Will Law Bring Order?

March 20, 2002

If you've forgotten about the Small Business Franchise Act (SBFA), a bill written in 1998 to protect franchisees from franchisor abuses, the American Franchisee Association (AFA) is eager to refresh your memory.

As president of AFA, Susan Kezios is a fiery proponent of the bill, known also as HR 3308. Despite being sponsored by 52 congressmen, the SBFA has languished in legislative limbo since its co-introduction by Howard Coble (D-N.C.) and John Conyers (D-Mich.) But Kezios insists it's not dead yet.

"No, hell no!" Kezios said. "We're really pleased by all the feedback we're getting up on the Hill. We're confident there'll be movement on it in 2002."

The AFA believes that the SBFA's passage would curtail what it views as a widespread abuse of franchisor power. The legislation would mandate each party bound by a franchise contract to honor its terms honestly, reasonably and in good faith.

The pizza franchise industry, in particular, has seen its share of such conflicts. The largest such battle, between Detroit-based Little Caesars Enterprises (LCE) and its franchisees, was settled last September. Chief among franchisees' complaints were charges that products and raw materials sold through LCE's distribution arm were priced well above fair market value, and that mandatory royalties contributions to national ad campaigns didn't benefit operators' bottom lines.

In 2000, the acrimony boiled over into a class-action suit brought by the franchisees against LCE, and culminated in an 18-month mediated negotiation in which franchisees gained near-equal status in decision making for the Little Caesars chain.

Heavy-handed treatment by franchisors such as LCE, plus the expensive and drawn-out litigation necessary to combat it, said Kezios, is what makes the SBFA necessary.

"We need this bill to make sure there's a cop on the beat when it comes to post-sale relationship issues," said Kezios, referring to changes in franchise agreements after contracts are signed.

Not surprisingly, the International Franchise Association (IFA) -- whose members are primarily franchisors -- takes the opposite view. The SBFA, it says, is an unnecessary intrusion by "big government" on the business world.

"If you read the last bill ... it would put the federal government in the business of basically writing private commercial contracts between parties in business," said Betsy Laird, vice president of government relations for IFA. "The U.S. Chamber of Commerce called it a trial lawyer's bonanza. There's a lot of open-ended and vague standards ... the only way to figure out what it meant would be to go to court to have a judge or jury interpret it. It's a bad bill."

The Slow Grind of Government

Laird remarked that the bill currently is stalled because of lack of momentum on the Hill, but Kezios blamed the pause in the action on the terrorist attacks of Sept. 11.

"We received a phone call two days after September 11 that there was going to be a hearing on our issues on October 3," Kezios said. "But they didn't have that hearing because all the anthrax stuff started up."

In either case, the wheels of legislative pondering typically are prone slow moving. For example, in the summer of 2000, three senators requested a report by the General Accounting Office to audit the Federal Trade Commission's enforcement of its so-called Franchise Rule. That effort, the senators hoped, would determine whether franchisor abuses were widespread. The report, which took nearly a year to complete, was published last July.

As expected, the AFA and IFA drew different conclusions from the data.

Laird pointed out that, of 3,680 complaints the FTC received from 1993 though mid-1999, only 8 percent involved franchises. The rest involved "business opportunity ventures" (such as such as vending machine routes, which do not require a trademark, but require payment to distribute goods or services).

"Over and over again (the report) seems to say that there is just no credible statistical data to show there's a serious, systemic problem going on in franchising that warrants federal legislation," Laird said. "The bottom line is, there's not much there to support that you need more legislation. There's just not much of a compelling case."

But critics argue that the FTC's caseload is a poor barometer of franchiser abuse, because the Franchise Rule itself is concerned only with pre-sale disclosure requirements, which are supposed to be clear in every franchisor's Uniform Franchise Offering Circular (UFOC).

The report also showed the FTC investigates few franchisee complaints, and often closes investigations without comment. The GAO study found that of 79 files for investigations the FTC closed from 1997 through 1999, only two documented the reasons why.

"We need this bill to make sure there's a cop on the beat when it comes to post-sale relationship issues."

Susan Kezios
President, AFA

"Most (franchisees) do not even see (the FTC) as a viable means to address problems," said attorney Peter A. Singler, who was called to testify before Congress in favor of the SBFA bill in 1999. In addition to his work in the courts, Singler is a multi-unit Round Table Pizza franchisee. As managing partner of California-based Carter & Singler, his law firm represents many large franchisee associations, numerous individual franchisees, and the Round Table Owners Association.

