What can franchise legislation do to overcome the one-sided adhesion terms of the common franchise agreement? Statutes can address the three stages of the life of a franchise: the formation, the ongoing relationship, and the ending of the relationship. But such laws are absent from most states: a majority of states have no franchise laws at all. Of those that do, almost none of them govern the ongoing relationship.
Franchise formation: Franchise legislation may address misrepresentations and fraud in the offer and sale of franchise units.
One of the sleight of hand provisions in many franchise agreements, called a “no-representation and no-reliance clause,” is aimed at insulating franchisors from claims for fraud in the sale of franchises.
Here is how no representation and no reliance provisions work. Buried deep in the agreement, they state that no additional representations were made in the franchise sale other than those set out in the franchise agreement and FDD, and that the franchisee relied on nothing else in buying the franchise. But in reality franchisees often ask questions of the franchise sales staff, who actively seek to complete sales by providing additional information. According to the no-reliance clause, the franchisee is supposed to determine which statements are proper and disregard any others, including earnings claims they asked for and were given. A properly drafted franchise statute could forbid the use of no-representation and no-reliance clauses, or declare them to be void, and stop misrepresentation in the sale of franchises.
End of the relationship: Franchise legislation sometimes addresses franchise terminations and non-renewals. Most franchise agreements provide that the franchisor can terminate the agreement a myriad of reasons. Statutes can limit termination only to cases where there is good cause, and require the franchisor to provide notice and an opportunity to cure, thus giving the franchisee a chance to avoid termination. Statutes can also provide a right to renewal, and protect franchisees’ equity by requiring approval of sales and assignments of franchise agreements to qualified buyers. Such statutes recognize that franchisees have too much money, capital and sweat equity in their businesses to be subject to arbitrary terminations, denials of renewals, and refusals to allow transfers of franchise agreements.
Do these things happen? Unfortunately, they do. Franchisees in some systems are targeted for termination, or threatened with it, unless they accept expensive new programs or pay for “voluntary” remodels. Simply put, the modern franchise agreement makes almost every franchisee vulnerable to their franchisor’s overreach. Statutes can help to level the playing field.
During the relationship: Franchise legislation may protect franchisees from unfair conduct during the ongoing life of his or her relationship with a franchisor. Unfortunately, only a handful of states provide statutory protections for franchisees during the term of their franchise relationship. Thus, if a franchisor puts another competing franchise outlet near a franchisee’s existing unit – which cannibalizes the existing franchisee’s customers and reduces his or her sales – the case will be decided on the contract language. Unfortunately, such language often directly or indirectly immunizes the franchisor’s conduct. Likewise, if a franchisor requires its franchisees to purchase products used in the business from specified vendors, franchisees generally must do so, even if the product is overpriced because the franchisor is receiving kickbacks. Statutes can address unfair conduct like permitting encroachment and making decisions based on kickbacks.
In the last few years in California, the Coalition of Franchisee Associations, with the support of franchisees from multiple systems, including 7-Eleven and Subway, sought to strengthen California’s franchise laws in each of these three key areas. The ambitious initial effort failed, and, as a result, the next proposed bill was limited to amending the California Franchise Relations Act regarding unfair terminations and transfer denials, and protecting franchisee equity. That effort took three more years and ultimately succeeded, despite an initial veto by Governor Jerry Brown. Initiatives are proceeding in other states as well, including Maine, Massachusetts, and Pennsylvania. These efforts are worthwhile and should eventually bear fruit. Why? Because the need to overcome one-sided unfair franchise agreements and level the playing field for franchisees is enormous and fundamental, and because justice is on the side of franchisees. •
Peter C. Lagarias is a nationally known trial lawyer with Lagarias & Napell, LLP, a law firm in San Rafael, California representing franchisees and franchisee associations. He is a certified specialist in franchise and distribution law by the Office of Legal Specialization of the State Bar of California.