A number of states are attempting to level the playing field between franchisors and franchisees by passing so-called “fair franchising” acts.
Rhode Island enacted three years ago; California, Vermont and Massachusetts are all poised to act on their version during their current legislative session.
In essence, the acts aim to solve a perceived problem of a few bad apples spoiling the entire barrel. Although most franchisors operate fairly, a few have engaged in deceptive or unscrupulous practices that have caused franchisees to unwittingly lose significant amounts of money. Legislators have focused on this issue as one that needs fixing.
Many of the lawmakers’ concerns are rooted in the perception that franchise agreements have, over the last twenty years, become more complicated and skewed toward the interest of franchisors. Some franchisors have been accused of repeatedly subjecting franchisees to unfair terminations and non-renewals.
Many franchisees are welcoming the acts with open arms. After all, franchisees rely on their businesses to earn a living. Many have their entire life savings wrapped up in the franchise. If it fails, they face the real possibility of financial ruin.
California’s version of the bill includes the following protections for franchisees:
- Sixty days – instead of the current five – to settle overdue fees
- Automatic renewal of franchise agreements under the current terms, unless the franchisee has materially breached the contract
- Protections against new franchise locations opening up in the franchisee’s territory
- A requirement that both parties deal in good faith
- A requirement that the franchisor recognize an independent association of its franchisees
In addition, under the proposed law, all franchisors would owe a duty of competence to their franchisees.
Considering how fast this issue is taking off, it would not be surprising to see a similar bill introduced in New York in the near future.
Source: NuWire Investor, “California Legislates Fair Franchising,” March 16, 2012.