Is the franchise relationship “highly regulated,” or even “over-regulated”?
Opponents of franchisee-friendly legislation (including the International Franchise Association) argue that’s the case.
Franchise salesmen and brokers are fond of assuring prospective franchisees that buying a franchise is a safe investment, since the industry is highly regulated.
UnhappyFranchisee.Com has asked leading franchisee attorneys whether the characterization of franchising as “highly regulated” is accurate.
Franchise attorney Peter Lagarias, an active supporter of fair franchising legislation, contributed the article, posted below.
(For other responses and discussion, see IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In).
Over-Regulation of Franchising is a Myth Whose Time Has Passed
By: Peter C. Lagarias, Esq.
When the International Franchise Association and franchisors complain of excessive regulation in franchising, they should be firmly corrected. Repeatedly asserting a position does not make it so. And while everyone is entitled to their own opinions, everyone is not entitled to their own facts. The facts are that franchise laws do not cover the bulk of the three core areas of franchise relationships: 1. the initial period involving sale of franchises; 2. the franchise relationship during its term, and 3. the end of the relationship via termination, non-renewal or transfers.
The first area of regulation is the offer and sale of franchises. Is there excessive regulation? No. To begin, the federal regulation provides for disclosure with no private right of action. The federal disclosure regulations may only be enforced by the Federal Trade Commission. But the FTC has limited staff and that was before the federal sequester and shut-down. The vast majority of states have no franchise registration and disclosure law. That is none. Those few states which have franchise disclosure statutes often do not require registration before sales of franchises. Finally on top of this scant availability of disclosure rights, the actual disclosures made by franchisors have become franchisor disclaimers rather than just franchisor disclosures making a mockery of disclosure.
The second area for franchise regulation is the franchise relationship itself what is typically called regulation. There are no federal laws proscribing or regulation the franchise relationship. None. Most states, save a handful, have no laws governing the franchise relationship itself. In other words franchisors are free and unfettered to draft contracts with unfair and one sided provisions. In this completely unregulated world, franchisors are free to allow themselves to put additional units next door to existing franchisees, compete against their own franchisees, require franchisees to purchase product from vendors who pay rebates and kickbacks to the franchisor, and even set prices. The small number of states which have enacted limited limitations on unfettered and unfair franchise agreement terms have addressed only a few practices.
The third area for franchise relationship is the ending of the relationship. There are no general federal laws covering franchise terminations and non-renewals. Many decades ago, however, Congress passed limited protections from unfair terminations and on-renewals regarding gas station franchisees and car dealers. Ironically these are two of the more well-heeled groups of franchisees and dealers, and even these statutes contain loopholes and limitations not revisited. But all other franchisees have no federal statutes or regulations protecting them from unfair or opportunistic terminations. On the state level, the vast majority of all states have no statutes protecting franchisees from wrongful terminations or non-renewals. And the few states with such limitations often have multiple categories allowing immediate termination or non-renewal, and limited remedies otherwise.
The real myth whose time has come to be addressed is that of franchisees in distress. Those of us regularly representing franchisees repeatedly have to tell them that there is no statute prohibiting a franchisor from putting another unit next door to them. Other times we have to bust their urban myth that they have a statutory right to renew their franchise if they have performed previously. Or more generally we have to tell them there is no franchise statute in most states requiring the franchisor to act in good faith. Deflating franchisee myths is all the more difficult because of the situation of many franchisees. They have invested their life savings in their franchise business which has served as their livelihood, and they are facing termination, non-renewal, or other devastating and unfair practices from their “business partner” franchisor. There ought to be a law. Unfortunately for them, and contrary to the franchisor’s myth, there usually is none.
Peter C. Lagarias is a certified specialist in franchise and distribution law by the State Bar of California Board of Legal Specialization. He concentrates his practice on representing franchisees and distributors as well as franchisee associations. He has personally represented franchisees in hundreds of different franchise systems including in contract negotiations, fraud and disclosure violations, contract disputes, termination and renewal issues, antitrust and other claims.
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