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The Fight for 'Fairness in Franchising'

The Fight for 'Fairness in Franchising'
Image credit: Photography by David Johnson
Pushing for dialogue: the Coalition of Franchisee Associations' Misty Chally.

Imagine owning a small business for 20 years, pouring all your time, money and sweat into achieving a decent cash flow and a little equity. Then imagine getting a contract in the mail stipulating that if you want to continue doing business, you must replace thousands of dollars of perfectly good equipment, adjust suppliers or prices or make a dozen other changes that could destroy your bottom line. And if you don't sign, you more or less forfeit your life's work.

That's the situation the Coalition of Franchisee Associations (CFA) says veteran franchisees are increasingly facing as their agreements come up for renewal. And that's the climate new franchisees are entering when they sign into systems where the power and control have shifted dramatically to the corporate side.everyone together to stand up for important considerations is a positive move in unifying franchisees."

"Over the last 30 years, franchise agreements have become more onerous and one-sided," says Jim Coen, vice chairman of the CFA and president of Dunkin' Donuts Independent Franchise Owners. "They say nobody puts a gun to a franchisee's head to sign these contracts, but that contract is a loaded gun. The flip side is, if you walk away or walk out, the franchise agreement makes it hard to harvest the equity you've built up in your business. Some of these agreements are pretty much intolerable."

That's why the CFA, founded in 2007 in Washington, D.C., to represent independent franchisee associations and to lobby Congress on their behalf, has released a 12-point Universal Franchisee Bill of Rights. Among other recommendations, the document calls for giving franchisees the right to set prices and join independent associations, to renew or transfer their franchise and to protect their territory from encroachment. It also stipulates how franchisors should handle a default. Since the document was finalized in June, more than a dozen franchisee associations representing 50,000 franchise units and 1.4 million employees have signed on.

But this won't necessarily change the way the system operates. In fact, Coen sees the Bill of Rights as a starting point for dialogue, not the basis for a legally binding document. "We believe the most important thing is beginning a conversation between franchisors and franchisees to identify that there is work to be done and there are unfairness issues. The Bill of Rights helps create a forum to discuss these issues," he says. "Franchisors should be willing to discuss these topics and get their franchisees' perspectives to understand the issues we bring up."

Misty Chally, deputy executive director of the CFA and its chief lobbyist, says if franchisors are not open to discussing their contracts, then the franchisee community may consider introducing elements of the Bill of Rights as legislation. However, she admits that could be an uphill battle. A fair franchising bill introduced in 1999 by Rep. John Conyers (D-Mich.) withered on the vine, and Chally says most members of Congress don't know the difference between a franchisor and franchisee, much less the minutiae of their contracts. Still, she thinks there are major issues that should be addressed--like encroachment, in which a franchisor opens a corporate-owned store in or near a franchisee's territory, cannibalizing its customer base; and nondisclosure clauses, which prevent a franchisee whose contract has been terminated from discussing the matter with other franchisees.

"There are a lot of legal rights franchisees give away," Chally says. "These contracts are not negotiable. You have to sign, or you walk away."

Dave Glodowski, chairman of the CFA and chairman of the Legal and Legislative Committee for the Independent Hardee's Franchisee Association, agrees. "There's less flexibility on our end," he says. "Officers at franchise systems talk to each other, and so do their attorneys. If they see an issue in one system, they try to get ahead of it in their system. They tighten down the flexibility of franchisees they have had in the system 25 or 30 years. They see it as protecting their brand, but it's also a form of control."

Not all franchisee representatives agree with the CFA guidelines. Robert Purvin, CEO of the American Association of Franchisees and Dealers-- which released its own Franchisee Bill of Rights soon after the trade group was formed in 1992--thinks the Fair Franchising Standards, a set of guidelines the organization uses to assess contracts, is more comprehensive than the CFA Bill of Rights. He believes the CFA document is missing two key points: First, franchisors need to recognize franchisees' ownership in their business, allowing them to build equity; second, franchisees must be allowed to carry on their trade if they leave the franchise system.

"Can you imagine a journalist paying $100,000 to get a degree to practice in their field, then being told by a newspaper they can't be a reporter if they leave the company?" he says. "Those are huge deals not dealt with in the CFA version."

