Franchising

In California, a Bill to Protect Franchise Buyers Gains Ground


In California, a Bill to Protect Franchise Buyers Gains Ground

Photograph by Craig Cozart

California franchise owners may get stronger protections in their dealings with franchise systems if a bill passed Tuesday in the state’s Senate becomes law.

The bill 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 change would help even a playing field that has tilted in favor of franchisors over the past half century, says Robert Purvin, chairman of the American Association of Franchisees & Dealers. The organization, based in San Diego, supported the bill. “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,” Purvin says.

Franchisees who have invested their own money into building a restaurant or other company are at the mercy of the system they license when their contracts expire, he says. Franchisors may refuse to renew contracts on the same terms, leaving operators little recourse but to acquiesce or leave the system. 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,’” Purvin says. Protecting franchise associations will also give buyers more power to negotiate fair contracts with franchisors, he says.

The International Franchise Association, the franchise industry’s K Street lobbying group, 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.

The National Federation of Independent Business backs the bill, according to franchise news source Blue Maumau. (Update: After this story was published, the NFIB emailed to say that it had changed its position on May 23. The organization is now “neutral” on the bill, says Michelle Orrock, NFIB’s communications director in California.)

The bill would help protect California franchise owners when their contracts come up for renewal, says Joel Libava, a Cleveland franchise adviser known as the Franchise King. “Maybe the franchisor is psychologically trying to strong-arm the franchisee,” Libava says. Under the proposed law, he says, “franchisors cannot bully, they cannot all of a sudden change things.”

Existing commercial law implies that people are held to a good-faith standard when they enter into contracts. Making it explicit in the statute will give judges more leeway to “examine and determine what’s reasonable in a commercial setting,” says Charles Internicola, a New York attorney who represents both franchisors and franchisees. The law “is intended to water down the franchise agreement itself,” he says. “When parties enter into franchise relationships, the franchisor has more control over the process and is in a better negotiating position.”

The bill passed the California Senate on the strength of Democratic support, in a 22-12 vote with five abstentions. It now goes to the state’s Assembly, also controlled by Democrats, for amendments.

John_tozzi
Tozzi is a reporter for Bloomberg Businessweek in New York.

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