomplish much. “The emperor has no clothes,” concluded franchisee advocate Jim Coen about the famed lobbying power of the IFA and its franchisor members.
This article was republished with permission from Blue MauMau.