Still, Purvin says of the CFA, "I applaud their main purpose. It's the same thing we did 20 years ago, and it didn't need to be done again," he says. "But the fact that they have brought everyone together to stand up for important considerations is a positive move in unifying franchisees."

The Washington, D.C.-based International Franchise Association (IFA), which represents some of the largest franchise systems, also sees little use for the CFA's document. Leaders of the IFA point to the organization's own Code of Ethics, which its member franchises are required to follow, as a stronger framework for agreements.

"We don't think a Bill of Rights is really necessary," says Alisa Harrison, IFA vice president of communications and marketing. "We're really proud of our Code of Ethics. We're membership-based and represent franchisors, franchisees and suppliers; we're not hearing anything about the Bill of Rights from them. It's not even on their radar screens. What they are saying is, ‘We are dying out here.' They can't get credit, and other policies coming out of Washington are affecting their businesses. That's what our members are focusing on."

Richard Solomon, a Houston-based attorney who has represented franchisors and franchisee associations, is also critical of the CFA's document. "Frankly, the Bill of Rights is just so much nonsense. It's just venting by frustrated franchisees who can't organize into any type of coherent force," he says. "They don't have proof that franchisors are violating any contracts; they just don't like the agreements they've signed. Essentially, many of these people bought a franchise and didn't know anything about it. They didn't want to comply with the terms of the agreement after they got into business. What they need is competent due diligence before they sign an agreement."

The CFA emphasizes that the Bill of Rights is not a call for revolution or an attempt to negate current contracts, but simply an effort to make the franchising system stronger for all parties. "Part of the success of franchising is in the tug of war," Glodowski says. "The corporate side is looking at the top line, and franchisees are always looking at the bottom line. That's one of the components that makes the franchise model so competitive and so successful."


Know Your Rights
Here are the major points of the CFA's Universal Franchisee Bill of Rights. For more information, see FranchiseeBillofRights.org.

Freedom of Association
A franchisee may freely associate with other franchisees or associations.

Good Faith and Fair Dealing
A franchisee may rely on a franchisor's good faith, fairness, exercise of due care and performance, including the administration of advertising, rewards programs, marketing funds and franchise or development agreements.

Uniform Application of Brand Standards
Franchisors shall maintain consistent operating standards under a specific franchise system brand name and uniformly apply such standards in a nondiscriminatory manner.

Full Disclosure Regarding Fees Collected from Franchisees
A franchisor shall make available to the franchisee all records of marketing, rewards programs and related fees that have been paid by franchisees, vendors, suppliers and licensees.

Right to Price
A franchisee may establish the price of goods and services it sells.

Fair Sourcing of Goods and Services
A franchisee, or franchisee purchasing cooperative, may purchase from any vendor goods and services that meet the formally established standards of the franchisor.

Right to Renew the Franchise
A franchisee may renew its franchise under terms free of unreasonable costs and/or stipulations.

Right to Transfer
A franchisee shall have a right to transfer its franchise to a qualified purchaser, including, but not limited to, family members or business partners, without unreasonable costs, stipulations or penalties.

Encroachment
A franchisee shall have specific market protection wherein the franchisor shall not materially impact the franchisee's business, or allow another entity with the same or a similar brand to operate.

Ample Notice of Significant Change; Franchisee Termination Rights
Notice of significant change to the franchise system shall be given in a reasonable time prior to required changes. A franchisee may terminate without penalty, or liquidated damages, if a change to the franchise system would cause substantial negative impact or if the franchisee is experiencing substantial financial hardship. Under such termination any noncompetition covenant shall be void.

Default; Franchise Termination Rights
Prior to franchise agreement termination, the franchisee shall be given detailed reasons for alleged default and reasonable time to cure. Termination shall not occur without good cause and shall not compel payments of liquidated damages and/or early termination fees. All franchise agreement rights shall remain in full effect for any franchisee not in default or that cured a default. A default under one franchise agreement shall not constitute a default under a different franchise agreement.

Fairness in Dispute Resolution
A franchisee may elect to have all dispute resolution proceedings and legal action occur in the local venue of the franchisee and shall not be required to submit to mandatory binding arbitration.

Jason Daley lives and writes in Madison, Wisconsin. His work regularly appears in Popular Science, Outside and other magazines.

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This article was originally published in the November 2011 print edition of Entrepreneur with the headline: Fairness in Franchising.

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