The AFA suggests that the more telling aspect of the GAO report is this: Of 154 franchise complaints where specific allegations could be determined, 141 (92 percent) involved either post-sale issues or a combination of pre-sale disclosure and post-sale issues.

"The end result of that report provides Congress with basically what we've been telling folks since 1993," Kezios said. "Namely, that the FTC doesn't address post-sale franchise abuses."

The GAO report also noted:

* The FTC reported that limited resources and other law enforcement priorities prevented the full investigation of every meritorious complaint.

* The extent and nature of franchise relationship problems are unknown because of a dearth of readily available and statistically reliable data.

* The FTC reported that the data it collected is insufficient to form a fair opinion about the need for federal franchise relationship legislation.

"So our conclusion," Kezios began, "is that, look, they don't have the authority, they don't have the resources, fine. We're back to the fact that we need the Small Business Franchise Act to level the playing field."

IFA's Laird said that within her association, mechanisms already are in place to handle franchisee-franchisor disputes. Among them are an Ombudsman program and a National Franchise Mediation Program administered by the CPR Institute for Dispute Resolution.

In recent years the IFA also established a Franchisee Forum to give a stronger voice to its franchisee members. In February, Steve Sigel, a Dunkin' Donuts franchisee, will be appointed IFA's chairman, marking the first time a franchisee has held that position.

Still, Kezios suggests that many of IFA's reforms are merely reactions to the proposal of the SBFA. The IFA installed its ombudsman and mediation programs -- along with a revised Code of Principles in 1999, just as the bill was gaining attention.

"Just the fact the SBFA is proposed as legislation gives franchisers pause in their dealings with franchisees," Kezios said. "We've seen certain franchisers and their chains starting to talk with franchisees, just because the hammer is out there."

Changes in Attitude

Even without laws such as the SBFA, opposing sides in franchise battles have reached positive accords.

When the dust finally settled between LCE and its franchisees, Lee Hotchkiss and Bob Rooyakker, two of seven franchisees who negotiated the terms, called the agreement the best in the pizza business (see related story, "A Fair Deal for All").

After filing a class-action suit against Round Table Pizza in 1996, the Round Table Owners Association struck a deal with its Walnut Creek, Calif. parent in 1998. The company agreed to provide training and support services, submit an annual accounting of its advertising fund to a third party, reduce restrictions on franchisees operating competing foodservice outlets, and allowed franchisees to take disagreements to arbitration.

"Ultimately, business necessity and sound judgment prevailed," said Singler. "Both sides were able to resolve their differences and agree upon a fair and reasonable means of dealing with each other."

Singler said that since the groups reached that accord, no major disputes have erupted between them, and that additional legislation, such as the SBFA, wouldn't help a Round Table franchisee much if it passed.

"For the most part, many of the provisions of the Small Business Franchise Act would be irrelevant to the Round Table system since the concerns are already addressed by our contract," Singler said. "(But) I cannot say that of any other franchise system."

Still, Singler suggests that the legislation is needed more now than it was in 1998.

"Generally, someone buying a single share of stock in a publicly traded franchise company has considerably more rights than a franchisee who invests his or her life savings in the franchise business," Singler said. "All anyone needs to do is to read an average franchise agreement (UFOC) to realize there's a problem."

Additionally, he believes franchisee lawsuits would decrease if regulatory measures were established.

"I am not one to advocate intrusive legislation," he said. "However, our economy is shaky right now. If you have a basic structure that is inherently one-sided, it jeopardizes that institution, and the seeds for abuse and costly conflict are present. When that institution envelops more than half of our retail economy, it is easy to see the need to protect that institution and set basic levels of fairness."

In a letter Laird wrote to Congress, she stated that IFA's position is laws aren't needed to address problems that are routinely solved by humans. Despite some franchisee concerns, the letter said, "franchising is flourishing ... because the overwhelming majority of franchisers and franchisees work together in mutually beneficial relationships."

Kezios, meanwhile, enters 2002 with the belief that the bill will now begin to gain momentum.

"The bill hasn't been introduced in the Senate, but we think that will eventually happen as well," she said. "It takes awhile to educate Congress. Maybe two, three, four, or five Congresses."

Topics: Commentary

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