Franchising World May 2012
By: Judith Thorman
Assembly Bill 2305 will hurt franchise businesses, job growth efforts, and consumers by adding unnecessary restrictions to franchising opportunities. Despite being portrayed as pro-franchisee legislation, the bill will hurt franchisees and franchisors alike.
Franchising is Already Regulated by California and Federal Law
California regulates franchise disclosure under the Franchise Investment Law or “FIL” and regulates the terms of the relationship between franchisor and franchisee under the Franchise Relations Act or “FRA.” The FRA is one of the more restrictive and stringent state laws governing franchise relationships. If adopted, AB 2305 would amend both laws, making it extremely difficult for existing franchise systems to conduct business in California and making the state an unattractive place to open new businesses. The legislation is burdensome, unnecessary and duplicative.
For more than two decades, the Federal Trade Commission’s Franchise Rule and the California Department of Corporations’ FIL have required extensive pre-sale disclosure of information about every franchise investment. Franchisors must, prior to the sale of a franchise:
• Provide potential franchisees with detailed information that explains the rights and financial obligations of the parties, including rights to terminate or take other adverse action, the cost and any fees a franchisee is required to pay, and comprehensive information regarding virtually every aspect of the franchised business.
• Give potential franchisees contact information of existing franchisees so that they can discuss the existing franchisees’ experiences in the franchise system.
• Wait 14 days before allowing the franchisee to sign a franchise agreement to ensure the investor does not rush his or her decision making. It is in this period that potential franchisees can complete their review and analysis of the franchise opportunity.
The FRA currently requires good cause (as defined in the statute and more than 20 years of case law) to protect franchisees from unjust terminations by regulating the conditions under which a franchisor can terminate or refuse to renew a franchise agreement.
Under current law, investors in a franchise system are provided with more information to help aid their decision-making than is required in almost any other type of business investment setting. In addition, with well over 2,000 franchise systems operating in approximately 300 different business lines, there is a wide range of investment options from which investors can choose.
Assembly Bill 2305 will hurt consumers. Franchisors impose standards and expectations on all franchisees to protect the brand’s reputation, other franchise owners nearby, and, ultimately, the general public, their collective customer. This bill will allow substandard franchise outlets to continue offering inferior products and services to consumers. Franchisees, franchisors and consumers all have a vested interest in maintaining a franchise’s brand integrity, which results in consistently high quality purchasing experience.
Assembly Bill 2305 will hurt both franchisees and franchisors. It limits the ability of the franchisor to freely develop a business by interfering in a contract between two consenting parties, and would create the most limiting constraints on franchise growth in the country. The encroachment provisions of the bill would limit a company’s ability to add additional locations and hurt economic development in California. Such protectionist language also would limit franchise opportunities for a growing economic segment, women and minorities and inhibit a franchisor’s ability to receive infusions of new capital, vital to sustaining and expanding a brand. Additionally, the bill requires identical treatment of all franchisees, which is nearly impossible in long-term relationships involving scores or hundreds of franchisees. A perverse effect of the legislation is that it will tie the hands of franchisors from assisting franchisees in many circumstances. Take for example the franchisee, experiencing temporary cash flow problems. Under the restrictions imposed by the legislation, a franchisor would be prohibited from granting the franchisee an extension on payment of a debt.
Assembly Bill 2305 will inhibit job growth. During a period of stagnant growth globally, franchisors, like many other businesses, are being extremely judicious with their investment capital. Adopting such burdensome legislation would undoubtedly force franchisors to look to other states to expand their brand–taking jobs and new businesses with them.
Assembly Bill 2305 will add considerable legal expense. This bill will increase the cost of operating a franchise business in California. The bill is replete with legally actionable terms such as “good faith,” “unreasonable” and “duty of competence.” These terms, either broadly defined or undefined, would require judicial involvement to resolve minor disputes, at great expense to both franchisors and franchisees. Franchisors would be forced to recognize any franchisee association. The cost must be passed on to consumers and franchisees in the form of higher prices.
Judith Thorman is senior vice president of government relations & public policy for the International Franchise Association at 202-662-0768 or email@example.com.