Some franchising issues are so familiar, they're almost like family. They may pop up just a little too often and sometimes tend to irritate, but you're stuck with them.
Recently, two perennial franchising issues experienced significant changes. The Iowa Franchise Investment Act acquired a significant amendment that mixed new controversy with the old, while the Uniform Franchise Offering Circular (UFOC) underwent its first complete renovation since its creation in 1974.
The Iowa Blues
The debate has raged fairly consistently since 1992, when Iowa passed what is widely considered the most onerous franchise law ever. Some considered Iowa a guinea pig of sorts; though controversial issues such as franchise relationships, encroachment and termination had long inspired franchisors and franchisees to spout theories about what would happen if legislation were enacted, Iowa just went ahead and did it.
More than three years after enacting the law, Iowa legislators have finally attempted to clear up some of the regulation's stickier details. "These changes were helpful from the perspective of franchisors," says Mary Beth Trice, a partner with San Francisco law firm Bartko, Zankel, Tarrant & Miller. "However, the statute has gone from being ambiguous to being more unwieldy."
The addendum to the law, passed in the summer session of 1995, addressed several issues, including the transferability, renewal and termination of franchises. The encroachment provision, however, stole the show. As it was previously written, the encroachment provision made it unlawful to open locations within an "unreasonable proximity" to existing franchisees' outlets.
"Not only was it difficult to determine what 'unreasonable proximity' might have been, but the measure of damages was also questionable," says Trice. "In the [amended] version, the focus has drifted away from the geographic proximity of the business and instead talks about recovery when the placement of a new outlet under the same trademark has an adverse effect on a franchisee."
Rather than settling the matter, however, Trice believes this extensive change may create a whole new round of squabbles. "It's potentially more problematic than a provision that speaks to [geographic] proximity," she explains. "We went from a situation where franchisors knew they couldn't put a franchisee too close to an existing franchisee to a situation where franchisors have to look at whether the placement of a new franchisee is going to have an adverse impact. We sort of traded off one set of questions for another."
One aspect of the new act that seems definitive is the way in which franchisees can allege encroachment: They must prove that the new franchise unit has adversely impacted their sales by 5 percent or more. Still, this requirement worries some franchisees, who fear it will be difficult to pinpoint the cause of financial losses. "Because this [provision] isn't very clear," says one franchisee, "I'm concerned with how it will be interpreted."
Yet Trice points out that Iowa franchisees still have more reason to feel secure than do their counterparts nationwide. "Surely this has to be viewed as a law enacted to protect franchisees," she says. "To say that franchisees have lost rights in Iowa is not correct. The statute still creates extraordinary potential for remedies on the part of franchisees that they wouldn't enjoy in most other states."
It's an environment franchisors are all too aware of. "I'm not sure the solution passed is acceptable to everyone, but I think it's a little better defined than the law we had before," says Bill Kimball, chair of the Iowa Coalition for Responsible Franchising and president of the Des Moines-based franchise Medicap Pharmacies. "But Iowa still has the most restrictive law in the country, and I question whether that's good for the state."
Among industry insiders who have been observing this real-life experiment, the consensus seems to be that something isn't working. Neither franchisors nor franchisees seem particularly thrilled by the law and, according to Kimball, some legislators are saying "this was a mistake and should be repealed. The political reality is that it would have been impossible to [get this law repealed] this past session. But I wouldn't discount the possibility in future years."